October 26, 2006
Online Grocers: Where are they going?
By Laura Klepacki, Special to GMDC
(www.gmdc.org)
Safeway has just taken 100 percent of online retailer GroceryWorks. Fresh Direct in the metro New York region is growing. And, to add fuel to the fire, forget about speaking to the literati. Premier online retailer, Amazon.com, has now grabbed the attention of another distinctive and highly attractive consumer segment – new mothers.
The internet behemoth, whose sales jumped 23 percent last year to $8.49 billion, after a two-month test, launched its online grocery store in July. It currently offers 14,000 shelf stable foods and household goods across multiple categories, including baby care, cough & cold and vitamins, most offered in bulk sizes a la Costco.
Remarkably, disposable diapers have emerged as a best selling category. Of the top ten items in Amazon’s Grocery division, various Pampers stock keeping units hold six spots. Pampers Cruisers, Size 4, 140-count Economy Plus Pack, priced $37.87 is currently the number one best seller.
If there is any wonder whether general merchandise and health and beauty categories can have a place with online grocery retailers, Amazon has laid the question to rest.
Other hot sellers at Amazon include Senseo coffee pods, Bounty paper towels and Clif nutritional bars, along with baby wipes, dietary supplements and batteries.
Sales in the online grocery market have been climbing in the double digits, according to Jupiter Research, up from $2.5 billion in 2004 to $3.3 billion last year. It projects sales this year will reach $4.4 billion.
Yet, as a class, online grocery sellers have been slow to make a significant impact on the U.S. grocery industry, commented Vikram Sehgal, research director at Jupiter. “It still represents less than one percent of total U.S. grocery sales and we expect it to be small.”
Part of the reason is the fragmentation of the market. For instance, two of the largest – Peapod and Fresh Direct – only maintain regional footprints. Chicago-based Peapod, a subsidiary of Royal Ahold, has sales estimated at less than $300 million.
Meanwhile, Fresh Direct, with estimated sales under $200 million, remains concentrated in the New York metropolitan area. Other larger players include Netgrocer and Schwan’s, a provider of frozen meals.
Earlier this month [October], Safeway acquired the remaining 43.8 percent of GroceryWorks making the e-tailer its wholly-owned subsidiary, incorporated into Safeway.com and Vons.com. New Jersey-based Pathmark has also begun dabbling in online sales.
So when it comes to shelf stable and general merchandise, what instantly gives Amazon an advantage over others in its reach? Anyone in the U.S. can buy from Amazon and be privy to its attractive shipping rates – such as free delivery on orders of $25 or more [for most items]. Other online grocers typically require a higher minimum purchase and tack on a delivery fee.
To entice trial, Amazon is currently offering $10 off grocery store purchases of $49 or more through November 30.
Discussion Questions: How do you see the competitive
environment between grocery e-tailers and retailers developing? Will more households,
particularly those with children, increasingly cherry-pick deals from e-tail
sites who would normally go to brick and mortar stores to buy these goods? Can
online merchants find new growth in general merchandise and health & beauty
care, where the dollars for them could be substantial?
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Online grocery shopping has been a struggle of economics and consumer demand. The home delivery model works well in certain metropolitan areas, which is why Peapod and Grocery Works remain regionalized. But let’s not forget Webvan and Streamline and why those models no longer exist. It is difficult to add costs to commodities and hope the consumer sees a value in it. The New York market certainly is an anomaly and difficult to use as a model for replication.
However, the consumer does see the value of online ordering for stock-up, non perishable categories and GM/HBC products. These are categories in which the consumer knows what they purchase and what size. Additionally, the consumer knows their purchase frequency on these items and will see a value in ordering over the internet and having the items delivered to their home, if the price is right.
Online grocery shopping will continue to evolve and improve. Retailers need to have these multiple points of contact with the evolving consumer. As these models mature, the economics and key categories will become clearer to the retailers, who remain cautious after so many failed attempts.
I agree, Kai. Our data shows that there are a variety of processes consumers use to buy different types of products and services. These are not so much purchase-process preferences as requirements. The “see it” and “touch it” processes are a requirement in a number of large categories. There is also a “smell it” process and a “try it first” process. There is also a “references and test” process, and a number of others. These processes appear to be ultra-stable in the sense that they have not changed over the last 50 years or so, despite the technological explosions.
