COVER STORY: Back online

In hindsight, it's easy to see why Webvan and the other pure-play, online grocery ventures of the Nineties failed. They were the products of entrepreneurs with vision but little experience or equity in food retailing to back up their enthusiasm. Starting out with virtually no brand image, little infrastructure, and hefty upfront costs, their business plans seemed destined to fail.

That's not to say that their ideas were bad ones. While the dust from the dot-com bust was still settling, companies with plenty of supermarket industry experience like Safeway, Ahold, and Albertsons plugged along with online businesses guided by experienced senior executives. The pure-plays died on the vine, but many bricks-and-clicks operations took root and are now beginning to yield fruit.

Netherlands-based retail giant Ahold made headlines in 2001 when it handed over almost $100 million to purchase Chicago-based online grocer Peapod. Even smaller regional players and independents are getting into the game, many with the help of New York-based MyWebGrocer, which provides information infrastructure for online operations, such as Web interface, hand-held computers to assist picking, and integration to pricing systems and POS systems. The company now works with 45 different grocers, including Shaw's, Harris Teeter, D'Agostino's, and Lowes Food Stores.

Why all the attention to a business that seemingly hasn't proven itself? "It's basically a long-term strategy of making sure they're holding onto or increasing their market share," says Pete Abell, director of retail research at Boston-based AMR Research. Studies show that retailers who are first to offer online service in their marketing area end up gaining the inverse market share. So if a retailer has a 25 percent market share and is the first to introduce consumer-direct grocery shopping, 75 percent of the people who sign up are not its customers. "In the long run, the real question is whether you can afford not to do it, because you're going to lose market share to others that do it," says Abell.

Brick-and-mortar food retailers are proving to be the most viable candidates to make online grocery shopping successful. They bring with them brand names that are already trusted by shoppers, tried-and-true relationships with the world's leading suppliers, and, in many cases, logistics and technology systems tailored to the notably challenging food supply chain. And unlike Wal-Mart and other supercenters that compete on price, they can focus their models on service—an imperative to any successful online operation.

Supermarkets that have taken the plunge into e-retailing are finding some notable perks, foremost among them a significantly bigger ring. The average basket size for online grocery is a whopping $125. That compares to only $73 for in-store shoppers. Add to that the fact that online shopping tends to mimic in-store shopping patterns, so some consumers go to the Web for fill-in as well as major shopping.

Perhaps the biggest online payoff for brick-and-mortar grocers is the opportunity it provides them to increase loyalty through one-on-one communications with their best shoppers. About half of online customers respond to questionnaires and give feedback on shopping experiences, a phenomenal return rate that provides insights retailers would be hard-pressed to obtain in store settings.

"It doesn't matter so much to me whether they shop online or shop in the stores. I just want to win their loyalty and keep them coming back to Albertsons," says the Boise, Idaho-based retailer's marketing v.p., Pam Powell. "This seems to be something that is making shoppers' lives easier and winning their loyalty."

The 5-percent potential

Although few if any experts say online shopping will take the place of visits to the store, they note that online operations are currently bringing in a modest 1 to 2 percent of total sales. Officials at Safeway have estimated that online shopping could bring in 3 percent of their overall business over the next five years, and AMR's Abell predicts that the number could reach 5 percent overall for retailers.

A report by AMR Research predicts that as online retailing moves from early development into a growth stage, the channel will likely see rapid growth and strong profitability. Today, online grocery retailing is being tested in a limited number of densely populated urban and suburban areas, and its main draw is female heads of household with children at home. The West Coast has become a hotbed of online grocery activity. and Safeway's GroceryWorks, which is 35-percent owned by U.K. retailer Tesco, are going head-to-head to win consumers in California, Oregon, and Washington. Albertsons also recently expanded its service to Las Vegas.

Peapod and its Ahold partners Stop & Shop and Giant serve Chicago, Boston, Washington, D.C., Long Island, N.Y., and parts of Connecticut. In four of those five markets, claim Peapod officials, the company has achieved a positive operating cash flow and is on track for the profitability goals set by Ahold. Observers note that it has taken Peapod about 10 years to hone a profitable model.

Publix, the most cautious of the major retailers in its rollout, is testing the waters with its PublixDirect service in several southern Florida counties. In July, the Lakeland, Fla.-based chain announced it was postponing its expansion plans for Atlanta and Orlando.

Other retailers have said that, as they fine-tune their models, they plan to carefully expand operations to other markets and under other banners. "This is the model to go forward with, but we're going to take it slow. We're learning as we go along," notes GroceryWorks president Gary Rocheleau, who joined the company in May and was formerly v.p. of marketing at Safeway's Vons division in California.

