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STORE OF THE MONTH: Click by Brick

It's 6 p.m. on Wednesday, and several shoppers are walking the aisles, loading their carts with a week's groceries. If an item is unavailable, they check their lists and make a substitution. In less than half an hour they're finished and ready to check out—or in this case, click out.

It's a common scene that's played out millions of times a day in supermarkets. What's new here is that the "shoppers" are employees picking groceries from customers' requests, and the venue is a 7,800-square-foot fulfillment center on the second floor of a 68,000-square-foot Stop & Shop store on Main Street in Norwalk, Conn. This location, one of six in operation by Peapod, Skokie, Ill., is proving that the marriage of bricks and clicks can be a profitable union.

It is, in fact, the most closely watched experiment in online retailing since Webvan, which burned through nearly $1 billion in venture capital–primarily on expensive warehouse operations–and whose demise piqued the industry's interest in the potential of brick-and-click operations like Peapod/Stop & Shop and Tesco in the UK. The latter will soon bring its expertise to bear in the United States through GroceryWorks, an operation in which Safeway Stores has an interest.

For the moment, however, all eyes are on this New England retailer, whose model is considered by many to be the safest bet for profitable online retailing. One reason is the attitude of the parent company, Ahold USA, which hopes to combine its expertise in brick-and-mortar retailing with Peapod's 11 years of technical savvy. This "bricks and clicks" strategy has already begun turning operating profits in Chicago, Long Island, N.Y., and Norwalk, according to Peapod CEO Marc van Gelder.

Ahold bought a controlling stake in Peapod early last year, when the online retailer was teetering near bankruptcy, and in August 2001 successfully completed a $35 million tender offer for the remaining shares.

While officials declined to discuss specifics on profits, it was noted that the Norwalk center, which made its first delivery on June 21, 2000, handles an average of 1,200 orders weekly, with an average order coming to about 60 items and ringing up $130. Based on these figures, average weekly online volume for Norwalk would be a respectable $156,000.

Although the demise of Webvan has given rise to a throng of online skeptics, van Gelder is confident that overall sales will continue to escalate. "Our total sales in existing markets were up 42% in 2000. Customers want the service and the Internet is here to stay," he says.

Walter McKee is director of home shopping at the Connecticut division, a former regional operations manager for Stop & Shop and a 31-year veteran of brick-and-mortar retailing. "The logistics of delivering groceries is by far the biggest and most expensive challenge. We have 12 delivery trucks that drive about 3,800 miles weekly, and the cost of delivery is higher than what we charge customers," McKee says. "We're always studying factors such as truck size and routing options, how much time we spend on the road and at the customer's house, when the trucks are loaded, and who does the loading. There are a lot of pieces to consider," he notes.

The problem is exacerbated by Peapod/Stop & Shop's trading area, which includes most of Connecticut's Fairfield County. The Norwalk center makes deliveries seven days a week to upscale suburban areas such as Stamford and Greenwich, and smaller bedroom communities like Ridgefield, which covers 35 square miles and has a population of 24,000. The total delivery area covers 31 zip codes.

As orders have increased over the past year, the management team has had to shed some conventional thinking and simply learn to adapt to constant change in order to find quick, cost-effective solutions. "It's a lot like a marriage," McKee says. "There are days where someone disagrees about something, but it's never gotten to the point where people don't talk. We just go out and resolve the issue.

"It's been my experience at Stop & Shop that you don't go into something half-hearted. We're in it to make it successful, and we're willing to be flexible enough to try different things," he says.

McKee himself is an example of this flexibility. He was involved in core grocery operations for 31 years and rarely worked on computers before he was recruited for the challenge of combining store operations with online technology. To help with the task, he brought along with him three other experienced Stop & Shop staffers: Brendan Ryan, who manages the fast-pick center, also called "the zone"; Darryl Belton, assistant zone manager who handles merchandising; and Michael Piscitelli, assistant zone manager in charge of shopper training and product quality. On the Peapod side is Kiki Stiemer, vice president and general manager at Peapod's Chicago office, who became the liaison with the Norwalk operations.

