Peapod will eliminate free delivery in Boston and Chicago. Cutting out its free delivery runs will help Peapod in its continuing push to profitability.

However unpopular, the decision makes good economic sense. Although parent Royal Ahold continues to inject Peapod with additional funding, the pressure is on for Peapod to prove its business model can be a moneymaker.

Now that Peapod has the online grocery market all to itself in Boston and Chicago, due to the collapse of both Webvan and HomeRuns.com, the company will eliminate free deliveries in a bid to reach profitability by the second half of 2003.

Peapod, which had been delivering orders of more than $100 for free, notified Boston-area customers yesterday that all orders placed on or after August 31 would carry a minimum delivery charge of $4.95. In Chicago, the company's biggest market, free deliveries are being eliminated but fees are being capped at $2.95 for orders over $100.

Paula Wheeler, a Peapod spokeswoman, said the elimination of free delivery was needed to help the company reach its goal of profitability by the second half of 2003. "We're making an adjustment to the fees to make sure we're viable long term," Wheeler said.

Wheeler acknowledged the company was able to eliminate free deliveries in Boston and Chicago in part because competitors in those cities have gone out of business. Peapod has seen its business jump 40 percent in the Boston area since the demise of HomeRuns, which also charged for all deliveries.

However much customers in Boston and Chicago may not like the recent news, economically Peapod's decision makes sense. In the first quarter of this year alone, Peapod reported a net loss of $15.5 million - an 18% increase over its net loss in the same three-month period in 2000. Although Peapod's parent company, Royal Ahold, has so far made willing investments totaling
more than $198.8 million, the money will dry up sooner rather than later if Peapod cannot prove itself a potentially profitable business. Peapod's announcement simply proves the old maxim "nothing in life is free," something those living in the Internet age seem to forget too often.

(c) 2001 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.

To view related research reports, please follow the links below:-

Online Grocery in the US 2001 - Profitability at the virtual checkout

Grocery Retailing in Europe