The models are as diversified as the markets, varying in how groceries are selected, how they're delivered, and how much they cost. Albertsons and Safeway are sticking to an in-store pick method similar to Tesco's successful U.K. model, which has employees hand-picking orders in selected stores at off-peak hours. Peapod's partners either build mini-stores within their stores or use state-of-the-art warehouses specifically designed for the online operations. Publix is using only a warehouse to fulfill its orders.

The pick's the trick

Picking the groceries is one of the trickiest parts of the business. After all, out-of-stocks are even more annoying to customers who are paying a little extra for convenience, whether that be a delivery fee or a markup on grocery prices. Out-of-stock items are among the chief reasons consumers don't stay with online grocery shopping, according to AMR Research. Consider that a typical order has two to five substitutions, so with an average item priced at $2, that's about 4 percent to 10 percent of the total basket.

MyWebGrocer, which began operating in January 2000, addresses out-of-stocks on the consumer end by including instructions in the customer profiles that are sent to its supermarket clients. "If the order is from a return customer who was unhappy with something that occurred, there's a note that says 'return customer, take extra care.' The retailer has the capability to call the customer up immediately and apologize and offer a future discount," says president Mike Spindler.

Most retailers offer free returns if they make a mistake. Still, as the saying goes, the first impression is everything. "We've set a high bar of expectation in this service, because in order for it to be a convenience, we have to earn the customers' trust," notes Spindler. "It's not very convenient if you order online and then the delivery comes and you're missing two items for that evening's dinner. In fact, it's almost more inconvenient."

Albertsons' Powell concurs. "We make sure our fulfillment stores really understand the importance of being in stock. Their report card will surface really fast," she says.

Delivery can also be a challenge to making online service work unless, like Albertsons, the company already has an infrastructure. "We've utilized our handheld units that we normally scan the shelves with for ordering purposes. And we have our own trucks and warehouses, as well as sophisticated transportation software to handle the logistics," says Powell. delivers to more than 1,100 ZIP codes and covers about 20 percent of its total store count for both pickup and delivery.

A number of retailers have opted for store pickup, at least in the initial stages of their launches. The verdict is still out on whether customers prefer to have the groceries delivered to their homes or offices, or would rather pick them up at a local store. Delivery tends to attract early adopters more quickly, observers note, but the upfront costs are definitely higher. Delivery adds an extra $8 per order on average, according to AMR Research.

The store pickup option is not without its costs, however. Retailers must consider how to store perishable items and must have personnel and a printer and scanner to deal with orders.

"Pickup is not a huge amount of the business. The home delivery option is much more popular," says Powell. "But we offer it because it's an important convenience that our customers want."

MyWebGrocer's Spindler says his clients have found success with both models. "Of our two top-performing stores, one uses pickup and the other uses delivery. They're neck-and-neck in terms of volume, and their markets are similar," he says. "Usually when we have retailers who offer both delivery and pickup, if they're the first player in the market delivery gets more press early on and gets more adopters. But after a year, they even off. And after a couple of years, they get more pickup business."

Another variable on which retailers have split opinions is pricing. While Peapod's prices vary from those in the stores, many others try to keep prices the same, even incorporating sales and promotions going on in the store. "Our prices are different, just as in any store, but they are priced fairly for the competitive market we're in," says Skokie, Ill.-based Peapod's director of marketing, Annette McMillan, who is a former advertising and marketing director for Dominick's. She says Peapod runs hundreds of sales every week. Still, Peapod's average basket size is $135, considerably higher than its competitors.

MyWebGrocer's Spindler counsels retailers to keep pricing in line: "Customers don't want to be gouged on their groceries. If the name of the store is associated with the retailer, people expect to pay virtually the same price that they're paying in the store."

Delivery prices also vary among retailers, with some charging a flat fee and others using sliding scales to encourage more spending. For example, Peapod, which asks for a minimum order of $50, lowers its delivery price to $4.95 for orders above $100. The fee for orders between $50 and $75 is $9.95, and for orders between $75 and $100, the fee is $7.95.

As retailers continue to fine-tune their e-retailing models, one thing is for certain: The earlier they begin, the more advantage they have over the competition. "This is a legitimate channel, and the ones who have gotten into it first—and are learning to do it well—are at an advantage," says AMR's Abell. "As the saying goes, 'retail is detail,' and in this business, you constantly have to be looking at the details."

Just as important, retailers must stay up to date with their customers' needs—and convenience is a need that doesn't seem to be going away. That's one of the main reasons the companies that are online today are likely to stay that way for years to come.
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