At present, Norwalk is one of six Peapod by Stop & Shop fast-pick facilities fulfilling online orders. Four others are located in Boston and one is in Long Island, N.Y. Two freestanding facilities just under 100,000 square feet are located in Chicago, along with one in Washington D.C., which partners with Giant, another Ahold chain. Expansion plans are underway for the East Coast, according to van Gelder, who declined to comment on specific locations.

Part of this quest lies in delivery size and charges. At present, the minimum order size is $50. With an order of $50 to $75, the delivery charge is $9.95; for orders of $75 or more, $4.95. Groceries arrive about 24 hours after an order is made.

The fulfillment center, formerly the store's secondary storage area, has 21 full-time and six part-time Stop & Shop employees, who take turns working one of two shifts Monday through Friday: 7:30 a.m. to 4 p.m., or 3:30 p.m. to midnight. On Saturday and Sunday, they work from 3 p.m. to midnight, picking the next day's deliveries. The productivity goal is to complete an average of 100 orders per shift, officials note.

The shelves are stocked much like a standard grocery store. However, items are coded, enabling "shoppers" to look for numbers within lettered sections, instead of having to seek out brand names. The shopers move through the aisles in a one-way direction. As an item is picked, it is scanned into a Palm Pilot, which verifies that the correct product has been chosen. The product is then bagged like a traditional shopping trip, and bags are placed in insulated totes.

In grocery, larger items, such as dishwashing detergent and soft drinks, are placed at the beginning of the shopping pattern, followed by smaller items, and finally bread. Variety is similar to that in the core store, with a similar ratio of national brand vs. private label.

Perishables including produce, meat, deli, seafood, bakery and floral are brought upstairs at the beginning of each shift and placed in refrigerated cases. Store managers downstairs are responsible for making sure these orders are filled.

"Managers are actually running two departments, but in their own subtle way, they wear it as a badge of courage," McKee says. "We've had to make sure our departments have enough people to satisfy the core store, as well as the secondary business," he notes. "On average, a store like this would have five full-time produce peo- ple. We have 10."

Each perishable category is bagged separately and placed in separate totes. Items are packed according to temperature, utilizing Peapod's cool chain technology, which calls for varying amounts of gel packs and dry ice. Shoppers have to follow strict packing guidelines.

The cool chain technology ensures freshness for up to 18 hours, Piscitelli says, an important factor since groceries packed during the evening shift sit until the next morning's delivery.

Once orders have been filled and grouped according to order number, they are taken down by elevator and staged in front of the delivery area. When a truck is ready, orders are loaded, with the first delivery ready to go at the back of the truck. Approximately 23 orders will fit into each vehicle, which has been designated for a specific delivery zone. The Fairfield County delivery area has been divided into six zones, with zones periodically added as Peapod's marketing area expands.

The entire shopping process is monitored by a computerized labor management system. This means that management can keep an eye on how fast shoppers are working and keep a record of productivity.

The ideal average time for a shopping trip is 22 minutes, according to manager Brendan Ryan, who has set up a "productivity board" resembling a tic-tac-toe board that displays the number of shoppers per shift and the number of orders they are encouraged to complete.

New items are added to the mix every week, according to McKee, who notes there are currently 6,900 active SKUs that include grocery, dairy, frozen and meat. "There are always a lot of new items that come to the core store that we need to offer. There's also a fair share of discontinued items; if the store discontinues it, so do we," he says. McKee aims to add an additional 1,000 items to the Norwalk zone.

Basically, customers drive variety, McKee says. In fact, they often request items via Peapod's Web site. But sometimes knowing which items to add can be a challenge. "We look at demographics, but we also experiment. I can't tell you how many times we've brought items up that we thought would do well and didn't." McKee and his associates are in the process now of going through data from other Peapod fulfillment areas and core stores in the service area to get more ideas for product selection.

There are a handful of items that just can't be transported—at least until technology catches up with the business. "A cake with whipped cream frosting would be an issue for us, because we don't think we could consistently bring the consumer a high-quality item," McKee notes.

