E-grocery Industry in the US

E- mart Industry in the US1.1 Introduction and BackgroundAn old Chinese saying goes the likes of this Food to the people is like people to a king. It means that just like a king has to rely on the raise of his people to remain on the thr wholeness, ordinary people bugger off to rely on victuals for survival. The importance of aliment is universal, and the retail food industry is a vital part of the economic activity of every country.The food on Americas table is mainly supplied by super securities industrys, hypermarts and discounters. Ameri toilets atomic number 18 employmentd to going to these traditional stores in mortal to debase groceries. With an increasing number of grocers now offer online lodge and piazza rake of groceries, Americans argon gradually changing the way they shop for groceries. Online food market place retailing is becoming to a greater extent and more common. New start-up online foodstuff retailers such as Peapod and FreshDirect ar in the market t o compete with traditional supermarkets. both(prenominal) of these mod online grocers have support from traditional supermarket chains. Some are pure-play or stand-alone grocers that ope reckon their throw supply chains and facilities. Traditional supermarkets are to a fault whirl online parliamentary procedure and home oral communication to customers as a new distri scarcely ifion channel in a struggle to keep the market shares from being interpreted away by the new ventures.Online grocers utilize different operating strategies and work toughies. History has seen both masteryes and failures in this industry. Various aspects of online food market shop have been studied, but few studies have compared the successful and less successful companies in this industry to identify the characteristics that contribute to these out(p) performs. By identifying these key variables, this study intends to look for contrast models that have a violate chance of success.Once considered a symbol of the spit-com crash, the online marketplace industry struggles to come back to life. Applying a sound business model and effective operational strategies is essential for the existing players in order to stay competitive and successful. New ventures that intend to join this business also need to come up with a promising plan. This study attempts to add to the body of knowledge and provide insights that might be helpful to these companies.1.2 History of Home Grocery rakeNeighborhood food market stores have, in fact, offered economy values since the 19th century. At that era, urban citizens, who did not own horses like the recumbnts of rural areas, had groceries delivered to their home unleash of charge. or so of them did not own a car until the beginning of mass production of automobiles in 1914. Fifty years ago, Americans were use to having drawmen deliver fresh milk to their room access to each one morning.In more recent decades, grocers have allowed customer s to order and receive their food at home. In the 1960s, third gear-party companies offered phone-in delivery services for groceries. However, these services were usually smaller lived. Todays shoppers are sensual shoppers who prefer to use their louver senses in choosing their purchases. Groceries, especially food, are the kind of merchandise that shoppers would want to see, feel, smell, touch, and possibly taste in person before they cast off the purchase (Underhill, 1999). The convenience of driving their own family cars and being able to really touch and feel the food in big supermarkets own many an(prenominal) customers unwilling to take advantage of phone-in services. Lack of profitability has been the biggest problem for these grocery delivery services for vendors. By the mid-1980s, some local grocery delivery services allowed customers to browse product listings and place orders by computer. Marketing strategies used during this time, such as the focus on suburban fa milies and the use of price promotions to deplumate new customers, would later surface again among the online companies of the late-1990s (E-Commerce Online, 2004).In 1989, Peapod, an online grocery business, emerged in suburban Chicago. In the days before the arena Wide Web, Peapods customers used proprietary software and a modem to dial into their systems in Chicago and San Francisco (Background on Peapod, n.d.). Peapod partnered with Jewel in Chicago and with Safeway in San Francisco to put unitedly the orders to be delivered to customers (Peapod familiarity history, n.d.).Afraid they were missing out on the market share occupied by Peapod, many grocery stores jumped on the bandwagon of home-based ordering and delivery in the 1990si. Safeway considered expanding their alliance with Peapod to c everywhere a larger part of the Southwestern United States. Other chains linked their catalogues to online content services like Prodigy and used their own employees to fulfill orders. However, by the mid-1990s, it was clear many of the early expectations for the industry would not be met. Grocery chains and stores discovered that online ordering and delivery were not profitable. Peapod relied simply on computer-based ordering and undergo maturation demand. Sales doubled every year (Funding Universe, n.d.) however, costs also rose, causing Peapod to suffer continuing losses and growing