Online Grocery Stores

This report will focus primarily around online traditional-style grocery stores rather than specialty stores. The latter are distinguishable from other e-commerce actors only by virtue of their products being edible. Thus, we will consider several major, nationwide online grocery stores offering a full line of products. These players include new Internet startups and firms using the Internet more as an order-taking mechanism for bricks & mortar (B&M) grocery stores.

The online grocery market currently amounts to $5 billion, with Forrester projecting a doubling by 2003. Even so, online sales will likely be only 2% of total US grocery sales, a "blip on the radar screen" (Forrester, 1999). The factors limiting online sales include both attitudinal barriers among customers and unwillingness among stores and packaged-goods suppliers. (We should note that Forrester expects specialty stores to grow significantly more than traditional grocery stores, although we do not consider specialty stores for this report.)

Consumers have shown surprising unwillingness to buy groceries online when compared to other online purchases. An October 1999 survey by Fast Company revealed significant attitudinal barriers to buying groceries online; indeed, these barriers were even more significant than barriers to other online activities, with the single possible exception of viewing pornography. (See Appendix, Table I) Reasons we have identified for consumer resistance to buying online are contained in the notes to Table 1 in the appendix.)

On the other hand, online grocers can leverage the following advantages to achieve profitability.

1. By stocking 75% less stockkeeping units (SKUs) than B&M stores, online grocers can achieve significant cost savings. While the average B&M supermarket stocks 40,333 items (Food Manufacturer's Institute), Homegrocer.com stocks 11,000 items (E-Commerce Times), and Peapod stocks 20,000 items (Khan & McAlister 93). Lower numbers of SKUs improves inventory control and reduces sales lost to out-of-stocks, currently 3.1% of all sales (Khan and McAlister 180). Some 8.2% of SKUs in B&M stores are out-of-stock at any one time (Kahn and McAlister 180), so reducing SKUs by 75% should significantly improve inventory tracking ability and reduce lost sales associated with out-of-stocks.
   
   Consumers, it may be argued, want variety and resent lack of choice among items. However, studies show that consumers may actually react positively to reduced variety when designed properly. By eliminating unpopular sizes, varieties, and items, and placing more of the popular sizes and items in their place (although such popular items were already stocked), consumers actually perceive more variety (Khan and McAlister 185). Today's consumers are more time-starved than ever (spending 20-25% less time in supermarkets than before), yet they are bombarded with 20-25% more SKUs to chose from. Thus, conclude Khan and McAlister, "brands and brand [size variety] can be reduced without affecting sales or consumer perceptions of variety" (66). Additionally, online grocers, by stocking less items, can reduce inventory and warehouse costs and increase margins.
   
   
2. Online grocers can provide better organized information. Consumers value information, but only when in a useable form. Consider the information overload caused in the cereal aisle. There are 150 cereals in the average supermarket, each of which has 100 pieces of information on its box, or 15,000 pieces of information total (Kahn and McAlister 161). In such a disorganized form, the information is difficult to absorb and process. By ranking items according to criteria relevant to consumers, such as value, nutritional content, and taste (see Virtual Vineyards for an example), online grocery stores can help consumers make better informed decisions.
   
   It should be noted, however, that B&M stores are altering their business models to provide information on-demand. A&P is focusing on "creating the best environment in-store [as] possible." This includes "hi-tech advances like self-scanning, flat projection TV screens, and even Internet access for product information" (Ideabeat). We are skeptical towards these in-store innovations, as we believe that the early-adapters and technically-savvy people who would use these devices in-store will not be in the store to begin with: they are the people buying online.

While the Internet grocery business will surely grow with the Internet, we believe that it will still be only a minor part of total grocery expenditures into the foreseeable future. We further predict that the "booms" in other industries online will precede any boom in online grocery shopping, for the reasons discussed above. Even so, it is doubtful that unless a radical change in consumer behavior occurs, B&M stores need not fear online grocery stores to nearly the degree that B&M bookstores fear(ed) Amazon.com.

Traditional Players

To determine the traditional players in the grocery industry we conducted an online searching using Yahoo.com. This search produced a list of 70 major supermarkets. Further research led us to identify the following leaders in the industry. For more information, visit Idea Beat or the Food Marketing Institute.

• Kroger Co.
  
  Kroger is the largest retail food company in the United States as measured by total annual sales. Founded in 1883 Kroger operates 1,410 food stores under seven names across 24 state, as well as 797 convenience stores under six logos in 15 states. Kroger’s primary business is their food stores, which account for 93% of their total company sales.
  
  
• Delhaize America
  
  Delhaize America is a supermarket holding company based in Salisbury, N.C. Delhaize America operates 1,263 stores in 11 states under the names Food Lion, Kash n’ Karry and Save ‘n Pack. The $10.2 billion company will soon be adding 152 Hannaford Brothers and Shop ‘n Save stores to its portfolio. In 1998 Delhaize America had earnings of $273 million and employed 99,000 persons.