One tool that has helped make transportation more efficient is Peapod software called SmartMile. It takes the orders and determines the best routes in each zone. Of course, factors such as rain and traffic can never be predicted or controlled.

Additionally, Peapod and Stop & Shop are offering discounts to shoppers who choose off-peak delivery times as an incentive to make delivery scheduling easier.

Deliveries are made in two shifts each day during the week: from 7 a.m. to 1 p.m., and then from 4 p.m. to 10 p.m. On weekends, deliveries are made in one shift from 7 a.m. to 2 p.m. Customers can choose a two-hour delivery period to receive groceries, but must be at home. This could change in the future with unattended delivery being offered in Chicago and Washington D.C.

In areas with unattended delivery, customers select a six-hour delivery window and designate a drop-off area. Surprisingly, customers generally aren't opposed to longer delivery windows, says Paula Wheeler, director of communications at Peapod. The totes used in unattended delivery are sealed for security and packed to stay fresh, although Peapod advises customers to unpack and store the groceries within an hour after the time window is up.

The company has also found a niche in office delivery. Local businesses stock up on the essentials, such as sugar and caffeine beverages. "You wouldn't believe the amount of cola they stock up on!" says Dalen Mathys-Cook, senior manager, fulfillment standards at Peapod.At one office, some employees who live outside the delivery zone combine their personal grocery lists into one office delivery.

his trend speaks to the main characteristic of Peapod's customers—time-starved. Many are members of a two-income household, have at least one child, and own pets. "We sell a lot of pet food," McKee says.

Another big seller is natural foods. "We move more natural foods online percentage-wise than three other Fairfield County Stop & Shop superstores," McKee says. Customers also request organic produce.

Perishables make up 90% of orders across Peapod's markets, with skim milk and produce faring best, according to Mathys-Cook. McKee likes to think that produce does well because Stop & Shop has a reputation for quality. "We're just as picky upstairs as we are downstairs," he says. That means that an online shopper will get a banana that's just as ripe as one in the store—unless they request a non-ripe banana. Customers do make special requests for produce or other items now and then, according to Mathys-Cook.

If a customer isn't pleased with an item or decides they ordered too much, they can return it with the driver for a full refund. This is part of the company's 100% satisfaction guarantee. Customers can also talk to the Customer Care center in Chicago, and an instant credit is issued.

If an item is out of stock, the customer doesn't find out until the delivery. Peapod plans to change that next year with new software that will notify customers on the Web site when an item is unavailable.

Customers can currently sign up for a substitution option, in which they agree to accept a similar brand if an item is out of stock. McKee says that the Norwalk store's 3% out-of-stock rate is the lowest in the division. If something is missing upstairs, they can supplement their inventory with items in the core store, he adds.

The fulfillment center and core Stop & Shop store both order from a Stop & Shop warehouse in North Haven, Conn., but they have separate order times. "We have our own order times upstairs for dry grocery, dairy, frozen, health and beauty aids and general merchandise," McKee says. "Managers of floral, produce, deli, seafood, and meat order for the fulfillment center, and those items come with the full load." Each week the fulfillment center receives four dry grocery shipments, two frozen, one GM/ HBC, and four dairy.

Peapod has rolled out a new warehouse management system in Boston, and plans to begin using it in Norwalk next month, according to Wheeler. The system was developed in conjunction with McLane Company, Temple, Texas, a distributor purchased in 1990 by Wal-Mart. Since McLane works heavily with convenience stores, the company has refined its technology for an "each pick" system, in which products can be picked one at a time. This is especially helpful in online picks, since customers sometimes request single items, such as one or two bananas. Peapod also plans to introduce some major changes to its Web site this month, enabling it to work about 33% faster with a cleaner, more user-friendly look, according to Peapod's Wheeler. Most of the changescame from customers' suggestions, she adds.

For example, a section called "My Lists," where customers can look at previous orders, will now show their entire order history, not just the last five trips. Products will have thumbnail sketches beside them, something customers also requested. Peapod is also working on a way to integrate Stop & Shop loyalty card data from the store into the site. This would allow first-time users a look at their purchasing history in the store and would save time.
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