COVER STORY: Online Retailing: E-grocery's reality check
It's been a busy decade so far for grocery's online players. New York City's FreshDirect has been diligently whipping up fresh meal solutions to help city dwellers cook more like foodies. The Twin Cities' SimonDelivers has focused much of its efforts on the back end of operations -- implementing a new warehouse management system and enlisting new UPS tools to get its deliveries to customers faster and more efficiently. Peapod, MyWebGrocer, and two of the biggest brick-and-mortar chains -- Safeway and Albertsons -- have been busy, too, expanding their services and perfecting their supply chains.
And the truly savory news: The Web-based shopper's average basket size is now around $150, and almost all of these companies' e-commerce efforts have begun achieving some level of profitability.
But if the outlook is so good, why did Boise, Idaho-based Albertsons, LLC just shut down its online store?
The answer could be that the relatively young world of e-grocery is experiencing growing pains, with companies taking a more serious look at the business proposition of online ordering and home delivery, observers tell Progressive Grocer.
"Almost everything that comes out new goes through predictable phases of adoption," notes Jim Hertel, s.v.p. of Barrington, Ill.-based Willard Bishop Consulting. "There’s the 'nobody knows about it' phase, then the 'miracle drug' phase, then the 'realization' phase. If you can manage to go through all of that, you get to the point where people are probing what the true value is, and starting to work at it as a real business proposition. I think we’re entering that phase with online grocery."
Now a much more evolved industry than in the early, ignominious days of Webvan, to be sure, online grocery has proved to be a service consumers are willing to pay for. But it's clearer today than ever that retailers have to be willing to make considerable investments before shoppers will reciprocate. For some, such as Albertsons, the level of return never seems to justify the expenses required.
It's the pure players -- the e-grocers that aren't dependent on brick-and-mortar stores -- that at present are delivering much of the innovation in the virtual space. But many traditional retailers are adding or building upon online programs in hopes of bringing in new shoppers and expanding their reach.
The ultimate payoff that some of those who've made the investment are discovering: Online grocery generates a much more interactive -- and intimate -- relationship with customers.
Online in demand
Food/beverage/grocery online sales should reach $6.2 billion this year, predicts Cambridge, Mass.-based Forrester Research, a tally that would represent a 17 percent increase from 2005. That estimated gain is part of a larger trend that will see online sales top $200 billion this year, says Forrester in a report titled "The 2006 State of Retailing Online."
The actual sales figure for online grocery sales alone is probably closer to $1.5 billion, according to Ross Gillanders, e-business consultant at Buy4Now, an Ireland-based company that works with Superquinn in Ireland, as well as U.S. grocers A&P and Roche Bros.
Regardless of what current sales are, however, observers agree that online sales are going to grow at a steady clip for the next few years, as Amazon.com enters the arena with its own style of shopping service, and additional brick-and-mortar food retailers jump on board. (Gillanders says his company will roll out programs with two more major chains by the end of the year.)
According to one source who requested anonymity, Cincinnati-based Kroger Co. has been running a trial of grocery retail e-commerce in Denver and Alaska. On the King Soopers division's Web site, the company advertises a "HomeShop" service in regions of Colorado. Division Fred Meyer's site says that the retailer is "exploring a number of opportunities" in the online business.
In addition to the retailers offering full-fledged online programs, others are launching more limited operations. Grand Rapids, Mich.-based Meijer, Inc., for example, has a new e-commerce site up and running that focuses on about 40,000 hard-to-find products not offered the shelves.
And with the United Kingdom's Tesco poised to break into U.S. retailing later next year, all bets are off as to what the next decade of online grocery retailing will look like.
"Tesco has one of the most successful online commerce businesses in the U.K.," notes Sucharita Mulpuru, a senior analyst with Forrester Research. "That operational expertise will help them immensely when they arrive here in the States. The only thing they'll need to build is a brand, but they know what they're doing and they have fairly deep pockets. They may very well be the force that makes online grocery the significant channel everyone had predicted it would be back in 1999."
The reasons that more companies are moving to e-grocery are many and varied. For Amazon it could be merely to meet customer demand, although some analysts say the move is eerily similar to a bricks-and-mortar gambit made many years ago by another behemoth -- Wal-Mart.
