In a bid to avoid the seemingly inevitable cash drain of online-grocery trading; Grocery Gateway has upped its charges for delivery and minimum order level. The Mississauga-based e-tailer informed its 100,000 registered customers last week that as from 2 April, a minimum order will now cost C$60, rather than C$45, and delivery will cost C$2 more at C$8.
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In this era of Internet uncertainty, the question has to be asked; was the hike part of a cautious plan for long-term sustainability or an essential reaction in the light of rising costs and the ever-distant spectre of profitability?
Analysts could be forgiven for questioning the wisdom of a price hike while the online consumer is still so fickle as to be easily scared off. Gateway founder and CEO Bill DiNardo is confident however that this is the right move, pointing out that this is the first price hike by the company since “it started in my basement three years ago.”
“The more we learn about the business, the more we’re learning about what it will take to be successful,” he added.
This includes halving the delivery window, which fell from three hours to one and a half. Nevertheless, DiNardo maintains that there is still a long way to go: “Probably the single biggest hurdle is the delivery economics: getting the route density you need and being able to pop off enough orders an hour to keep your drivers productive.”
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By GlobalData“We’re still coming to grips with what all that means.”
Profitability is still a long way off however, as revenue remains stable at around C$3.5m a month. The costs and profits equation is difficult to solve on the Internet and Grocery Gateway is anxious not to follow in the footsteps of US e-tailers Streamline.com or Shoplink.com, which both folded last year. Even the largest US operation, Webvan.com, is struggling.
“Regular margin on the order plus our service fee needs to be more than what it costs to pick, pack and bring [groceries] to your door,” says DiNardo, admitting that the most important goal is to generate profit from Grocery Gateway’s 75,000 square foot base.
“We have to prove that you can make money at the facility level before punching it out in more markets,” he added.
The company is relatively secure however, having generated funds of about C$70m from some large investors. These are, DiNardo believes, patient enough to see a moneymaking model through. Indeed, the distinctly conservative business model of Grocery Gateway, which focuses on Toronto, is welcomed by those who realise that delivering goods from local shops to homes avoids the heavy costs involved in developing infrastructure.
The only problem with this approach is that a lot of effort will have to go into convincing consumers not to go to the supermarket. As DiNardo explains, “we compete with ingrained habits. You’ve established a ritual around how you put food on the table. We’re trying to change people’s behaviour.”
A recent study by the University of Georgia showed that growing numbers of consumers in the US are willing to buy their food shopping online. Some of the more optimistic industry spectators expect that by 2010, online groceries will be dominating 7% of the entire grocery market sector, worth US$57bn. If the Grocery Gateway hike was a necessity in the face of draining cash resources, or a planned part of the long-term business model, any move to keep e-tailing business afloat is a worthwhile one in the face of the market potential.
To visit the Grocery Gateway website, click here.
By Clare Harman, just-food.com editorial team
