Online Grocers Can Bring You Many Things, They Just Can't Deliver A Profit

from the point-click-eat dept

Wed, Nov 22nd 2006 8:51am — Carlo Longino

Toss this onto the pile of signs of a bubble: online grocery delivery services are "looking good". One New York company, FreshDirect, says it's improved the business model of previous spectacular failures, like Webvan, by focusing its efforts on just one city, and it's also got some other improvements: it beats supermarket prices on meat and fish, and it's also getting special fridges put in some apartment buildings to facilitate daytime deliveries. And although the company says it's expanding and is operating at near-full capacity, it still isn't profitable on its $240 million in yearly sales. To try and change that, the company is taking a trick out of regular grocery stores' playbook by pushing prepared foods, which carry a higher margin, and by eschewing some low-margin products. It's also trying to beef up its web site and make shopping easier -- for instance, the site features recipes, and users can order everything that's needed in them with a single click. In the future, users will be able to enter food allergies they have on the site, and it won't display products that conflict with them. These are good ideas, and plenty of people think that online grocery shopping and delivery is a good idea -- including customers that rave about FreshDirect (and similarly raved about Webvan). Raving fans, however, don't necessarily mean the business model is sound. Just ask fans of Kozmo's home delivery service.

History is certainly against the services, and although the NYT says the problem with the likes of Webvan was that "they just didn't run the company well enough to make it to the golden age," it's hard not to be skeptical that FreshDirect, or any of the other companies trying to make it in the space, will succeed. After all, FreshDirect has been around for more than four years, when it first claimed it had learned from the mistakes of its predecessors, a line it repeated again two years ago. While it may not be making the same strategic mistakes, it is repeating the least endearing characteristic of earlier grocery services: the inability to make a profit.

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16 Comments

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Chubby, 22 Nov 2006 @ 9:08am

Play wii get food delivered!
If they expand geographically they are certainly doomed. I'm pulling for them!
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Joseph, 22 Nov 2006 @ 9:12am

It really sucks that these companies cannot make a profit for there services. Have they not tried selling ad space on their sites to their vendors?

I am one of those people still raving about Webvan. If they want to make a profit on the web they need to use the web and not just think about groceries.
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Patrick, 22 Nov 2006 @ 9:19am

Sponsored Ads
Joseph has a good point. They should sell sponsored ads like google. When you type in raisins, sun-maid can pay for their item to be on top.

There are many companies that would pay to be on top. Imagine how much Coke and Pepsi might be willing to pay to have their product first.
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Eddie, 22 Nov 2006 @ 9:26am

Quality
These services have a major flaw: unreliable quality of fresh foods. This includes fruits, veggies and meat (basicaly the most important and healthy stuff). I used to use an online delivery service, but a significant portion of my shopping is in fresh foods which often came bruised, mangled or even rotten. I can't imagine a way to circumvent this problem b/c the ppl filling the orders are inhenently trying to move product and have no motivation to select the prime items.
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Hayley, 22 Nov 2006 @ 9:29am

RIP Webvan aka Homegrocer
I agree. Webvan was great! I still miss them. Pets.com too, although God knows I probably put them out of business. They once offered a half-off coupon plus free shipping on anything. So I bought two hundred dollars worth of cat litter that lasted me for the next five years, long after Pets.com had gone to that place where all dead websites go...
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LazyDoode, 22 Nov 2006 @ 9:46am

"Online Grocers Can Bring You Many Things, They Just Can't Deliver A Profit"

I call Bullshit. I buy directly from Safeway's web site since they deliver. Going directly to the source, I don't see how this is not profitable for them.
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Voxx, 22 Nov 2006 @ 10:20am

Safeway is not an Online Grocer. It is an established chain where thousands of people walk through the doors daily, that also gets some of it's income from online services.
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Tyshaun, 22 Nov 2006 @ 10:41am

Is the problem the business or the product?
I don't think that inherently online grocers are doomed to fail, I think the problem is that the business models are shaky. I'm from NY and I mnever heard or webvan until the company went belly up in the first bubble. Aside from "on the top" product placement these companies really need to do some more advertising in general, and from the sounds of it, QA on the actual service delivery.

Why no TV or radio ads?

The idea should be to get the non-geek set excited. Seems like an easy sell to me, after working 8-10 hours a day who wants to have to go grocery shopping (the lines alone make me it a pain!). Just seems they need to do a better job widening the audience because the basic product seems pretty sound (although, how much do they pay to deliver the stuff?). Heck, this isn't even a single purchase item like cars or something, people need grocery shopping done every week or so, so if the price and quality or there, they can easily create a repeat revenue stream.
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Clay, 22 Nov 2006 @ 10:51am

Re: Quality
Simon Delivers, which operates in the Minneapolis, MN area also appears to not be turning a profit, from what I've heard from the inside.

We have always liked the quality of their produce, though. It is what I would have picked....