"My guess is that Amazon's entry into groceries is based on the same thought Wal-Mart had," says Willard Bishop's Hertel. "They're trying to get people to come back to the site more often by offering food and consumables." A major difference, at least for now, is that Amazon isn't selling perishable items.
For some brick-and-mortar grocers, offering online service might be, first and foremost, a defensive measure. In New York, for instance, a number of traditional retailers -- Gristedes, D'Agostino's, and A&P among them -- began taking their grocery offerings online after pure player FreshDirect began stealing away some of their sales via the Web.
"We came in a little late compared to some of the other services in New York, but we've found that customers are loyal to The Food Emporium brand," notes Heidi Chapnick, A&P's director of e-commerce. (A&P now offers online ordering and delivery through The Food Emporium banner in Manhattan, and the Waldbaum's banner in parts of Long Island and Queens.)
In Boston most consumers are familiar with the name Peapod. Local retailer Roche Bros. has now joined the online game, too, with startup investments to the tune of nearly a half-million dollars. The Wellesley, Mass.-based independent, which operates 17 stores in the greater Boston area, launched its program in late 2005, with the help of Buy4Now.
"We went into it because we're in a very competitive marketplace," explains Arthur Ackles, Roche Bros.' director of marketing, "and we know that we have people who'd prefer to shop with Roche Bros. but don't because they want home delivery."
E-commerce has also enabled Roche Bros. to expand its service area a little without having to build a new store, he notes. Also, Roche Bros. can add a new competitive advantage to the online game by offering more items at more competitive prices, according to Ackles. (Prices are the same as in the stores.)
Roche Bros. is similar to other brick-and-mortar chains that offer online shopping in that it uses an in-store picking model, where employees assemble online orders using products in the stores. The grocer uses a shopping manager and four or five pickers in each store. (Roche Bros. is currently picking from five stores, but plans to expand that as well.)
In just six months Roche Bros. has grown to filling about 1,200 orders a week on average, says Ackles. Pleased with the initial results, he hopes to do the online equivalent of one store’s business within five years.
Persistent ingenuity
Webvan, that failed large-scale model of the 1990s that wasn't backed up by a realistic financial plan, convinced many analysts and grocers that the only retailers that would be able to make money at e-commerce were the ones that already had stores to pick from. As such, observers applauded the wedding of Peapod and Ahold.
Ironically, however, the pure-play e-grocers have gotten the most attention in recent years for their persistent ingenuity in food retailing.
"Today you have Peapod, Fresh Direct, and SimonDelivers -- three pure players working out of warehouses," notes Christopher Brown, c.e.o. of the last of the trio, New Hope, Minn.-based SimonDelivers. (Peapod also uses "warerooms" in some of Ahold's stores.) "We've been truly focused on the customer experience on the Web, as well as research and the tracking that goes behind it.
"It's no secret why the people who came and went in this industry did so," continues Brown. "They weren't committed to the logistics and the true experience. That's why the three of us are becoming more profitable as we grow our business. All three of us are doing better today than we ever have." (To learn more about SimonDelivers’ investment in logistics, see "Simon says 'deliver' satisfaction," also online .)
FreshDirect, for its part, has given the term "differentiation" new meaning on the Web, notes Forrester's Mulpuru.
"FreshDirect has some unique merchandising features -- prepared meals and organic foods -- that enable it to compete with the Whole Foods and the Wegmans of the world, rather than with the razor-thin margins of the mass grocery chains like Kroger and Safeway."
While FreshDirect offers the same center store categories as conventional chains do, the company has really made its mark by focusing on ultrafresh product, often at a price advantage.
"We have differentiated our offering -- using the Web and a food production facility to offer fresh meals and ingredients -- that might be better than the brick-and-mortar offering," says FreshDirect's president and c.e.o., Steve Michaelson. "With fresh entrees, for example, we can sell them with a four- to five-day shelf life because we produce them here in our facility."
The e-tailer also provides extra services, such as the option to buy cedar-planked salmon that "gives amateur chefs a great opportunity," according to Michaelson.
While the pure players have been able to focus more on perfecting their game, some of the brick-and-mortar grocers have been locked into a limited version of what they’re already doing in their stores, says Willard Bishop's Hertel.
