The year 2000 saw the rise (and all too often fall) of many online grocers. Perry Caicco, a top-ranking food retail analyst for Canada’s National Bank Financial, has kindly contributed to his excellent analysis of the lessons learned. We bring you the edited highlights:

Over the course of 2000, the players in the Internet grocery industry split into five segments:

  • The pure-play full-line Internet grocers. (Webvan, Grocery Gateway)
  • The limited-line category specialists. (Ethnicgrocer, Small Potatoes)
  • The system-providers. (EZGrocer, Peachtree)
  • The infrastructure builders. (E-Box, Homeport)
  • The traditional grocers experimenting. (Safeway, Tesco)

Below, we examine three segments of the industry and determine exactly what was learned from each experience. [Editor’s note: Perry completed analysis on all five; in the interests of conciseness we are reproducing three.]

The pure-play full-line internet grocers: solving problems

From the many to the few
Shakeout or take-out were the only two choices for most pure-play Internet grocery companies in 2000. The difficult logistics of high-volume single-item picking and over-servicing delivery caused costs to increase almost directly with volume for many players. More importantly, investors, expecting that they were buying technology companies, belatedly realized they were buying start-up retailers, and disappeared faster than an unlocked Lexus. Even worse, these retail start-ups, many of which claimed they would be profitable by now, were actually building infrastructure – which takes years. With burn-rates high, those that weren’t well capitalized prior to the spring and summer tech meltdowns fell before the fall.

Now, the remaining pure-play full-line Internet grocers such as Webvan and Grocery Gateway have scaled back their growth plans for new markets and are focusing on developing profitability in existing markets. As such, they will try to boost volume in existing markets to get more service centre efficiency and more productive delivery routes. Webvan, in particular, is in dire condition, scheduled to run out of funds in mid-2001. Only a tech market recovery, improved operating performance or a “bricks-and-mortar” saviour can rescue Webvan’s shareholders.

In the meantime, there has been significant learning and, in fact, some parts of the online grocery business have gone very well. However, challenges persist.

What worked well

  • There appears to be no shortage of demand. In fact, the rapid growth of customers has caused operational problems for most players, which caused some customer relationship challenges.
  • Average order size is even better than projected. Most full-line Internet grocers have average order sizes of over Cdn$100, with some now over Cdn$120. Moreover, it’s a full shopping trip. Customers are not cherry-picking the bulk or commodity items. Perishables penetration is similar to in-store ratios.
  • Single-item picking has improved over the past two years. Although the pick-management software is less than ideal, the direct costs of service centre receiving, put-away, picking, order assembly and shipping seem to be under 15% of revenues.

Where the challenges lie

  • Gross margins are lower than planned. Suppliers have just not “played ball” with the standalone Internet grocers. The product cost gap between these (relatively) low-volume companies and their large traditional competitors is about 400 to 500 basis points.
  • Order frequency is not as high as some predicted. Many online grocers predicted that their dedicated customers would order as often as three times per month. Experience now shows the dedicated group at between 1.50 and 2.25 times per month. Clearly, customers see the online grocers not as their primary shopping trip but as an important adjunct experience.
  • Attended delivery is costly and complex. Even the best-run start-ups are still struggling with the costs of fully attended, high-service delivery. Those using multi-temperature vehicles have to re-assemble orders upon reaching the destination. Some are assisting in the unpacking process. The current delivery fees don’t come close to covering these costs.
  • Inventory management is a challenge. Because these are still low-volume businesses, suppliers are unwilling to hold much inventory. Because demand is still growing, forecasting replenishment needs is a challenge. High frequency, low-volume orders are expensive.

The infrastructure builders

Getting at the green mile
Given that the most significant problem in the online grocery business seems to be the cost and configuration of delivery, we were pleasantly surprised to see three companies – E-Box, Homeport and Whyrunout – attempt to focus specifically on this topic, each with its own innovative take on the “Green Mile” problem.

Pure delivery
WhyRunOut is essentially a pure-play delivery-only service using groceries as the backbone to expand into a wider array of home-delivered goods. In 2000, it signed a multi-year agreement with Stater Bros. Markets in California to distribute grocery products to nearly 2.5 million households. Stater Bros.utilizes WhyRunOut’s integrated marketing and web-based fulfillment services to sell to online consumers from 15 of Stater Bros.’ existing retail stores. Stater Bros. claims that, based on actual operating experience, 96 percent of customers who purchase groceries through the online marketplace are incremental to Stater Bros.

Unlike with some other online grocery delivery services (Webvan and that deliver a smaller selection of products from large warehouses, WhyRunOut customers select and receive products directly from the shelves of their neighbourhood stores. By aggregating existing retailers and delivery capacity, helps grocers and other brick-and-mortar retailers sell their products to online customers from existing retail stores. Other retail partners include dry cleaners, film processors, package shipping and movie rentals.

Unattended delivery: the holy grail
One of the more contentious issues in the online grocery business has been the nature of home delivery: should it be attended or unattended? Most companies have opted for a fully attended delivery model, with few regrets. The advent of tighter delivery windows has reduced the “no-show” customers to almost nil. The problem is the cost. The delivery person tends to spend time at the door (checking orders, talking with customer, often receiving payment) or actually in the house (unpacking groceries, retrieving totes). This is obviously costly – typical delivery in a fully attended model can cost US$10 to US$14 per house.

