Online Grocery 2005
By George Anderson
Safeway’s decision to roll out its online shopping and home delivery service in the Baltimore and Washington, D.C. region is the latest indication that such services are alive and well.
Safeway enters a market where Ahold’s Peapod service has been operating for a number of years. Safeway operates its service under a partnership with Tesco.
To attract consumers, Safeway is offering first-time customers free delivery on their first order, the company said.
According to Forrester Research, online food and beverage purchases are expected to growing to $17.4 billion in 2008. In 2003, online grocery generated $3.7 billion in business.
Moderator’s Comment: What is the state of online grocery in 2005? Where do you see the business moving in the years ahead? –
George Anderson – Moderator
We have talked about online services several times and there is definitely a market segment that can make use of it. These would tend to be users who are confronted with very busy schedules and who have the infrastructure (i.e., freezers, pantry space, etc.) to hold both frozen and shelf stable products. It becomes pretty easy to spend the minimum amount required for delivery.
There will always be the question of fresh items. Unless you are a large household, you will probably be supplementing the bulk purchase with local purchases between deliveries. These purchases will be at the “brick and mortar” outlet. I don’t think enough thought has been put into integrating the two channels.
Instead of the original order beginning in the store, specialized distribution centers can be combined with in-store selection to provide the customer the best of both worlds. High labor service departments in the store can be supplemented by low labor sales generated online. By having the bulk order selected and delivered to the store, where the customer can also come for their fresh items, the customer still saves time and the retailer saves on delivery costs and continues to get impulse buying. Weekly promotions that give the consumer a reason to visit the store and a limited line of “emergency items” that can be used to fill-in the bulk purchases make the smaller footprint store a destination for the consumer. When you look at the “other end of the horse,” the manufacturers and suppliers of new items will like the new format because of all the online promotions that can be conducted. This will help them lore customers to their new products. It is the retailer’s obligation to minimize the online noise so it doesn’t ruin the shopping experience. Better integration of the merchandising program across both online and brick and mortar channels will help both improve their results.
The success of the online experience depends on broadband availability which is continually improving. I think online shopping has no place to go but up.
The state of online grocery is much like the state of Americans’ health. Some people are quite healthy, some are reasonably healthy but still have health challenges, and most are in some part of the pits.
Online grocery is suited to where the driving conditions and parking are highly congested; where residential areas are loaded with people with the means to pay for this service; where there is some security on both the deliveries and the receipts. This a “convenience” that the customer pays for. The audience with that mindset has to grow if online shopping is to be more than a spot-success.
Since our country is growing more affluent customers annually with interests other than grocery shopping and since urban living is growing ever-more crowded there is a constrained potential for on-line shopping. Washington, DC, is a good example of where conditions are more favorable. The affluent and the busy multi-interest people are the target audience for on-line shopping… but those are the people who also eat out regularly. Now Safeway has the opportunity to show us how they can master the on-line shopping sector better than others. Good luck and hope lower-priced Wal-Mart doesn’t enter the game.
I find it amazing that we are still debating the viability of online shopping more than a decade after its inception.
Granted, it has yet to provide barn burning profits and any other retail “format” would probably have been abandoned long ago if it produced the same level of losses. However, I firmly believe that the most successful model — and the one that will produce consistent growth for the supermarket industry — is one we have yet to see.
I can’t speak to technical issues, but I am convinced that consumers see online shopping as a strong alternative across retail and their online purchases will continue to increase. Food has a particular problem. If people can’t touch it, smell it or see it in person, they are suspicious of its quality. Some people, even younger generations, will never ever buy food online regularly. They like and want the in-store experience you can’t get in front of a monitor. Others will increase their purchases slowly but surely. It sounds trite, but patience and dedication will eventually lead to profitability.
Online grocery shopping is a valuable addition to the mix, but it addresses a niche. I’ve used several of the services over the years and my biggest criticism is that I can’t quickly find what I want, and if I find it, can’t be sure the item delivered will be what I thought I selected. Having said that, the major business challenges are replacing the shopping “chore,” and the delivery, with explicit pricing. Shoppers don’t think in terms of dollars and cents when considering the cost of the process of going to a store, spending some valuable part of their day doing “stock pickup” and then working as a delivery agent getting the stuff home.