This consumer behavior complexity is little known and leveraged. It is understandable how we can easily be lost in the thrill of seeing how we might apply new delivery methods, but what we are faced with is a set of largely invisible boundaries that dictate online purchases–what can be sold and how and where.
Convenience is a key factor for consumers, especially for parents who often have more time constraints. Young moms spend a lot of time on the internet, are computer savvy, and will look for price breaks like free shipping, discounts etc. I see the growth of on-line retailers which is built on increasing market share and household penetration over time. Amazon has a clear advantage with their name recognition, but local companies like Peapod are building sales as well.
I also see an opportunity for online retailers to offer services like ready to eat quick meals, assembly meals, and “healthy” meals with full nutrition information provided. Why not combine these food orders with a menu, cooking utensils, cookware, holiday and birthday party entertaining paper goods and decorations (along with the diapers!) for busy families and others. Make it easy for the moms and the word will spread quickly.
Whether this can be a future business model is yet to be proven, but if consumers continue to ask for convenience, offering food, general merchandise and HBC products delivered to one’s home seems to have great appeal. Remember, not everyone likes to go shopping in a store all the time. Consumers like choices.
I’ve experimented with several of these online grocers, with a view to actually getting the touted benefits. There are two reasons I’ve given up:
1. Difficulty of finding what I want, even after multiple major shopping purchases – so I could begin with prior lists. I don’t know whether an online virtual reality store would help, but the present systems just do not work (for me.)
2. Lack of stock is a major problem. One reason for buying books at Amazon is that I know that if it’s available anywhere in the world, I will probably be able to click and receive. Online grocers don’t even come close. Even with Amazon’s 14,000 skus. Give me a break. I like to get 8 oz. cans of light syrup fruit. Obviously the rest of the world doesn’t have a big interest in this, so it’s hard to find.
This is one category that simply won’t ever be huge–outside the obvious niches; new moms, wealthy single urban workaholics, the handicapped and the very old. That said; these are pretty great niches!
Amazon–c’mon it’s a loss leader at best. Safeway had to buy out GroceryWorks as their ‘partner’ violated their agreement with them and has announced the opening of thousands of stores; FreshDirect–it’s fantastic but forget about success outside of NYC.
It’s a $1B category, when mature; that’s great but only maybe a point or two of overall grocery.
I think a theme that will emerge is the value equation question – if online gives a better value (price, ease of shopping, ease of receiving delivery, variety options, etc.), people will use it. If it doesn’t deliver value, they won’t. Does anyone out there know Amazon’s business model–how do they make money with free delivery over $25? Is this just an introductory offer that will soon go away (like it did for Webvan)?
Online grocery retailing is a difficult sell. People like to go to the grocery stores (thus the growth of high-end and customer centric grocery chains like Wild Oats) to do their shopping, and the relatively low cost of items, plus the concern over freshness with fruits, vegetables, dairy and meat, will continue this trend. Unlike standardized hard goods or HBC, perishables do not have a place in the online grocery industry, except for large metropolitan areas, where it may be difficult or inconvenient to purchase all of the products you need from your local grocer. Here, purchasing online, especially HBC and hard goods, makes sense. This is a great area for the online grocer to grow, but the rest of suburban America will continue to shop (and prefer) the traditional on-ground grocer.
Online grocery is unlikely to be profitable for anyone serving the general public. The pick/pack labor cost is very high compared to the gross margin and the delivery cost is likely to outweigh the gross margin, too. Amazon can give away their groceries in the short run, but everyone in the supermarket business knows that losses of this magnitude can’t be erased simply through higher volume.
Online grocers have to charge for their labor and delivery to survive. Whether the public likes online grocery shopping or not doesn’t matter if the retailer loses money. If Fresh Direct was profitable, it would’ve expanded into multiple markets by now. Instead, it’s only in select parts of the NY metro area. Manhattan and Brooklyn Heights aren’t typical American places.