"Retailers have created certain shopper expectations around what they do in the store," explains Hertel. "Now they’re trying to compete, using what they can do online. They incur a lot of expense, too, whether they're picking from a store or from a centralized distribution center."
Those added expenses are perhaps least welcome by the big national chains that have looked at online operations, notes Mulpuru. "They already have challenges steering their big brick-and-mortar ship in the correct direction, before distracting themselves with another small business idea that at best will add a percentage point or two in the near term to their revenue."
Mulpuru guesses that Albertsons left the space because e-grocery was a management distraction to the company's new owners, who have bigger fish to fry. "It wasn’t contributing in a material way to their company sales, and, in a vicious cycle, the company wasn't able to allocate appropriate resources, either marketing or labor, to growing the business."
Eden Prairie, Minn.-based Supervalu, which inherited some of Albertsons' online operations when it purchased a huge chunk of the latter's stores spread throughout the country, is keeping the Web operations running for the time being.
"We're exploring the best approach for integrating online shopping into the new Supervalu so that it can deliver the most value to the business," says spokeswoman Haley Meyer. "We do not anticipate making any changes to our current program in the near term."
Markets served currently by Albertsons-related online shopping under Supervalu's domain are Seattle, San Diego, Los Angeles/Orange County, Santa Barbara, Palm Desert, Portland/Vancouver, Las Vegas, Boise, Salt Lake City, Philadelphia, and Delaware. (That includes Acme.com for the Acme banner.)
The implication is that wrought large, a Web-based food retailing strategy can be seen as a big bite to chew on, for relatively little potential nutritional value.
Smaller regional chains may actually have a better chance at making e-grocery successful, notes Mulpuru. "If some enterprising regional store managers were empowered with getting such a business up and running, it may stand a chance."
Third-party providers might help improve the odds further. For now, more than 50 regional grocers are taking this route. MyWebGrocer.com, the country's largest provider of online shopping solutions to the supermarket industry, counts among its client list Winston-Salem, N.C.-based Lowes Foods; Elizabeth, N.J.-based Wakefern Food Corp., the co-op that operates ShopRite stores; Charlotte, N.C.-based Harris Teeter; and Supervalu.
"Using our solution, the retailer does not need to invest in software development, hardware, and staffing to support the technical elements of e-commerce," says Rich Tarrant, MyWebGrocer’s c.e.o. "By leveraging their well-recognized brand, conveniently located stores, inventory, and labor, they are able to provide time-pressed consumers with a valuable convenience while establishing a profitable new business channel."
Some of MyWebGrocer’s clients are seeing up to 10 percent of total revenue from the online sector, adds Tarrant.
Other advocates of this brick-and-click model note that these retailers are better prepared to expand as their operations grow, since they can, through e-commerce, add on the equivalent of more stores without building new warehouses.
Buy4Now’s Gillanders lays out the business case for brick-and-mortar grocers to connect with a third-party ally.
"The biggest issue grocers have with e-grocery is whether it will be profitable," he explains. "We say, 'Sure it will.' You can end up getting the revenues of an extra store without the investment of an extra store. But to make it work, retailers must have at least five stores in an MSA. It must be a reasonably affluent area with more than 1 million consumers. Internet penetration must be at 70 percent. Otherwise the service won't pay for itself."
Gillanders estimates that grocers under these conditions can break even with an online operation in six to seven months.
Online intimacy
While profitability can take a while to achieve, one major payback most e-grocers say they can count on sooner is a more intimate knowledge of their shoppers' characteristics, wants and needs, and shopping behavior -- knowledge that is applicable in the real world as well as the virtual.
"We've learned so much from our customers," notes Roche Bros.' Ackles. "Home delivery customers are very vocal. If these same people went into the store and didn’t find what they were looking for, they'd choose something else and not mention it to the manager. Now we know about it, and it’s making our store operations more efficient."
On the flip side, however, out-of-stocks online and order errors are major challenges, concedes Ackles. "We have to choose something else for them when we don’t have what they want. They may not agree with what we see as the perfect substitution."
Indeed, when customers order their groceries over the Internet, they tend to show a "pickier" side, says Gillanders. "The biggest reason they don’t come back is that they think the products [offered] aren't as good as what they'd pick themselves."