These traditional bricks and mortar supermarket retailers are the deep pockets of this industry. For example, currently Kroger Co. does not offer an online grocery service on its web page.  However, if they were to enter this space they would be able to take advantage of their 1,410 stores to provide the space needed for inventory, and they would also be able to use their existing employee base to tackle customer service issues. In essence an existing supermarket retailer does not have to concern itself with establishing supply chains, inventory, or brand recognition. Hannaford Bros. has already entered this space with Homeruns.com. This online grocer uses the synergies between the existing bricks and mortar stores and the online site to provide fresh, individualized, and cost efficient service to its customers. As more of these supermarket retail giants enter the market, they will provide stiff competition for the online-only players. Another advantage of traditional players is that brand names matter even more on the web. The person who is comfortable shopping at a traditional Food Lion will more than likely be as comfortable shopping online with Food Lion.

The major disadvantage of B&M supermarkets is has been their entry into the online space.  Not unlike Barnes and Nobles in the online book selling market, these supermarket retailers have allowed online grocers such as Peapod.com to develop brand awareness online. These traditional players are now behind the curve and will have to quickly make up for lost time. Additionally, the ability of these traditional players to adapt to the changing needs of the consumer will be greatly challenged by their innovative online rivals. Furthermore, online consumers search for information-rich products: it will not be enough for a traditional store just to allow consumers to browse their inventories online. These traditional stores will have to meet this desire for information rich products by expanding their offerings into such categories as gourmet food and ethnic cuisine.

Online Key Players

In the list of dozens of online grocers, we have identified six grocers who are either first movers, have a strong financial partner, or have a distinct business model. If the reader is interested to learn more about these players, or any other online grocer, we recommend the websites of Gomez Associates and Yahoo! Internet Life, which specialize in ranking online services.

• Peapod.com
  
  Peapod is the oldest player in this market and is said to be the market leader. Established in 1989, it now delivers to 100,000 registered households in eight metropolitan areas (Austin, Boston, Chicago, Columbus, Dallas, Houston, Long Island, San Francisco). Peapod delivers with its own distinctive green trucks form 7am to 10pm, except Sundays. The company clearly has a first-mover competitive advantage. Peapod has been rated the number one online grocer because of its 12,500 quality products inventory and its reliable customer service. Another popular feature are the specific packages that customers can choose from. Examples include the "Late Night Study Buddy" or "New Baby Welcome". Critique has been addressed to Peapod because of sometimes poor product information on its websites and the inability to browse the store without registering as a member. In October 1999, the Company extended its service to deliver nonperishable groceries nationwide with FedEx. Peapod went public in June 1997 and is traded on the NASDAQ (PPOD).
  
  
• Webvan.com
  
  Webvan is an Internet retailer providing same-day delivery of groceries. The Company is relatively young and opened its first delivery service in the San Francisco Bay area in June 1999. The company had a very successful $320 million IPO (NASDAQ: WBVN) and plans to expand quickly into 26 markets in the next three years. The next step will be the opening of a second distribution center in Atlanta in the second quarter of 2000. Webvan's major competitive advantages are the large capital base and the extensive use of automation technology, which allows the company to deliver the groceries in a 30min time window. Another distributional strength of the company are exclusivity contracts with local producers, which allow the delivery of the freshest meat and fish products. Major questions remain, however, concerning if Webvan will be able to grow according to its quick schedule while maintaining customer service and efficiency at the same level.
  
  
• Streamline.com
  
  Streamline is one of the most interesting players in this market. It delivers a selection of 10,000 groceries in three metropolitan areas (Boston, Chicago, Washington). In addition to the basic groceries, Streamline provides a multitude of services to its customer, including photo-development, dry-cleaning, and UPS-pickup. Streamline also installs a free refrigerator in customers' houses in order to deliver fresh foods when the customer is not at home. The value added by these extensive services is Streamline's main competitive advantage, since they increase switching costs vis-a-vis other competitors. Streamline's main disadvantages are that customers might be reluctant to give home access to Streamline employees, and a potential deterrant effect created by their flat service fee of $30 per month for deliveries. Streamline also only delivers once a week per customer. Streamline is listed on the NASDAQ (SLNE).
  
  
• Homeruns.com
  
  As noted earlier, Homeruns is different than the other players because it is owned by Hannaford, a major bricks and mortar grocer. Homeruns offers 6000 products and only delivers in the Boston area. The company's major competitive advantage is its use of synergies with its bricks and mortar distribution system. This has allowed Homeruns not only to be fresh and individualized, but also very cost efficient in its distribution system. Homeruns has been rated number one by Gomez Associates in the category Bargain Shoppers. Because Hannaford, the mother company, has been acquired by Food Lion, the six largest chain in the US, analyst expect Homeruns to extend its services in other areas of the country. Homeruns main competitive disadvantage is its unappealing Website design and the lack of special features, like pre-specified packages.