We eat very few prepared foods, so pushing them would not get us to spend more "margin" money with them. The problem for us now is that one kid went off to college, and the three of us left find it hard to hit the $80 and get a break in delivery costs.
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Vincent Clement, 22 Nov 2006 @ 11:37am

Re:
It's not bullshit. Brick and mortar grocery stores have razor thin margins on foodstuff. So it is possible that Safeway's online presence is losing money. But they may also be breaking even (or making a small profit) by utilizing their existing brick and mortar supply chain.
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Crazy employee at albertson's, 22 Nov 2006 @ 11:51am

yeats its very hetic and unorganized
I work at a acme/albertson's store in south jersey where all .com employees are all part-time. We try doing our best but mangement insists on us being timed doing 100 items in less than 60 mins, also it dosn't help that the website stock dosn't match the stork stock.

Some shoppers just don't care as we get between 5 hours on a slow week and 40 hours on a holiday week.

We would be doing excellent is mangement handled its employees better and advertized alot more, right now theres a small sign on our front windows thats barely visible.
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Vincent Clement, 22 Nov 2006 @ 11:53am

Re: Is the problem the business or the product?
I think online grocers are inherently doomed to fail. Brick and mortar grocery stores already have razor thin margins and rely on increasing volume to generate profit. They count on you visiting the store and buying more than what is on your list. Instead of spending $150 on groceries, they hope you spend $200.

With an online grocer, it is less likely that you will order things NOT on your list. It's much easier to focus on the task when you don't have thousands of products staring at you or people offering you samples or certain smells are wafting through the store. It may be convenient for you to order online, but how much of a premium are willing to pay for that convenience? Something tells me that most people are not willing to pay too much for that convenience, which translates into an ever smaller probability of profitability. That is not a good thing.
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Andrew Griffiths, 22 Nov 2006 @ 1:36pm

OnLine Grocers - Profitable?
Tesco in the UK is the largest online grocer in the world, with over �1 billion ($1.9 billion approx.) in sales last year. They originated the pick-from-store approach (Safeway got their initial technology from Tesco) and claim to be profitable. Of course, a lot of games can be played with profitability, especially when there are transfer price issues; e.g. what price does the online operation pay the store for products - cost from manufacturer + some handling cost (?), retail price in store, etc? Perhaps the most important impact though is that Tesco is winning incremental sales so that total store productivity (sales/sq. ft.) is higher.

A point regarding supermarkets' low profit margins: supermarkets like to pride themselves on "how efficient" they are and how they have optimized their supply chains. Well, you can be highly efficient at doing the wrong or less-than-optimal thing. The fact that Costco can sell at prices well below (& Whole Foods well above) supermarkets' indicates that there's plenty of "margin" in the system to play with. Of course this potential margin could be tapped by supermarkets' only if they changed their business models. Some are doing this; e.g. Safeway has been quite successful with their shift to �lifestyle� stores.

What none of the supermarkets have evidenced yet is an integration of the Internet and its potential impact into their business models; supermarkets� web sites � even Tesco�s (grocery, non-grocery is good) � are appendages only and they show it � i.e. they suck. There seems to be a presumption that online grocery = online delivery only, which indicates classic ostrich like behavior of the entrenched players. (From NY Times article) Richard Braddock, Chairman of FreshDirect, puts it this way: Phase 1 of the Internet revolved around providing information. Phase 2 revolved around basic transactions. In Phase 3, what Mr. Braddock calls �the golden age of marketing,� smart companies are starting to use the information about customers to sell products in fundamentally new ways. And who�s got more information about your shopping habits than your grocer?

As in all industry transformations, the big money will go to those who get consumers to change their behavior in ways that the consumer finds really valuable. For most people (outside of Manhattan etc.) online ordering and delivery haven't reached that hurdle yet. But some form of �online� will.
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Tim, 22 Nov 2006 @ 2:31pm

Re: Quality
I disagree with the implication that this flaw is inherent in the model. While I won't argue that I've experienced the same things with some vendors, Webvan's performance in this area was phenomenal. In fact, one of the ADVANTAGES that Webvan had over our local corporate chain store was the quality of their produce which was exceptional.
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L Schodts, 27 Nov 2006 @ 9:53am

Safeway and Peapod work just fine.
I'm currently living a bi-coastal life....half my time in DC and half my time in Sacramento and on both coasts I have home grocery delivery. Peapod.com on the east coast and Safeway.com on the west coast. If you only use them to bring in can goods, dry goods and non-perishables it really is a time saver...not to mention how much easier it is to have someone else bring up cases of bottled water detergent's and packs of diet coke. In California they actually bring cases of great wines...straight to the door. :)

Personally I can't rave enough about these two services. If you don't rely on them for perishables they've excellent.
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Kurt, 28 Nov 2006 @ 5:21am

Grocery Gateway works just fine as well.
I use Grocery Gateway all the time in Toronto. Once they partnered with a large grocery chain (Longos), they seem to be doing well.

God help me if they shut down.
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