The News – 07/16/01

How Not to Be an Online Grocer

In the wake of Webvan’s recent closing, another online grocer, HomeRuns, serving Boston and D.C. has also abruptly shut down. The company was founded in 1996 by grocery retailer Hannaford Brothers but simply was allowed to run out of money.

Unlike HomeRuns, WebVan tried to go it alone, buying rival HomeGrocer for $1.2 billion in stock, and ultimately building $30 million warehouses in San Francisco, Atlanta and other cities. Last Monday, Webvan folded after burning through $830 million, closing operations serving 750,000 customers in seven markets: San Francisco; Los Angeles; Orange County, Calif.; San Diego; Seattle; Chicago; and Portland, Ore. WebHouse Club, Priceline’s grocery (and gasoline???) affiliate, burned through $390 million before calling it quits. Other dotcom grocers who cratered include Streamline, Shoplink, and PDQuick (acquired by WhyRunOut.com). Trailblazing grocery service Peapod, although still hanging in there, was forced to pull out of San Francisco.

It’s gotten so ugly for online grocers that the analysts are even backpedaling. Once upon a bubble, Jupiter Media Metrix predicted that Net grocers would rack up $6 billion in sales in 2002. Recently, the analyst firm lowered that estimate to $1.3 billion and even declared that “grocery delivery is economically unviable for the foreseeable future.” This may be true. Cyber Dialogue found that although 24 million American adults seek information about supermarket categories online, only 34 percent actually purchase them online.

So is Simon Delivers, a local Minneapolis area online grocer, crazy? Maybe, but their approach to the business could just work. I am a happy Simon Delivers customer. Aside from a few glitches (purchased items that did not show up), I am very happy to have groceries show up at my door once a week. They even deliver water softener salt. Simon Delivers doesn’t charge a delivery fee for orders over $75, they accept manufacturer coupons, and they even run specials just like a real store. But Webvan proved that great customer service and high customer satisfaction isn’t enough in this business where a 3 percent profit margin is the norm.

The main difference in Simon Delivers’ approach is their attitude toward growth. Rather than swinging for the fences and burning through cash building an infrastructure to serve millions, the company is deliberately widening their service area a little at a time. In fact, we had to wait when they expanded into our area before they’d take us as a customer. Simon Delivers now has 43,000 customers, and expects 2001 sales of $55 million (the recently defunct HomeRuns had $30 million in sales last year in two markets). The company forecasts becoming profitable, on a net income basis, in the next year.

Rather than burning investors’ cash building their brand and an expensive infrastructure, Simon Delivers’ method is likely to be more successful in the post-crash consumer eRetailing environment. But one thing has always puzzled me about online groceries. Why haven’t more food retailers followed Hannaford’s lead and gotten into online retailing?

Turns out they are. Global grocery giant Royal Ahold bought a controlling stake and has made an offer for the rest of the shares of the original online grocer, Peapod. The company is said to be retooling Peapod to serve its established chains, such as Giant Foods and Stop & Shop. Ahold claims to have successful online shopping operations with annual sales of 250 million Euros in The Netherlands, Sweden, Norway, Argentina and Guatemala.

In fact, Ahold’s been doing it online in Argentina since 1997. Disco, one of the country’s largest supermarket chains at 237 stores, has become the country’s leading e-commerce player. Its online sales have grown to $40 million, which ain’t hay when you consider eCommerce in Argentina is estimated by Accenture to be only $150 million. Online grocering was merely an extension of Disco’s decades-old home delivery service, which last year delivered a quarter of the company’s sales.

Obviously home delivery can work, and the combination of the warehousing infrastructure of established grocery players with slick online stores might be the key to success. Jupiter thinks that a hybrid model, where consumers order online, then visit the store to complete their shopping and find the groceries already bagged and waiting, may succeed. Gartner, while admitting that established grocers could make it online, wonders why they’d bother, since there’s no established model for success.

So, how do you not succeed in online grocery? Raise too much money, grow way too fast, and try to build everything yourself. Sounds like a good prescription for failure for any online retailing business. The prescription for success, however, is still being written.

The Standard

Briefly Noted

• Shameless Self-Promotion Department: We’ve recently re-ranked the trends in the TrendSpot, adding a new trend: the Post-PC World.
  The TrendSpot
• Wireless Stumble: Goodbye Ricochet? Metricom, provider of the Ricochet wireless service, has filed for bankruptcy. The service is expensive at $80 a month and will eventually be eclipsed by 3G wireless networks (but don’t hold your breath).
  Metricom
• 

  More Disposable Tech: Since the last newsletter, another prepaid disposable phone has come to our attention from, who else, prepaiddisposable.com . Parent TelAmerica appears to be a pyramid, er, multilevel, er, network marketing scheme in which consumers become distributors of the $40 phone. The 5-ounce digital/analog phone comes with 100 minutes of nationwide airtime. The company claims to have received an order for 10 million of the phones from a major corporation.
  TelAmerica

• Thumb Envy? Seiko Instruments Austin Inc. (SIAS) has introduced

  the Thumboard™ TB5000, which it calls the first integrated and mobile mini-keyboard solution. The device is basically a small, thumb-enabled keyboard for the Palm™ V series. So if you have thumb envy from watching Blackberry users thump out emails, this gadget’s for you. It slips directly onto the handheld, fully covering the graffiti area and interfacing with the serial port. Thumboard also includes Hot keys (Calendar, To Do, etc.) and text editing capabilities by way of the Command function key.
  TwoMobile

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In the unlikely event that you want more of my opinions, I’ve started a Weblog. It’s the fashionable thing for pundits to do, and I’m doing it too. A Weblog is a datestamped collection of somewhat random thoughts and ideas assembled on a Web page. If you’d like to subject the world to your thoughts, as I do, you can create your own Weblog. You need to have a Web site that allows you FTP access, and the free software from www.blogger.com . This allows you to right click on a Web page and append your pithy thoughts to your Weblog.

I’ve dubbed my Weblog entries “Stratlets”, and they are available at www.stratvantage.com/stratlets/ . Let me know what you think. Also check out the TrendSpot for ranking of the latest emerging trends.

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