Other Players

Two other players are worth noting, including Home Grocer, which is owned by Amazon, and Net Grocer, which solely delivers via FedEx. The list of players is long and it is very hard to tell which one are going to succeed it this market. On one hand some players have only be around for several months and it still has to be proven that their business model will be successful, and on the other hand different players serve different geographical areas, and therefore they don't compete against each other. The player who emerges dominant will best address the challenges presented under Table I and best capitalize on the advantages mentioned earlier.

Growth Projections

As with many facets of electronic commerce, the growth projections for online grocery shopping are staggering.  Forrester Research has undertaken a comprehensive study of the industry, and has predicted that the market will grow more than tenfold in the next five years, from $235 million in 1998 to $2.8 billion in 2003 (see figure in appendix).  Nevertheless, this projected number remains at a disappointingly low 2% of overall category sales.  Additionally, research by Smith Barney has predicted that homes using online grocers will grow from approximately 200,000 in 1999 to 15-20 million by 2009 (see figure in appendix).  That same firm has projected that 20% of all groceries in Western Europe and the Pacific Rim will be purchased online by 2005.  Certainly this provides evidence that there is a tremendous potential market that is not being fully exploited.

Industry Trends

Some of the trends that may contribute to the growth of online grocery shopping include automating warehouses and offering additional services, and the use of handheld information appliances.  Automated warehousing, pioneered by Webvan of California, represents the first major opportunity for a profit margin increase in the grocery industry in many years.  This means that neither stockboys, nor cashiers or baggers will handle the customer’s merchandise, creating significantly lower costs for the grocer.

The second trend, an increasing breadth of services, is currently being attempted in Boston by the firms Shoplink and Streamline.  Eventually, this will allow grocers to become a one-stop-shop for food, videos, dry cleaning, and a wide variety of home maintenance services (see figure in appendix).  This is truly a new channel to the consumer; the companies that can secure a first-mover advantage in the home delivery arena will have the best leveraging power with product suppliers and the providers of home services, especially considering high initial start-up and switching costs.

A third trend pushing the development of online grocery services is the use of handheld information appliances.  Pilot programs such as HighPoint rely on the use of handheld barcode scanners to track items as they are used (see figure in appendix).  By moving information services away from the PC, these appliances greatly increase the practicality of online reordering services.  The scanners (either a laser-pen or a modified PalmPilot) can be synchronized with the PC at a later time, and may eventually be net-enabled through wireless technology such as Bluetooth.  While current technologies enable only straight-rebuy options, future marketers may link this scanner data to advertisements and online coupons, similar to the Catalina customized coupons available in bricks-and-mortar stores today.

Segmentation and Specialization

Ignoring the dry-cleaning market for now, there are currently two main segments in online groceries.  First, Peapod is leading the pack in full-service grocery delivery.  This set of companies can fill orders for almost any type of grocery, but struggles because there is very little profit margin.  The second category is being led by Whole Foods, and consists of specialty grocers who do not offer fresh products.  While these companies will never become a full-time replacement for a bricks-and-mortar grocery store, they will fill a large and very profitable niche as a high-end marketer of specialty foods, and are predicted by Forrester to overtake full-service grocers in sales by the year 2000.

Finally, Forrester points out the potential present in such categories as nostalgia foods, which appeal to the group of baby boomers who will be turning to the Internet to purchase their groceries.  Items like Nilla Wafers and Cracker Jack promise to lure these middle-aged customers in large numbers. 

Appendix

Table I.

The reasons for this consumer resistance, we believe, are the following:

1. Grocery shopping is a habitual act. While the average consumer shops for groceries 2.2 times per week (Kahn and McAlister 96), few consumers shop so often for cars, books, or airline tickets. Thus, grocery shopping is more habitual, and it will take more effort to change consumer buying patterns. Moreover, consumers often visit several stores in a week, presumably looking for specific items or hoping to take advantage of specific promotions.
2. Grocery shopping is a community act. Most grocery consumers shop with a friend, be it a spouse, child, or friend (Kahn and McAlister 123). Online grocers must overcome the "serious social obstacle" that "the community function of buying groceries at local supermarkets--where folks can interact with friends neighbors, and relatives--is sometimes more important than the inconvenience associated with filling up a shopping cart" (E-Commerce Times).
3. There is no significant time savings associated with online shopping. Excluding driving time, the average consumer spends 45 minutes in his visit to the supermarket (Khan and McAlister 122), while the Peapod (an online supermarket) buyer spends 37 minutes (Khan and McAlister 93).
4. Delivery is cumbersome and expensive, but also slow. In the age of instant gratification, Internet delivery will have to offer significant value to make up for slow delivery relative to traditional shopping. (Delivery time could be considered time in checkout and driving home, still quicker than even the speediest UPS man.)

Diagrams not available due to potential copyright issues

Diagrams not available due to potential copyright issues.

Diagrams not available due to potential copyright issues.

Work Cited

Kahn, Barbara, and Leigh McAlister. The Grocery Revolution: The New Focus on the Consumer. Reading, Mass: Addison-Wesley, 1997.