Please, let’s dispel the rumor voiced by Kai Clarke that “perishables do not have a place in the online grocery industry.” Safeway successfully serves my neighborhood, a suburb of Sacramento — definitely not a large metropolitan area — with a complete selection from across the store. Fresh meat, fish, and produce; dairy and other refrigerateds; bakery; and frozen foods. Perishables.
I leaned heavily on Safeway delivery a couple of years ago while recuperating at home from surgery. They never, ever let me down, and the ice cream was never melted. I specified green bananas and got ’em. They even offered to carry everything into the kitchen for me, but I needed the exercise. Unfortunately, if online grocers have to rely primarily on the homebound (like new moms) for growth, the model won’t work.
Additionally, online grocers are totally missing out on one of the largest sources of online sales: Products not in stock. Even Amazon doesn’t stock everything they sell — stuff is shipped from other retailers — and most successful e-commerce sites rely heavily on sales of products they do not own or carry in their stores (if they have stores). Remember our discussion of Costco’s online sales site last week? The vast majority of the items offered there are not carried in Costco stores. Supermarkets have not yet figured out how to do that. Could they sell cookware, cookbooks, high-dollar health and medical devices, etc., and have them shipped from the manufacturer? Of course.
The evolution of the online grocer will follow the path of the online clothing retailer or electronic retailer. The traditional grocery buyer will hesitate to buy online initially, but word of mouth will sell convenience and savings. If online can deliver value then it will fly. The next step is the development of low cost frozen shipment. This will allow the sale of the higher profit meat, seafood and dairy along with the contents of the frozen food section. I can imagine a package designed to handle 1.5 cubic feet and the consumer would fill it with product and each item added would advised the consumer of the space used and space remaining. Mail order retailers like Omaha Steaks and others have developed very cost effective ways of shipping frozen product and protecting it from premature thaw. This could evolve into direct shipment from manufacturers, especially from the meat packers who operate on ultra thin margins.
For the most part, it appears it has not evolved much past the “Jelly of the Month Club.” I agree with the rest of the above that online grocery retailing has been a bust so far. Otherwise all the smart retailers would be into it (Publix, H-E-B types), not just the below par chains (Safeway and such) who have highly paid execs recycling old internet grocery ideas to give the appearance that they are trying to come up with a new idea.
1. It’s still a trickle, but I see more and more manufacturers marketing directly to consumers and bypassing retailers.
2. Frozen foods are definitely a problem. But they aren’t going to gain as big a market in places served by, say, FreshDirect, since apartment refrigerators/freezers are smaller than those, typically, in suburban and rural areas.
3. FreshDirect’s concept is terrific for major urban centers, and their website is a joy in how it makes things simple and bonds with customers. Anybody/everybody can learn from it. Go to
http://www.freshdirect.com. BTW, they’re also getting into delivering food for offices, which is one area too often overlooked in such efforts.
4. Not surprised about diapers doing well on delivery, especially among city dwellers. Before moving to the woods, I lived in Manhattan and Brooklyn, and used to struggle home with bulky bags. Any way to get high-cube items like diapers delivered would have gotten my attention.
Dr. Banks is very, ‘right on’ for the perishable products being part of these two programs.
Importantly, such services by retailers, Peapod types and internet companies need to do their homework and research on geographic locations.
Secondly, the offering of perishables – produce to meals to catered events, etc. – needs extra ‘tender loving care.’ But, Peapod has done very well in Chicago.
Is there business in perishables? All you have to do is talk to the Food By Cab Co. in Chicago. Restaurant to cab, to consumer. How perfect, and profitable! Hmmmmmmm
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Online grocery shopping has been a struggle of economics and consumer demand. The home delivery model works well in certain metropolitan areas, which is why Peapod and Grocery Works remain regionalized. But let’s not forget Webvan and Streamline and why those models no longer exist. It is difficult to add costs to commodities and hope the consumer sees a value in it. The New York market certainly is an anomaly and difficult to use as a model for replication.
However, the consumer does see the value of online ordering for stock-up, non perishable categories and GM/HBC products. These are categories in which the consumer knows what they purchase and what size. Additionally, the consumer knows their purchase frequency on these items and will see a value in ordering over the internet and having the items delivered to their home, if the price is right.
