Online-Based Grocery Delivery Thrives At Last

The Robin ReportMuch of the attention in food retailing these days has been focused on electronic-based  marketing such as mobile apps, mobile checkout, QR codes and iPad abilities of all sorts.

That’s all justified, but the biggest action in electronic retailing is in a business sector that was once all but left for dead. That would be online-based grocery ordering and delivery. Right now, online merchants such as Fresh Direct, Peapod and others are doing well enough that they’ve become confident in their own futures and are splurging on costly geographic expansions.

That stands in stark contrast to the fate that befell online grocery merchants several years ago. Back then, numerous conventional retailers and online-only retailers either drastically downsized or failed outright. The most spectacular flameout happened when online grocer Webvan went out of business in 2001 after just a couple years of recklessly expanding and burning through $830 million of investors’ money.

Strangely enough, Fresh Direct, the online delivery service, now considered to be the nation’s most successful, was founded not long after the Webvan fiasco.

How did Fresh Direct manage to wrest success from those ashes?

Possibly the chief difference between Webvan and Fresh Direct can be seen as the space between hubris and prudence.

Webvan assumed that a never-ending flow of investor capital would be forthcoming, so it branched out from its San Francisco headquarters to nearly a dozen operating locales all across the land, both in the West and the East. Each market was supported by a specially built and costly automated warehouse. Along the way, Webvan acquired Home Grocer in a stock swap with an astounding valuation of $1.2 billion. In truth, it was more like a failing company swapping nearly worthless stock with another failing company with nearly worthless stock.

Operationally, Webvan guaranteed delivery times of a half-hour despite the fact that Webvan covered sparsely populated and far flung suburban areas. As if indulging in self-inflicted wounding, it offered extraordinarily generous free-product deals to consumers to generate trial.

In short, the cost of capital, product and operations simply couldn’t be covered by revenue production.

By contrast, Fresh Direct aimed for efficiency by starting in a densely populated urban area, New York City. The initial market was Manhattan. Backstage support was located across the East River in Queens, where warehousing costs were relatively low and Fresh Direct could move its delivery fleet to Manhattan across a nearby, toll-free bridge. Delivery trucks could be loaded with numerous orders and in many instances parked on a Manhattan street while deliveries were made to many residential or office buildings with-out moving the trucks again.

Fresh Direct was able to offer a two-hour delivery window with every expectation that such a goal could be met. Facilitating that was the fact that Manhattan apartment building doormen would receive deliveries if the consumer happened to be out during the delivery window.

Only after Fresh Direct had field-tested its methods did it start edging out to areas in nearby suburban New York, Long Island, New Jersey and Connecticut.
That’s not the only form of expansion in store from Fresh Direct. It has acquired a 16-acre site in the Bronx on which it plans a new headquarters and a 500,000 sq. ft. distribution center. That is roughly twice the size of its Queens facility. Employment is expected to increase to 3,000 from the current 2,000. The facility is expected to open in 2015.

Fresh Direct’s capitalization is also growing. Startup capital came from several investment funds, but more recently Wm. Morrison Supermarkets of the United Kingdom acquired a 10 percent stake in Fresh Direct for about $52 million. It’s expected to seed workers into Fresh Direct to learn about grocery selling online. Morrison has also gone to school on the nonfood side of the business by means of its acquisition of kiddiecare.com, a baby-products retailer. Morrison is eager to learn the delivery business to better compete at home with rival Tesco, the U.K. supermarket operator credited with inventing internet-based shopping as early as 1984, leveraging off earlier successes with telephone ordering. Morrison intends to enter the home-delivery business in the U.K. next year.

Financial results for Fresh Direct and its rivals are difficult to ascertain since they are either privately held or units of publicly traded companies that don’t break out online results. Many trade observers are of the opinion that Fresh Direct has been profitable for a couple of years, and that most or all of its rivals are doing fairly well, but haven’t yet achieved break-even.

Fresh Direct’s closest competitor has to be the Peapod online grocery delivery service. Peapod was founded in 1989 and in its early days partnered with several major supermarket chains, including Kroger and Safeway. That changed in 2001 when it was acquired by the Ahold supermarket chain of the Netherlands. Ahold eventually jettisoned Peapod’s relationship with all supermarket banners but its own in this country, chiefly Stop & Shop and Giant.
Peapod’s current operating area is mostly in suburban areas of the Northeast and the Washington, D.C., region, but it recently entered portions of Manhattan, putting it in direct competition with Fresh Direct.

Peapod initially used affiliated retail stores as fulfillment centers. In time, it moved to dedicated centers, although some are attached to retail stores in a bid to increase efficiency. Beyond that, many conventional supermarket operators have renewed their search for a means to offer neighborhood online-based deliveries or store-pickup services. For instance, Publix Super Markets, which abandoned online deliveries several years ago, has started a store pickup initiative to fulfill online orders.

Indeed, a majority of major supermarket chains offer online ordering and delivery services that they operate themselves. Many should be viewed as defensive postures, not as profit centers.

Walmart Stores, too, is experimenting with online ordering of groceries in an area of San Jose, California.

Finally, as if to sound a cautionary note, Amazon didn’t have much luck with its bid to join the burgeoning ranks of grocery-delivery services. More than a year ago, Amazon introduced a van-based delivery service in Seattle dubbed “Amazon Tote.” Although that would seem to dovetail nicely with Amazon’s successful experience in selling consumables online, and nationwide, Tote was discontinued in short order.

Nonetheless, the verdict is in: In one form or another, online retailing is back and here to stay.

David Merrefield About David Merrefield

David Merrefield is principal of DRM Initiatives, Inc., a retailer consulting group. He is the former Vice President and Editor of trade publication Supermarket News. He is based in New York City.