Online shopping brings these functions explicitly into play, and shoppers will allow online to compete with offline (paying for those services rather than doing them themselves.) Chains who establish themselves and can hang on and improve without losing their shirts in the meantime, will benefit and thrive as the world turns, just like Amazon has. This is a grow-improve-hang on game that will yet pay massive rewards. (But maybe not right away. Offline – bricks and mortar – can improve, too.)
This is still a niche business but will increasingly become an integral part of many retailers’ overall efforts to serve the broader needs of their shopper base.
There are enough “straws in the wind” like Fresh Direct to demonstrate that some shoppers really like this type of service, assuming it delivers real value, i.e., that the cost to the shopper is viewed as “worth it.”
Expect increased price and service competition over the next year or two and as this increases, the share of business done by this segment will grow, primarily as a complement to regular grocery shopping.
Keep in mind that Amazon is developing a grocery strategy.
Fresh Direct sales are growing nicely, but no one outside the company can tell if there are any profits. They are a nonunion firm, with a starting wage of $7/hour. Their customers in NYC love them, because the prices are very good (for NYC) and the service is excellent. What’s unclear is how the company can pay people to pick, pack, and deliver based on the modest margins and service fees. Given the size of the staff (3 figures, going to 4 figures assuming the growth continues) they’ll end up organized by a union who’ll double the compensation cost, based on increased wages and union benefits. I doubt that they’re profitable now, and with a union in the future, their losses are assured. Americans demand their groceries at very low margins and low price points. Picking, packing, and delivery are very labor intensive. Sales can be achieved, but profits are unlikely.
My previous occupation was in the retirement care industry. I’m tempted to believe that there is a demographic that is entering a time in life where it has become painful to shop, and will consider alternatives out of necessity.
Safeway has the name that this group will trust. Publix? Home Grocer? No. Granted, this group is uncomfortable online, but at this stage they are probably beginning to use caregivers, who could do the ordering. And – this group communicates within itself regularly.
This is a small target audience, but it’s growing and here to stay.
There is no question that online food shopping, like shopping for other goods, will represent a sizeable segment of the grocery market as soon as providers can get their operations in order to handle volumes and efficiency. Time-constrained people and those seeking convenience have trained themselves to use the internet for all types of shopping – food is just a logical extension. This merchandise segment is unique in that it might be termed “daily goods” or goods that are purchased repetitively. All the more reason for people with limited time to use this service. Most likely they buy the same brands consistently and so, unlike apparel (which does well online), there is very little that needs to be done in person. If you add in the convenience factor, this is a winner if executed properly.
So far, I still don’t see any companies making a profit with online grocery shopping. If there was money to be made, the well-run grocery companies would be doing it. If Publix could not make a go of it, I doubt a misguided company like Safeway can do any better. Most people still find that grocery shopping is not an inconvenience or unpleasant experience. Perhaps Safeway realizes that shopping in their stores is an unpleasant experience and that online shopping might be a better alternative for their shoppers. Super Valu released an excellent report a couple of years ago that went into great detail why online shopping has been a flop in the USA. I’ve passed it along to other RetailWire readers in the past.
Like David, I thought of Publix instantly. When it comes to home delivery of groceries, I’m reminded a little of the old South American joke, which says that Brazil “is the country of the future, and always will be.” But in this case, I’m bullish over the long haul. I think Fresh Direct has a good model and is doing well, which suggests that this works best in upscale urban markets. It’ll come. The pioneers get the arrows in the back, but eventually someone makes it, and then others follow.
Delivering groceries has been around since the horse and buggy days. My father delivered groceries to the local people back in the 40’s and 50’s. However, back then, there were no Wal-Marts, or Aldis to pick off the profits they made on every item. Everybody today expects something for nothing, and in small rural towns, it is no longer mom & pop taking care of Mrs. Smith’s entire weekly grocery order.
