Peapod, the US online grocer given a shot in the arm by Dutch retail giant Ahold, is confident of long-term success. As rival Webvan’s predicament worsens with this week’s resignation of founder Louis Borders, Peapod reports a strong rise in profits and average order value.
Last March, Peapod was heading for bankruptcy when Ahold stepped in with a US$73m cash injection in return for a 51% controlling stake in the online grocer. Although headquartered in the Netherlands, Ahold now generates much of its sales and profits in the US, where it runs the Stop & Shop and Giant Food chains. To protect its investment, Ahold also installed one of its logistics experts, Marc van Gelder, as Peapod CEO, reports the Financial Times.
In the year since Ahold came on board, Peapod has upped its average order value to US$125, with gross profit margins up from 25% to 32% or US$40. A new US$5 delivery charge bolsters this to US$45 per order.
Some US$27 of this is then swallowed up by picking, packing, replenishment and delivery costs, with another US$5 spent on telecoms, customer care and billing, and a further US$5 in fixed overheads. This leaves Peapod with US$8 per order in net profits – before marketing costs. Take those into account and it becomes clear how important the average order value is. Most of the processing costs are the same, however large or small the order, but the value affects the end profit per order significantly.
One way Peapod has tried to become more efficient while remaining convenient for consumers is offering increased flexibility with a premium price. This is masked in a “discount” for those customers prepared to, for instance, specify a six-hour delivery window rather than the normal two hours.
One difficulty that needs to be overcome is length of time customers take to place an order online. The average time a consumer needs to compile a shopping list online is over an hour. The company is hoping to cut this by using loyalty card data from online shoppers who also frequent physical stores to keep shopping habit data.
As the Financial Times article pointed out, investors have yet to regain confidence in the online grocery sector. Peapod’s stock has fallen from about US$3 to US$0.75 since last summer.