By contrast, the unattended delivery companies Streamline and Shoplink both folded in 2000. The cost of their infrastructure – essentially expensive temperature controlled boxes – seems to be what killed them. However, the cost of delivery was reduced to under US$5 per household. The critical reason – and the “holy grail” of the Green Mile – was reduced delivery times.

In built-up urban areas with congested traffic it is difficult to achieve even five deliveries an hour during the day. However, new innovative box-delivery systems such as Homeport in the UK and E-Box in Canada could increase delivery frequency to over 10 per hour, reducing delivery costs to under US$5 per household. Homeport, Lantes and Brivo all have systems in progress in the UK, E-Box is in development in Canada, while in Australia Eezeebox is looking to be the market leader in this segment.

Each of these companies is developing a box or locking system to allow for quick delivery access and secure, insulated holding of multi-temperature products.

Homeport: a trial with Sainsbury
The London company Zbox, which had spare capacity in its milk float division, developed Homeport, which it is testing with grocer Sainbury. An electronic locking port is fitted outside the front door. The delivery person swipes a smart card past the bar code and can then secure his box to the port with a metal cable. Homeowners can then open the box with their smart card and can also place returns in it for the next delivery.

Sainsbury’s have signed an agreement with Homeport to trial unattended delivery boxes for its Sainsbury’s to You home delivery customers. In a first for a UK supermarket, customers will be able to receive home shopping without having to be at home. Initial testing began with a small number of customers in early December with ambient products only. Sainsbury’s is currently looking at ways of delivering chilled and frozen foods using Homeport. If testing proves successful Sainsbury’s will begin a second phase of trial with both chilled and ambient foods in the new year.

Ebox: possibly the next Wal-Mart
Canada’s E-Box is perhaps the most innovative of the various companies pursuing lower-cost methods of home delivery. In fact, the company has determined that its innovative unattended delivery model reduces home delivery cost so much that it can safely back into becoming an online retailer – first as a limited-line provider, and later as a comprehensive full-line grocery and general merchandise provider.

Traditional grocers: picking up the pieces

Various models in test
Among traditional grocers, respected Tesco’s high-profile pronouncements about the success of their store-pick online grocery model have emboldened many others to move forward in various ways. Another European-based grocer, Ahold picked up the pieces of Peapod (and some assets of Streamline). It is opening up a series of services in its U.S. divisions under the names such as “Peapod by Stop n’ Shop” (Connecticut) and “Peapod by Giant” (Washington), the latter to operate out of an unopened Streamline service centre. As well, some mezzanine storage areas in Ahold stores will convert to Peapod fulfillment centres.

Safeway purchased a strategic position in Groceryworks and planned to expand the warehouse-picked system from Dallas to Houston, Phoenix and Chicago, but has recently pulled back and is focusing on profitability in the Texas market. Publix is opening its first online grocery warehouse in April.

Albertson’s continues to experiment with two different models. In Dallas, Albertsons operates a classic warehouse-pick Internet grocery system. In the Seattle model, customers pre-order dry grocery and come to a store location for pick-up and to shop the perishables.

Wholesaler SuperValu offers its independents a canned program from system provider

More innovative still, the UK’s Sainsbury has teamed up with Homeport to develop an unattended home delivery system. Grocery boxes are “locked” to a Homeport station at the house, then unlocked by the customer at later time using a smartcard.

Here in Canada, Loblaw‘s e-grocer project and Sobeys IGA Cybergrocer are stalled, and nobody else has made a significant move or change in the past 12 months.

The traditional grocers have big advantages
From the above evidence, its clear that the old-line players are still experimenting – but they are certainly taking the channel seriously. Existing supermarkets are interested enough in the continual rise in demand to take a crack at the operating problems of online selling. The advantage they bring is buying power so large they have a going-in 400 to 500-basis point product cost advantage over the standalone Internet grocers. Given the thin profits available to even the most successful of the start-ups, this difference is almost insurmountable. As well, the traditional grocers can bury various costs of running their online business. Tesco apparently doesn’t charge its subsidiary for the “excess” store labour it uses for picking, or for store rent. Some traditional grocers are using an area inside an existing DC and sharing buyers and support staff with the online business. But more importantly, large successful grocers can afford to experiment with online business. It costs little relative to their scale and scares off investors who might otherwise be interested in continuing to fund the standalones.

The lessons we learned

The year 2000 has produced some fascinating data and important learning on the online grocery business. We would characterize the four most important pieces of learning as follows:

  1. Unattended delivery is the “Holy Grail” – and worth pursuing. Any online grocery service that solves this problem – that manages to reduce delivery costs to under $5 – is beginning to create a sustainable model.
  2. The traditional grocers have enough buying clout to do online groceries efficiently – at least 400 basis points better than pure-plays. This gives them an unassailable advantage in profitability. Pure-play grocers MUST either build perfect process or create alliances with large traditional grocers.
  3. Customers see the online grocer as one portion of their monthly shop, not as all of it. Online grocers must understand the specific circumstances that drive their orders, and market right to that need over a wider population group. Again, an alliance with a traditional grocer would assist in capturing the dynamics behind the entire array of shopping occasions.
  4. Single-item picking and packing is still is in infancy. Direct-mail based software doesn’t work – it’s too slow. Traditional grocery warehouse management software doesn’t work – it’s too inflexible. Methods and processes of picking many low-ticket items, in a multi-temperature environment, at high speeds, for loading onto routed trucks, are still in the early stages of development.

By Perry Caicco

Perry Caicco is Senior Vice President, Food and Consumer Products, at National Bank Financial. He can be reached by telephone on +1 416-869-6754 or by email at