How retailers deal with out-of-stocks can be a transaction closer or killer, he adds. "We advise grocers to ask the shopper upfront if they want the picker to substitute [items]. They can provide a 'notes' feature, so shoppers can make comments. The pickers can call the shopper to discuss the order."
SimonDelivers claims that it has deeper relationships with its customers than any other grocer in the country. Armed with real-time customer data, the company has even launched a research company called U.S. Research.
"We do work for major brands, helping them with new product launches and test pilots," says Steve Lauder, v.p. of customer relations. "We have become a learning lab for brands and manufacturers because of the unique way we can go to market."
Another technology provider offering similar services is Minneapolis-based Grocery Shopping Network (GSN). The company specializes in online marketing and counts retailers such as Ukrop's Super Markets, Clemens Markets, and Pathmark Supermarkets in its client base.
"The Internet is the only medium that can encourage interactivity between the consumer and the retailer," says Curt Lund, president of Hometown Info, Inc., the holding company of GSN. "We see the usage of the Web as the greatest advancement in channel management -- relaying information from consumer to manufacturer to retailer in real time."
In Lund's view, too many companies see the Web purely as a vehicle for online ordering, but miss its ability to have a one-on-one relationship with customers. At GSN the focus is on personalizing the shopping experience for each household, with recipes and shopping lists customized by diet.
The key players in e-grocery seem to share Lund's enthusiasm for personalization. A spokeswoman for FreshDirect says the company would like to "revolutionize" online grocery shopping by customizing the experience even more. "We’d like our customers to be able to sign on and have their very own personal fresh food store filled with the items they love," she notes.
SimonDelivers is also aware of the power of personalized catering to consumers. The company recently launched a mobile shopping service, so that its customers can use their BlackBerry to order groceries.
"The bar has to continually be raised," admits Brown of SimonDelivers. "Just delivering groceries to people's homes is the culmination of seven years of hard work. The reality is that others can enter this business faster than we did."
MyWebGrocer’s Tarrant seconds that emotion.
"In the last 18 months we have introduced additional services to complement our e-commerce solution, including a full Web site offering recipe selections, an integrated and interactive online circular, e-mail marketing services, and a host of other online solutions," notes Tarrant. "We are constantly working on our next level, which is to become the outsourced Internet IT solution for the supermarket industry."
In this way, perhaps retailing in the online world is not so different from the "real" world -- just faster.
And the truly savory news: The Web-based shopper's average basket size is now around $150, and almost all of these companies' e-commerce efforts have begun achieving some level of profitability.
But if the outlook is so good, why did Boise, Idaho-based Albertsons, LLC just shut down its online store?
The answer could be that the relatively young world of e-grocery is experiencing growing pains, with companies taking a more serious look at the business proposition of online ordering and home delivery, observers tell Progressive Grocer.
"Almost everything that comes out new goes through predictable phases of adoption," notes Jim Hertel, s.v.p. of Barrington, Ill.-based Willard Bishop Consulting. "There’s the 'nobody knows about it' phase, then the 'miracle drug' phase, then the 'realization' phase. If you can manage to go through all of that, you get to the point where people are probing what the true value is, and starting to work at it as a real business proposition. I think we’re entering that phase with online grocery."
Now a much more evolved industry than in the early, ignominious days of Webvan, to be sure, online grocery has proved to be a service consumers are willing to pay for. But it's clearer today than ever that retailers have to be willing to make considerable investments before shoppers will reciprocate. For some, such as Albertsons, the level of return never seems to justify the expenses required.
It's the pure players -- the e-grocers that aren't dependent on brick-and-mortar stores -- that at present are delivering much of the innovation in the virtual space. But many traditional retailers are adding or building upon online programs in hopes of bringing in new shoppers and expanding their reach.
The ultimate payoff that some of those who've made the investment are discovering: Online grocery generates a much more interactive -- and intimate -- relationship with customers.
Online in demand
Food/beverage/grocery online sales should reach $6.2 billion this year, predicts Cambridge, Mass.-based Forrester Research, a tally that would represent a 17 percent increase from 2005. That estimated gain is part of a larger trend that will see online sales top $200 billion this year, says Forrester in a report titled "The 2006 State of Retailing Online."