Online grocery shopping will continue to evolve and improve. Retailers need to have these multiple points of contact with the evolving consumer. As these models mature, the economics and key categories will become clearer to the retailers, who remain cautious after so many failed attempts.
I agree, Kai. Our data shows that there are a variety of processes consumers use to buy different types of products and services. These are not so much purchase-process preferences as requirements. The “see it” and “touch it” processes are a requirement in a number of large categories. There is also a “smell it” process and a “try it first” process. There is also a “references and test” process, and a number of others. These processes appear to be ultra-stable in the sense that they have not changed over the last 50 years or so, despite the technological explosions.
This consumer behavior complexity is little known and leveraged. It is understandable how we can easily be lost in the thrill of seeing how we might apply new delivery methods, but what we are faced with is a set of largely invisible boundaries that dictate online purchases–what can be sold and how and where.
Convenience is a key factor for consumers, especially for parents who often have more time constraints. Young moms spend a lot of time on the internet, are computer savvy, and will look for price breaks like free shipping, discounts etc. I see the growth of on-line retailers which is built on increasing market share and household penetration over time. Amazon has a clear advantage with their name recognition, but local companies like Peapod are building sales as well.
I also see an opportunity for online retailers to offer services like ready to eat quick meals, assembly meals, and “healthy” meals with full nutrition information provided. Why not combine these food orders with a menu, cooking utensils, cookware, holiday and birthday party entertaining paper goods and decorations (along with the diapers!) for busy families and others. Make it easy for the moms and the word will spread quickly.
Whether this can be a future business model is yet to be proven, but if consumers continue to ask for convenience, offering food, general merchandise and HBC products delivered to one’s home seems to have great appeal. Remember, not everyone likes to go shopping in a store all the time. Consumers like choices.
I’ve experimented with several of these online grocers, with a view to actually getting the touted benefits. There are two reasons I’ve given up:
1. Difficulty of finding what I want, even after multiple major shopping purchases – so I could begin with prior lists. I don’t know whether an online virtual reality store would help, but the present systems just do not work (for me.)
2. Lack of stock is a major problem. One reason for buying books at Amazon is that I know that if it’s available anywhere in the world, I will probably be able to click and receive. Online grocers don’t even come close. Even with Amazon’s 14,000 skus. Give me a break. I like to get 8 oz. cans of light syrup fruit. Obviously the rest of the world doesn’t have a big interest in this, so it’s hard to find.
This is one category that simply won’t ever be huge–outside the obvious niches; new moms, wealthy single urban workaholics, the handicapped and the very old. That said; these are pretty great niches!
Amazon–c’mon it’s a loss leader at best. Safeway had to buy out GroceryWorks as their ‘partner’ violated their agreement with them and has announced the opening of thousands of stores; FreshDirect–it’s fantastic but forget about success outside of NYC.
It’s a $1B category, when mature; that’s great but only maybe a point or two of overall grocery.
I think a theme that will emerge is the value equation question – if online gives a better value (price, ease of shopping, ease of receiving delivery, variety options, etc.), people will use it. If it doesn’t deliver value, they won’t. Does anyone out there know Amazon’s business model–how do they make money with free delivery over $25? Is this just an introductory offer that will soon go away (like it did for Webvan)?
Online grocery retailing is a difficult sell. People like to go to the grocery stores (thus the growth of high-end and customer centric grocery chains like Wild Oats) to do their shopping, and the relatively low cost of items, plus the concern over freshness with fruits, vegetables, dairy and meat, will continue this trend. Unlike standardized hard goods or HBC, perishables do not have a place in the online grocery industry, except for large metropolitan areas, where it may be difficult or inconvenient to purchase all of the products you need from your local grocer. Here, purchasing online, especially HBC and hard goods, makes sense. This is a great area for the online grocer to grow, but the rest of suburban America will continue to shop (and prefer) the traditional on-ground grocer.
