Image: Kroger
Can we finally let Webvan rest in peace?
The ghost of Webvan has been banished forever. The long defunct company, used for years as a caution to any considering an ill-advised jump into online grocery sales, no longer holds sway over the decision-making of retail business executives. Today, some of the largest grocers in the country – Walmart, Kroger, Albertsons/Safeway and Ahold Delhaize – all offer online sales with either on-site pickup and/or door-to-door delivery. Upstarts including Amazon.com, FreshDirect, Instacart and others abound.
Kroger and Walmart have been most aggressive among store operators rolling out their services. Each has been sure to offer their online ordering and store pickup in the home markets of their rival – tweak, tweak.
Walmart president and chief executive Doug McMillon recently credited “the continued roll out of online grocery and growth of pick-up in stores and clubs” as playing significant roles in his company’s strong quarerly performance.
“We continue to see proof that our customers enjoy a seamless shopping experience,” he said. “The distinctions that we talk about today between stores, apps, pick-up, delivery and sites are continuing to blur into the background for customers. For them, it’s just Walmart.”
Kroger announced plans last year to expand ClickList online ordering and store pickup system to 45 percent of its locations across the U.S. On the company’s earnings call in June, CEO Rodney McMullen said it had expanded ClickList to 25 markets with more to come.
Kroger has found a high level of satisfaction with the service and claims it does not cannibalize its in-store business. “From everything that we see, we find it an ‘and’ and not an ‘or’,” said Mr. McMullen. “And the ClickList customer continues to come into the store and it really — it’s just one more way of making their life a little bit easier.”
Earlier this week, Albertsons and Safeway began offering online ordering in Denver.
“The plan is to expand to other parts of Colorado, but this is our first go of it here,” Safeway spokesperson Kris Staaf told The Denver Post. “We’ve had the service in other markets like California, Washington and Oregon, and it’s been tremendously successful.”
- Is Walmart on a roll? – RetailWire
- Kroger’s (KR) CEO Rodney McMullen on Q1 2016 Results (Earnings Call Transcript) – SeekingAlpha
- Now Safeway and Albertsons will deliver groceries to your front door, too – The Denver Post
- Consumers go mobile to buy groceries online – RetailWire
- Kroger’s customers love to order groceries online – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: How do you see the online grocery market developing over the next several years? Do you see any game changers on the horizon?
Poll
BrainTrust
Ken Cassar
Principal, Cassarco Strategy & Analytic Consultants
Ralph Jacobson
Global Retail & CPG Sales Strategist, IBM
Webvan’s mistake was that of overreach. They tried to build extremely expensive ($35 million per market) automated fulfillment centers with local hub-and-spoke distribution systems which allowed them to deliver within 30 minute windows. And on top of this they tried to move into 20 markets in their first year. Today’s online grocery players have learned from those lessons. They pick their markets carefully. They opt for click-and-collect rather than delivery in some markets. They rationalize product selection. They eschew expensive automated fulfillment centers in unproven markets. And they charge for delivery. We all owe a debt of gratitude to Webvan for showing us the paths to not take.
No doubt more can be learned from failures than success; although some are better at it than others. We’ve looked at literally hundreds of eCommerce solutions for retail with a variety of technology platforms and business models. Different approaches are appropriate for different retailers.
That said, there are two technologies that are poised to change the eCommerce space: robotics and virtual/augmented reality. Plugging a VR experience into an eCommerce platform can dramatically change how consumers interact and buy. And the commercialization of autonomous vehicles and robots that’s happening changes the economics of how items will be delivered in the future. There’s still quite a learning curve, but many retailers have already started pilots to figure it all out.
Unlike durable-goods retailers, online grocers do not (yet) have cost advantages over brick-and-mortar retailers. This means that new entrants would probably not be profitable in the short term.
Nevertheless, Amazon is aggressively entering urban areas in the U.S. and the UK with its Amazon Fresh brand while promising a short-delivery window (one hour or less). If it succeeds, I do not see how a second entrant can compete with them. The reason being that delivery services involve very extensive economies of scale. I think that supermarket chains are aware of this latest fact and are therefore building (initially) unprofitable services in an attempt to preempt Amazon and other aggressive entrants from taking over their turfs.
When Webvan imploded, 6 percent of the U.S. population had broadband access at home, nobody had smartphones and Millennials were not entering their high-consumption life-stage.