The actual sales figure for online grocery sales alone is probably closer to $1.5 billion, according to Ross Gillanders, e-business consultant at Buy4Now, an Ireland-based company that works with Superquinn in Ireland, as well as U.S. grocers A&P and Roche Bros.
Regardless of what current sales are, however, observers agree that online sales are going to grow at a steady clip for the next few years, as Amazon.com enters the arena with its own style of shopping service, and additional brick-and-mortar food retailers jump on board. (Gillanders says his company will roll out programs with two more major chains by the end of the year.)
According to one source who requested anonymity, Cincinnati-based Kroger Co. has been running a trial of grocery retail e-commerce in Denver and Alaska. On the King Soopers division's Web site, the company advertises a "HomeShop" service in regions of Colorado. Division Fred Meyer's site says that the retailer is "exploring a number of opportunities" in the online business.
In addition to the retailers offering full-fledged online programs, others are launching more limited operations. Grand Rapids, Mich.-based Meijer, Inc., for example, has a new e-commerce site up and running that focuses on about 40,000 hard-to-find products not offered the shelves.
And with the United Kingdom's Tesco poised to break into U.S. retailing later next year, all bets are off as to what the next decade of online grocery retailing will look like.
"Tesco has one of the most successful online commerce businesses in the U.K.," notes Sucharita Mulpuru, a senior analyst with Forrester Research. "That operational expertise will help them immensely when they arrive here in the States. The only thing they'll need to build is a brand, but they know what they're doing and they have fairly deep pockets. They may very well be the force that makes online grocery the significant channel everyone had predicted it would be back in 1999."
The reasons that more companies are moving to e-grocery are many and varied. For Amazon it could be merely to meet customer demand, although some analysts say the move is eerily similar to a bricks-and-mortar gambit made many years ago by another behemoth -- Wal-Mart.
"My guess is that Amazon's entry into groceries is based on the same thought Wal-Mart had," says Willard Bishop's Hertel. "They're trying to get people to come back to the site more often by offering food and consumables." A major difference, at least for now, is that Amazon isn't selling perishable items.
For some brick-and-mortar grocers, offering online service might be, first and foremost, a defensive measure. In New York, for instance, a number of traditional retailers -- Gristedes, D'Agostino's, and A&P among them -- began taking their grocery offerings online after pure player FreshDirect began stealing away some of their sales via the Web.
"We came in a little late compared to some of the other services in New York, but we've found that customers are loyal to The Food Emporium brand," notes Heidi Chapnick, A&P's director of e-commerce. (A&P now offers online ordering and delivery through The Food Emporium banner in Manhattan, and the Waldbaum's banner in parts of Long Island and Queens.)
In Boston most consumers are familiar with the name Peapod. Local retailer Roche Bros. has now joined the online game, too, with startup investments to the tune of nearly a half-million dollars. The Wellesley, Mass.-based independent, which operates 17 stores in the greater Boston area, launched its program in late 2005, with the help of Buy4Now.
"We went into it because we're in a very competitive marketplace," explains Arthur Ackles, Roche Bros.' director of marketing, "and we know that we have people who'd prefer to shop with Roche Bros. but don't because they want home delivery."
E-commerce has also enabled Roche Bros. to expand its service area a little without having to build a new store, he notes. Also, Roche Bros. can add a new competitive advantage to the online game by offering more items at more competitive prices, according to Ackles. (Prices are the same as in the stores.)
Roche Bros. is similar to other brick-and-mortar chains that offer online shopping in that it uses an in-store picking model, where employees assemble online orders using products in the stores. The grocer uses a shopping manager and four or five pickers in each store. (Roche Bros. is currently picking from five stores, but plans to expand that as well.)
In just six months Roche Bros. has grown to filling about 1,200 orders a week on average, says Ackles. Pleased with the initial results, he hopes to do the online equivalent of one store’s business within five years.
Persistent ingenuity
Webvan, that failed large-scale model of the 1990s that wasn't backed up by a realistic financial plan, convinced many analysts and grocers that the only retailers that would be able to make money at e-commerce were the ones that already had stores to pick from. As such, observers applauded the wedding of Peapod and Ahold.
Ironically, however, the pure-play e-grocers have gotten the most attention in recent years for their persistent ingenuity in food retailing.