I am starting to develop a delivery day for my U.S. choice custom cut meats, starting next spring. The people want our meats real bad, but it remains to be seen how bad they want them (will they pay full retail?). The prices I will charge will be everyday retail, plus a delivery charge. No specials from my circular will be included, or I’ll get cherry picked to death. So, with that in mind, I’m curious to see if consumers are willing to pony-up a fair price for premium meats, at far less cost than an Omaha steaks scenario. I’ll let ya’ know.
I used to be a detractor of online, home-delivery grocery sales. Then, a confluence of living alone, home-officing, and recovery from open-heart surgery (no driving) forced me to consider home-delivery from a nearby Safeway to satisfy my guacamole jones. They did a pretty good job, especially since I was pretty much always home alone during that period. I even formed a relationship of sorts with my regular delivery folks.
Special circumstances like mine seem to drive the business of home-delivered groceries. As those special circumstances evolve with societal, health, and economic changes, online grocery sales will follow.
The deliverable foods business will have to reach out and create a profitable business model. $10.00 a gallon gas and parking lot safety might make delivery affordable but that’s another discussion. One model might be to network neighborhoods by day of the week and time of day. They pay a membership fee of $$$. Members are sent reminders on line to submit their orders by the end of previous day, the delivery truck warehouses incremental items milk, bread, candy etc… and volume and efficiencies drive the profits. Grocery stores have inherently low margins and need impulse sales to add margin dollars to the bottom line.
Pizza places already have a distribution network and continue to add different types of prepared food to their menus as they grow incremental business. Someone will figure it out. Way too busy and too tired to shop efficiently.
As I’ve said before, judging by the frequency of delivery by all three of the home delivery services covering the area where I live, online grocery shopping is growing steadily in the UK. There are more customers ordering more often month on month plus occasional purchases from specialist delivery companies with ready meal bias. It’s difficult to peak into the shopping baskets but I do know that the people using home delivery service vary in type, especially by income and age. I also know that these shoppers hit the stores themselves as well as buying from local farmers’ markets. Which possibly indicates that the delivery companies are used for cpg and bulk buys, cans and packages of brands that they know and don’t need to worry about. Leaving more time for the pleasurable side of shopping, to select fresh produce, meat, fish and baked goods from preferred suppliers, often small and local. If you spend less time in the supermarket, you can spend more time in a deli or farm shop or browsing around market stalls. Bottom line, then? Choice. People like it and the more they feel able to exercise it by shopping in several different ways, the happier they will be. I am a big fan of online shopping and cannot believe that it will disappear. Niche it may be, and province of the middle class and affluent, but for those who use it, it is a convenience which they would be loathe to lose.
The best of the best have been in and out. The best have tried and failed. The mediocre have done OK. However, Mr. Bishop uses the right term – it’s a niche.
Doc Banks also provides insight on one of the consumer sets that best fits this niche. It’s also a strong option for the aging population.
Personally, I think those outside of the description of supermarket operators are likely to have the best success. It’s a completely different model than the traditional supermarket retailer is used to living within. Smaller, local and even regional ‘non-traditional’ providers have the best opportunity to find success from my view. These providers will find success if they understand service as much as they understand food retailing. This is a service more than anything. Therefore, finding the right processes that create the best environment to execute are successful. It’s equally about execution as the food itself. Doing a ‘pretty good job’ is okay when it comes to the food part for this market. Doing a great job with execution will be the necessity. Traditional retailers are stuck in the mold of brick and mortar. New and innovative entrepreneurs will be the ones to eventually break the streak of failure.
Wishing Doc Banks the best of health!
Presently, and the major purpose… it serves as a service to the seniors, the posh suburban shoppers and/or city dwellers. You have to micro market its usage.
You have to forget making a profit (and when did retailers say we make 2 cents after tax, or we don’t do it?). But do get a decent margin… to come close to breaking even.
Some independents are using this convenient vehicle as a competitive advantage. And if Starbucks, Fridays, drug chains and independents, are testing a program like this, it raises the bar for grocers to play in this arena, in a smart fashion! Hmmmmmm