Today’s shopper, technology and competitive context are entirely different from the Web 1.0 era. And in the intervening 15 years, as awareness and demand has grown exponentially, a lot has been learned and applied to improve the economics of online grocery.
The first and closest-in game changer is the rapidly growing awareness and availability of online grocery, which drives trial. Many online grocers report that 85 percent to 90 percent+ of their business comes from repeat shoppers, so driving trial is essential.
Further out, warehouse automation and autonomous/electric vehicles (air- and land-based) are poised to have major impacts on significant cost drivers.
There are valid discussions to have about the outlook for online grocery, but “It’s been tried and doesn’t work!” is not one of them.
I see the online business growing, but mostly in urban areas where delivery costs can be somewhat reasonable. Even at that, profitability will be difficult. I have studied this for several years and making money delivering groceries can not be profitable unless the prices of the foods are raised 10 percent to 15 percent above the brick-and-mortar stores, which may turn a small profit.
I predict that the government is going to step in with additional regulations on the type of vehicle required, logging hours for delivery employees, inspections of all vehicles done randomly for cleanliness and probably a few other ridiculous regulations that will put an even greater strain on delivery profits. Click-and-collect will be the larger part of this growth, and the new designs of the future stores will have all the logistics designed for this program, as older stores currently do not have. It still comes down to value for most consumers, which is why click-and-collect will own the day, and the higher-cost delivery service will take care of the higher-ticket consumers for whom convenience is king.
I’m seeing it pick up at Walmart. Lets face it, is it really much fun walking in a Walmart? Of course not. I’ve been to a few Walmarts and saw the pickup service doing about $12,000 per week. Not a lot but it’s a start. Generally moms with kids who don’t want to deal with car seats, shopping and the time involved. Fifteen years ago I was working in Denver and Kroger started online shopping using one of their lower-volume stores as a depot. Then had a fleet of vans to deliver. It wasn’t going over too well then. Still, that was 15 years ago and its just now catching on. Webvan was just ahead of its time. We all knew it would catch on some day. And we also knew that only the multi-billion dollar grocers would be able to endure the growth period while the small companies did all the leg work and then went bankrupt.
From the very beginning I was quite visibly, and repeatedly, on the record saying that Webvan was doomed to fail, even when the business press was in love with it. It wasn’t that I thought the online grocery market was a bust. I was apparently one of the few people that bothered to read the Webvan business plan and notice it was … to put it charitably … fatally flawed from its inception. It would not have worked if it had triple the capitalization. That doesn’t mean there won’t one day be a model for a scaled online grocery service, either in conjunction with a brick-and-mortar retailer or a digital pure-play. The key for success is matching the right product selection to a broad enough market to make it financially sustainable. And, more critically, not making assumptions about shoppers, but basing the offer on real hard data and ethnographic observation. For example, there are some that would say the future has never looked brighter for online services given the ascendancy of born digital generations whose parents never showed them how to shop. On the other hand, some might feel the future is doomed because Millennials are an instant gratification generation who view preparing meals as a hobby, not a lifestyle. The point is, we don’t know which view is accurate, so we need to really focus in on developing more sophisticated methods for analyzing shoppers and their lifestyles. Find me a digital food purveyor run by an anthropologist or social psychologist and I might be able to show you a game changer.
Webvan?! Seriously? Having worked in the company the Webvan CEO came from, I can say that it was due 100 percent to overextending growth strategies. This can happen to any company. Was it before its time? No way! I started fulfillment for Peapod literally decades ago. Is online food shopping at its peak? Not by a long stretch. It’s still a tiny portion of all food sales. I believe technologies are available now to enhance the online food shopping experience and, as more retailers adopt these capabilities, market share will grow.
While Messrs McMillon and McMullen — confusing, isn’t it? — sound enthusiastic, and are certainly in a position to know, without any hard numbers given we’re left to our own speculation. And mine is (has been and will continue to be until I’m proven wrong) that various “online” grocery services will continue to grow, but will never represent more than a fraction of total sales. And the reason is simple: reintroducing a clerk into the shopping experience — and of necessity every pickup or delivery service must do so — goes against the whole process of cost containment and automation that has driven food retailing for the past century (literally a century: a happy 100th B-day to PigglyWiggly on Sep 6) … and I just don’t see that reality changing.