"Today you have Peapod, Fresh Direct, and SimonDelivers -- three pure players working out of warehouses," notes Christopher Brown, c.e.o. of the last of the trio, New Hope, Minn.-based SimonDelivers. (Peapod also uses "warerooms" in some of Ahold's stores.) "We've been truly focused on the customer experience on the Web, as well as research and the tracking that goes behind it.
"It's no secret why the people who came and went in this industry did so," continues Brown. "They weren't committed to the logistics and the true experience. That's why the three of us are becoming more profitable as we grow our business. All three of us are doing better today than we ever have." (To learn more about SimonDelivers’ investment in logistics, see "Simon says 'deliver' satisfaction," also online .)
FreshDirect, for its part, has given the term "differentiation" new meaning on the Web, notes Forrester's Mulpuru.
"FreshDirect has some unique merchandising features -- prepared meals and organic foods -- that enable it to compete with the Whole Foods and the Wegmans of the world, rather than with the razor-thin margins of the mass grocery chains like Kroger and Safeway."
While FreshDirect offers the same center store categories as conventional chains do, the company has really made its mark by focusing on ultrafresh product, often at a price advantage.
"We have differentiated our offering -- using the Web and a food production facility to offer fresh meals and ingredients -- that might be better than the brick-and-mortar offering," says FreshDirect's president and c.e.o., Steve Michaelson. "With fresh entrees, for example, we can sell them with a four- to five-day shelf life because we produce them here in our facility."
The e-tailer also provides extra services, such as the option to buy cedar-planked salmon that "gives amateur chefs a great opportunity," according to Michaelson.
While the pure players have been able to focus more on perfecting their game, some of the brick-and-mortar grocers have been locked into a limited version of what they’re already doing in their stores, says Willard Bishop's Hertel.
"Retailers have created certain shopper expectations around what they do in the store," explains Hertel. "Now they’re trying to compete, using what they can do online. They incur a lot of expense, too, whether they're picking from a store or from a centralized distribution center."
Those added expenses are perhaps least welcome by the big national chains that have looked at online operations, notes Mulpuru. "They already have challenges steering their big brick-and-mortar ship in the correct direction, before distracting themselves with another small business idea that at best will add a percentage point or two in the near term to their revenue."
Mulpuru guesses that Albertsons left the space because e-grocery was a management distraction to the company's new owners, who have bigger fish to fry. "It wasn’t contributing in a material way to their company sales, and, in a vicious cycle, the company wasn't able to allocate appropriate resources, either marketing or labor, to growing the business."
Eden Prairie, Minn.-based Supervalu, which inherited some of Albertsons' online operations when it purchased a huge chunk of the latter's stores spread throughout the country, is keeping the Web operations running for the time being.
"We're exploring the best approach for integrating online shopping into the new Supervalu so that it can deliver the most value to the business," says spokeswoman Haley Meyer. "We do not anticipate making any changes to our current program in the near term."
Markets served currently by Albertsons-related online shopping under Supervalu's domain are Seattle, San Diego, Los Angeles/Orange County, Santa Barbara, Palm Desert, Portland/Vancouver, Las Vegas, Boise, Salt Lake City, Philadelphia, and Delaware. (That includes Acme.com for the Acme banner.)
The implication is that wrought large, a Web-based food retailing strategy can be seen as a big bite to chew on, for relatively little potential nutritional value.
Smaller regional chains may actually have a better chance at making e-grocery successful, notes Mulpuru. "If some enterprising regional store managers were empowered with getting such a business up and running, it may stand a chance."
Third-party providers might help improve the odds further. For now, more than 50 regional grocers are taking this route. MyWebGrocer.com, the country's largest provider of online shopping solutions to the supermarket industry, counts among its client list Winston-Salem, N.C.-based Lowes Foods; Elizabeth, N.J.-based Wakefern Food Corp., the co-op that operates ShopRite stores; Charlotte, N.C.-based Harris Teeter; and Supervalu.
"Using our solution, the retailer does not need to invest in software development, hardware, and staffing to support the technical elements of e-commerce," says Rich Tarrant, MyWebGrocer’s c.e.o. "By leveraging their well-recognized brand, conveniently located stores, inventory, and labor, they are able to provide time-pressed consumers with a valuable convenience while establishing a profitable new business channel."
