Food Fight Anyone?

Viewing on-line markets as less than green, most traditional grocery retailers have shied away. But can they afford to stay away?

If ever there were a brick-and-mortar business, it's grocery retailing. From morning milk runs to the corner store to aisle-roaming weekly visits to stockpile everyday necessities, for most people going to the grocery store is as natural a part of daily life as going to work.

The question is, will it stay that way? And the answer is, well, maybe--but not if the new Web grocers have anything to say about it. As with virtually every other retail business, grocery entrepreneurs are opening up shop on the Web. Yet, unlike most retail segments--witness Barnes & Noble chasing Amazon.com--grocery hasn't felt the rumblings of a revolution.

Even as Peapod celebrates a full decade in on-line grocery retailing, and newcomers such as Web Van launch IPOs that overnight result in valuations at nearly half that of giants like Kroger and Winn-Dixie, most such powerhouses remain on the sidelines, watching the upstarts scrabble for a share of the $400 billion grocery market. While Skokie, IL-based Peapod now sells and delivers groceries on-line in eight markets--Chicago, San Francisco/San Jose, Boston, Houston, Austin, Dallas, Long Island, and Columbus, OH--the grocery giants are still using the Web primarily for corporate sites, where downloadable coupons are often the most interactive feature. Their take on on-line retailing tends to be boilerplate: "When it's profitable we'll be in it. Until then, shop at our stores."

Why this complacency when the short history of e-commerce suggests early entries get those coveted page hits? For Kroger, underwhelming results of a recent trial in Huntsville, AL, scuttled thoughts of launching an on-line division. Portland, ME-based Hannaford, a 154-store grocery chain currently merging with Salisbury, NC-based Food Lion, may be one of the very few exceptions. After Peapod opened on-line service in metropolitan Boston, Hannaford countered with the 1996 launch of its wholly owned HomeRuns.com subsidiary. It's been taking phone, fax, and on-line orders in the metropolitan Boston market--still also served by Peapod--ever since.

"Hannaford sensed the potential for a shift in consumer shopping habits and put that sense to work with a three-year test," says Allison Berglund, VP for marketing and sales for HomeRuns, who reports that on-line sales may make up as much as 15 percent of grocery sales early in the next decade. "The Web accounts for 85 percent of our business now, with phone and fax orders accounting for the rest."

"Capital-intensive, risky, fast-changing," is her description of the on-line selling environment, which may explain other chains' hesitation to leap into the fray. In grocery, margins are slim, investors wary. The cost of introducing on-line grocery sales and home delivery are formidable. Customers resist delivery charges, which run anywhere from $5 to $10 per order. Profits are, so far, nonexistent--hardly an attractive business proposition for a tradition-driven industry.

Yet behind that traditional facade are state-of-the-art information and communications systems that handle inventory control, shipping and receiving, checkout, frequent shopper programs, customer profiling based on purchases, and more. These very technologies prompted the first on-line grocers, says Andrew Parkinson, chairman of the Skokie, IL-based on-line grocer Peapod.

"The convergence and consolidation of technologies enabled us to solve the distribution problem," explains Parkinson, who cofounded Peapod with his brother, Thomas, now the company's CIO. The brothers saw the arrival of sophisticated database technologies as instrumental to their 1989 company launch. "As a result, we could reduce labor costs," Andrew Parkinson says. "On-line ordering was a natural outgrowth of phone ordering."

Natural to the Parkinson brothers, maybe, but this was 1989--an epoch removed from today's e-commerce capabilities. "Our first system used a DOS-based on-line service," Parkinson recalls. "Not many people were on-line. And in 1989 you couldn't raise $100 million just on the strength of an idea."

The brothers were convinced nonetheless that they had a strong idea, and technology was only part of it. At the time, Parkinson didn't see on-line grocery retailing as a technology business; and he still doesn't. "Our business is based on using those technologies to drive value to our customers," he asserts.

That value is driven at a premium price--margins for on-line grocers tend to be two to three times that of the less than 3 percent typical of brick-and-mortar grocery chains. "We use the technologies to increase our value to each customer," explains Parkinson. "Databases allow customers to review their most recent orders, create shopping lists, sort foods by calorie count or fat content, and tailor their shopping experience to their personal preferences, tastes, and habits."

"We're only just beginning to get a sense of the various ways technology will enable customers to use Peapod," says Parkinson, who believes profitability is just two to three years away.

Peapod tallied $69 million in sales in 1998, almost a third of the $235 million rung up by all the nation's on-line grocers. Manufacturer advertising--and the on-line grocer's ability to tailor ads to a customer's interests--is an increasingly important revenue stream.

Perhaps ironically, for a business whose potential rests on the World Wide Web, on-line grocery retailing is a local undertaking. While dry goods can be sold for delivery virtually anywhere, perishables have to be sold close to the destination. As a result, urban locales--Webvan and Peapod are in San Francisco, Peapod and HomeRuns in Boston--are where the online grocers are doing battle.

Berglund points out that HomeRuns' distribution center can handle a sales volume equivalent to that of six to 10 brick-and-mortar stores. While the subsidiary's service area is positioned so that it doesn't compete with Hannaford's retail stores, this raises the concern over whether on-line sales will grow to cannibalize brick-and-mortar register ring-ups.

Parkinson views this as one of the reasons traditional retailers hesitate to enter into the on-line marketplace. "They are concerned about cannibalizing existing markets. They can't afford much share erosion. There's no question that this is an expensive business to get into, one that hits the bottom line hard."

But Parkinson does not see on-line grocery retailing as a giant killer, however large the business becomes. "Stores are not going to go away," he notes, "but neither are we."

At the same time, anyone who sells groceries is a Peapod competitor. "We fight for share with the other on-line grocers," he says. "And we compete against the brick-and-mortar retailers on 'lifestyle' change. We need to convince consumers that Peapod is a smarter way to shop than in-store."

You'll know who's winning when you find yourself running to the nearest PC for a quart of milk.