Surviving online grocers try to extend their shelf life ONLINE GROCERY shopping, long-promoted as the modern answer to the arduous supermarket trek, is hardly moving in the express lane. Several popular U.S. e-grocers (Streamline.com, WebHouse Club and Shoplink.com) recently checked out early, leaving the few survivors (Peapod, Webvan, Groceryworks and others) to somehow broaden their virtual shelf appeal to an increasingly skeptical consumer.
Some Internet analysts say the dot-com grocers will never achieve profitability without depending on their real-world competitors for an infusion of customers and financial support. The so-called clicks-and-bricks grocery model, they say, is what ultimately will attract a large and loyal consumer base.
Although shoppers have said convenience is a key reason to buy groceries on the Web, product quality remains a critical e-grocery success factor. But online grocers are still figuring out how to make rudimentary foodstuff like an apple appear fresh when there is no ability to touch or smell it. And they are also struggling with “final mile” hurdles, or how to deliver the ice cream to your door before it melts.
That is partly why 1999 online grocery sales totaled only $335 million out of the $479 billion U.S. retail grocery industry, according to eMarketer, an Internet statistics firm. Still, many analysts say a large portion of grocery dollars will eventually move to the Web – but not until 2003. And even then, online grocers will account for a mere 1.7% of grocery revenues. Jupiter Media Metrix predicts that the e-grocery business could reach a substantial $3.5 billion in 2002, and Forrester Research projects online groceries will top $10.8 billion by 2003, accounting for 10% of total consumer e-commerce.
“Online grocers have struggled because they had to build an expensive infrastructure and wage fierce marketing battles to make customers aware of their service,” says Matt Stamski, senior analyst for research firm Gomez Advisors, which forecasts Internet grocery services will grow to a $2.3 billion market by 2001 – more than five times the size of today’s online market.
Since the grocery industry operates on razor-thin profit margins (an average of 1.2%), analysts say the remaining e-grocers are now likely to focus on retaining customers – one at a time. “Customer relationship management is critical to the e-grocery space, perhaps more so than any other shopping category,” says Stamski. “The grocers that have failed never grappled with customer relations because they were too focused on accruing enough customers.”
Despite the e-grocer shakeout, research firms have not revised their abounding grocery e-commerce revenue projections. Stamski notes that a strong online grocery sector will likely emerge within a few years now that the weaker entrants are being weeded out. “But we are not going to see any more pure-play grocers surface,” he says.
By nurturing their established customers, e-grocers can eventually bag profits. But it will not be easy. A recent joint study by Mainspring and Bain & Co. showed that the typical online grocer must retain a customer for 18 months just to break even.
And the loyal base of customers also will need to order more often. A 2000 joint study conducted by McKinsey & Co. and Salomon Smith Barney found that the frequency and size of each grocery order plays a far greater role in generating online profitability. For instance, while the average online grocery order generates only $9 in gross income, the typical online customer will purchase groceries on the Web up to 30 times a year. So order frequency drives the net present value of an online grocery customer to $909 over a four-year time period.
To increase per-customer sales, PinkDot.com uses a collaborative filtering computer program run in conjunction with ordering software to provide shoppers with massive database comparisons. So if a customer orders hot dogs online, the filter scans the database and finds that 5,000 other shoppers who ordered franks also bought mustard. Within seconds, the filtering software recommends a sale on the spicy brown brand.
EXPANDED OFFERINGS To drive up profits and reduce customer attrition, some online grocers are expanding their offerings beyond groceries to higher margin items. Webvan, which averages about 2,350 orders a day, is now delivering books, CDs and videos along with the milk and eggs.
The “Trojan Horse” effect of home-based delivery is easy once an e-grocer has established a meaningful relationship with a customer, notes Stamski, who finds that Webvan is starting to look a lot less like a grocer and more like a general retailer. Webvan’s loyal customers optimize the timesaving benefits of its home delivery service by piggybacking multiple shopping needs, such as dry cleaning and video rentals, onto each successive grocery order.
Out of all online shopping categories, online grocers have the unique opportunity to act as the aggregator of a shopper’s overall activity, according to “Consumer Direct: Shopping Behavior in the Age of Interactivity,” an ongoing study conducted by Peppers and Rogers Group and Institute for the Future for consumer goods industry leaders such as Kraft and Procter & Gamble.
The study found that e-grocers can ultimately form more cohesive one-to-one relationships with customers – being entrusted to handle their complete shopping information and needs.
Skokie, IL-based Peapod is one e-grocer that learned long ago the importance of developing relationships with its most valuable customers and how to customize the overall virtual grocery shopping experience. Acquired by Dutch brick-and-mortar giant Royal Ahold in mid-2000, Peapod enables shoppers to build their own personalized virtual supermarket. Customers can create tailor-made grocery lists that are stored and retrieved with each successive shopping trip.
Most importantly, Peapod teaches customers to become more efficient grocery shoppers. “How did we do on that last order?” it asks customers during their next visit, learning from them along the way. “We get feedback on 35% of our orders,” says Peapod spokesperson Paul Wheeler, “which helps us enhance our personalized service.”
E-grocers can observe a customer’s shopping behavior patterns, and use them to build relationships that grow smarter over time. If a Peapod customer shops with the service long enough to create a “smart” shopping list, that becomes a very big incentive to remain with Peapod, even if a competitor offers a similar service at an introductory price.
Home delivery also offers a way for e-grocers to learn and remember individual preferences for each customer and to act on those in a meaningful way so they can eventually eliminate a customer’s desire to abandon the relationship.
“The truck drivers are our company ambassadors,” notes Wheeler. “They are the only personal interaction with the customer, other than the call center. We encourage customers to ask them questions.”
While improving individual customer relationships will contribute to potential profitability, e-grocers are also determining which business model works best. The standard model incorporates building a centralized warehouse to gather and deliver the order via company trucks. Only Peapod sends its employees into existing brick-and-mortar stores to do the shopping, lowering overhead but shrinking margins.
Across the Atlantic, $30 billion British supermarket Tesco reached online profitability in early 2000 and has garnered 80% of Britain’s online grocery market, according to Forrester Research, using a model that combines the best of the Web with its own stores. U.S. e-grocers are examining Tesco’s path to online profitability where, since 1996, it has registered 500,000 online customers who generate more than 48,000 weekly orders worth $6 million.
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