Some of MyWebGrocer’s clients are seeing up to 10 percent of total revenue from the online sector, adds Tarrant.
Other advocates of this brick-and-click model note that these retailers are better prepared to expand as their operations grow, since they can, through e-commerce, add on the equivalent of more stores without building new warehouses.
Buy4Now’s Gillanders lays out the business case for brick-and-mortar grocers to connect with a third-party ally.
"The biggest issue grocers have with e-grocery is whether it will be profitable," he explains. "We say, 'Sure it will.' You can end up getting the revenues of an extra store without the investment of an extra store. But to make it work, retailers must have at least five stores in an MSA. It must be a reasonably affluent area with more than 1 million consumers. Internet penetration must be at 70 percent. Otherwise the service won't pay for itself."
Gillanders estimates that grocers under these conditions can break even with an online operation in six to seven months.
Online intimacy
While profitability can take a while to achieve, one major payback most e-grocers say they can count on sooner is a more intimate knowledge of their shoppers' characteristics, wants and needs, and shopping behavior -- knowledge that is applicable in the real world as well as the virtual.
"We've learned so much from our customers," notes Roche Bros.' Ackles. "Home delivery customers are very vocal. If these same people went into the store and didn’t find what they were looking for, they'd choose something else and not mention it to the manager. Now we know about it, and it’s making our store operations more efficient."
On the flip side, however, out-of-stocks online and order errors are major challenges, concedes Ackles. "We have to choose something else for them when we don’t have what they want. They may not agree with what we see as the perfect substitution."
Indeed, when customers order their groceries over the Internet, they tend to show a "pickier" side, says Gillanders. "The biggest reason they don’t come back is that they think the products [offered] aren't as good as what they'd pick themselves."
How retailers deal with out-of-stocks can be a transaction closer or killer, he adds. "We advise grocers to ask the shopper upfront if they want the picker to substitute [items]. They can provide a 'notes' feature, so shoppers can make comments. The pickers can call the shopper to discuss the order."
SimonDelivers claims that it has deeper relationships with its customers than any other grocer in the country. Armed with real-time customer data, the company has even launched a research company called U.S. Research.
"We do work for major brands, helping them with new product launches and test pilots," says Steve Lauder, v.p. of customer relations. "We have become a learning lab for brands and manufacturers because of the unique way we can go to market."
Another technology provider offering similar services is Minneapolis-based Grocery Shopping Network (GSN). The company specializes in online marketing and counts retailers such as Ukrop's Super Markets, Clemens Markets, and Pathmark Supermarkets in its client base.
"The Internet is the only medium that can encourage interactivity between the consumer and the retailer," says Curt Lund, president of Hometown Info, Inc., the holding company of GSN. "We see the usage of the Web as the greatest advancement in channel management -- relaying information from consumer to manufacturer to retailer in real time."
In Lund's view, too many companies see the Web purely as a vehicle for online ordering, but miss its ability to have a one-on-one relationship with customers. At GSN the focus is on personalizing the shopping experience for each household, with recipes and shopping lists customized by diet.
The key players in e-grocery seem to share Lund's enthusiasm for personalization. A spokeswoman for FreshDirect says the company would like to "revolutionize" online grocery shopping by customizing the experience even more. "We’d like our customers to be able to sign on and have their very own personal fresh food store filled with the items they love," she notes.
SimonDelivers is also aware of the power of personalized catering to consumers. The company recently launched a mobile shopping service, so that its customers can use their BlackBerry to order groceries.
"The bar has to continually be raised," admits Brown of SimonDelivers. "Just delivering groceries to people's homes is the culmination of seven years of hard work. The reality is that others can enter this business faster than we did."
MyWebGrocer’s Tarrant seconds that emotion.
"In the last 18 months we have introduced additional services to complement our e-commerce solution, including a full Web site offering recipe selections, an integrated and interactive online circular, e-mail marketing services, and a host of other online solutions," notes Tarrant. "We are constantly working on our next level, which is to become the outsourced Internet IT solution for the supermarket industry."
In this way, perhaps retailing in the online world is not so different from the "real" world -- just faster.