Online grocery is unlikely to be profitable for anyone serving the general public. The pick/pack labor cost is very high compared to the gross margin and the delivery cost is likely to outweigh the gross margin, too. Amazon can give away their groceries in the short run, but everyone in the supermarket business knows that losses of this magnitude can’t be erased simply through higher volume.
Online grocers have to charge for their labor and delivery to survive. Whether the public likes online grocery shopping or not doesn’t matter if the retailer loses money. If Fresh Direct was profitable, it would’ve expanded into multiple markets by now. Instead, it’s only in select parts of the NY metro area. Manhattan and Brooklyn Heights aren’t typical American places.
Please, let’s dispel the rumor voiced by Kai Clarke that “perishables do not have a place in the online grocery industry.” Safeway successfully serves my neighborhood, a suburb of Sacramento — definitely not a large metropolitan area — with a complete selection from across the store. Fresh meat, fish, and produce; dairy and other refrigerateds; bakery; and frozen foods. Perishables.
I leaned heavily on Safeway delivery a couple of years ago while recuperating at home from surgery. They never, ever let me down, and the ice cream was never melted. I specified green bananas and got ’em. They even offered to carry everything into the kitchen for me, but I needed the exercise. Unfortunately, if online grocers have to rely primarily on the homebound (like new moms) for growth, the model won’t work.
Additionally, online grocers are totally missing out on one of the largest sources of online sales: Products not in stock. Even Amazon doesn’t stock everything they sell — stuff is shipped from other retailers — and most successful e-commerce sites rely heavily on sales of products they do not own or carry in their stores (if they have stores). Remember our discussion of Costco’s online sales site last week? The vast majority of the items offered there are not carried in Costco stores. Supermarkets have not yet figured out how to do that. Could they sell cookware, cookbooks, high-dollar health and medical devices, etc., and have them shipped from the manufacturer? Of course.
The evolution of the online grocer will follow the path of the online clothing retailer or electronic retailer. The traditional grocery buyer will hesitate to buy online initially, but word of mouth will sell convenience and savings. If online can deliver value then it will fly. The next step is the development of low cost frozen shipment. This will allow the sale of the higher profit meat, seafood and dairy along with the contents of the frozen food section. I can imagine a package designed to handle 1.5 cubic feet and the consumer would fill it with product and each item added would advised the consumer of the space used and space remaining. Mail order retailers like Omaha Steaks and others have developed very cost effective ways of shipping frozen product and protecting it from premature thaw. This could evolve into direct shipment from manufacturers, especially from the meat packers who operate on ultra thin margins.
For the most part, it appears it has not evolved much past the “Jelly of the Month Club.” I agree with the rest of the above that online grocery retailing has been a bust so far. Otherwise all the smart retailers would be into it (Publix, H-E-B types), not just the below par chains (Safeway and such) who have highly paid execs recycling old internet grocery ideas to give the appearance that they are trying to come up with a new idea.
1. It’s still a trickle, but I see more and more manufacturers marketing directly to consumers and bypassing retailers.
2. Frozen foods are definitely a problem. But they aren’t going to gain as big a market in places served by, say, FreshDirect, since apartment refrigerators/freezers are smaller than those, typically, in suburban and rural areas.
3. FreshDirect’s concept is terrific for major urban centers, and their website is a joy in how it makes things simple and bonds with customers. Anybody/everybody can learn from it. Go to
http://www.freshdirect.com. BTW, they’re also getting into delivering food for offices, which is one area too often overlooked in such efforts.
4. Not surprised about diapers doing well on delivery, especially among city dwellers. Before moving to the woods, I lived in Manhattan and Brooklyn, and used to struggle home with bulky bags. Any way to get high-cube items like diapers delivered would have gotten my attention.
Dr. Banks is very, ‘right on’ for the perishable products being part of these two programs.
Importantly, such services by retailers, Peapod types and internet companies need to do their homework and research on geographic locations.
Secondly, the offering of perishables – produce to meals to catered events, etc. – needs extra ‘tender loving care.’ But, Peapod has done very well in Chicago.
Is there business in perishables? All you have to do is talk to the Food By Cab Co. in Chicago. Restaurant to cab, to consumer. How perfect, and profitable! Hmmmmmmm