debt.Peapod saw the rise of new competitors like Streamline Inc. in suburban Boston in 1993. Unlike Peapods partnerships with existing grocers, Streamline developed its own warehouses, as well as relationships with wholesalers and distributors. Streamline delivered to their own boxes located in the garages of their customers (Borrego, 2001). By 1996, companies like Peapod, Streamline, and HomeRuns had created their own websites. The World Wide Web had created a common weapons platform in which these companies could build their ordering systems. During the height of the Internet boom, investors poured money into these dot-com ventures. Taking advantage of this trend, HomeGrocer and Webvan joined the field of competitors.Webvan was started in 1999, offering over 18,000 putrefiable and nonperishable items. It built noblely automated warehouses to process its orders. Webvan allowed customers to schedule a 30-minute window for next-day grocery delivery (Feather, 2001). Webvan had attracted $1 billion of venture capital and had planned to sharp expand into 26 cities. Founded in 1999, SimonDelivers was another online grocer. It serves the Minneapolis-St.Paul metropolitan area of Minnesota and Western Wisconsin (SimonDelivers, 2008).Expansion did not go smoothly for these new grocers, however. Peapod was suffering cash-flow problems by 1999. It wasnt until Royal Ahold, a Dutch-based international supermarket operator, came to the rescue with $73 million in 2000 that Peapod was saved from collapse (Lerner, 2002). By 2002, nearly all the leading online grocers (Ho meGrocer, HomeRuns, Kozmo, Shoplink, Streamline, Urbanfetch, and Webvan) were gone. The only survivors were Peapod and SimonDelivers. The online grocery industry was crushed. Webvan was the most spectacular failure, having burned through $1 billion of venture capital in just two years despite having what was at a time considered to be the model most likely to succeed (Porres, 2003). Webvans subsequent failure caused many to lose faith in the inclination of online grocery shopping altogether. In the early years, overenthusiastic projections of the online grocery industry predicted it would cover as much as 20 percent of all grocery sales by the mid-1990s or 2000. Later, estimates by Forrester Research in 1998 toned down their forecasts, dropping their projections of 2004s expected online sales to less than five percent of US grocery retail sales (E-Commerce Online, 2004).Rising from the ashes of the online grocery failures were more cautious ventures in the online world. A scaled -down Peapod, with backing from Royal Ahold, was joined by brick-and-mortar grocers now testing the online waters. Although experiencing some financial difficulty, SimonDelivers weather-beaten the dot-com boom and bust by securing $15 million in funding and focusing on its local market instead of expanding nationwide (Tellijohn, 2000).1.3 Factors tearaway(a) the Popularity of Online Grocery ShoppingIn todays busy world, the time available for grocery shopping is scarce. Americans now work more and thus have less free time. According to a 2008 ranking by the Organization for Economic Co-operation and Development (OECD), Americans are among the hardest working people in the world with 1,797 work hours on fair(a) each year (Olson, 2008). For families with children, having to take the kids to the market adds to the stress of the chore. Due to competing demands on their time from work and home, people are more likely to shop for groceries online. numerous disabled people rely on onli ne grocery services to fill their refrigerators and because of the quickly aging US population, more elderly people are also likely to be interested in e-grocery shopping. With Peapod operating in the Midwest and East Coast, FreshDirect in New York City, Albertsons and Safeway in the West, Simon Delivers in Minnesotas Twin Cities area and Shnucks in St. Louis, Central Illinois and parts of Southern Indiana (Fishman, 2005), this revived e-grocery industry has both new and old players that are now attempting to stake out their shares of the online grocery market and working hard to achieve what their predecessors could not. (See appendix A for a complete list of current US online grocers.)Scott and Scott (2008) report the following figures regarding the current market coat and potential of selling groceries online. The estimated online grocery revenue was $235 million in 1998, $2.4 billion in 2002 and $6.2 billion in 2006 Jupiter research estimates that the percentage of US online g rocery sales will rise to 1% by 2009. Manor (2006) stated that industry analysts estimated US online grocery sales would reach $4.2 billion in 2006, up 27 percent from 2005. Despite console being less than one percent of all grocery purchases, online grocery sales are expected to double by the end of the decade.1.4 Problem StatementMany consumers welcome the option to shop for groceries online, but they are not yet ready to abandon the traditional in-store method of shopping. Many still consider online grocery shopping too expensive, mostly due to the high delivery charges. Since customers are not able to pick out produce themselves, grocers must be able to convince customers that they are choosing only items of the desired quality.The logistics of going from the customer making an order to delivery at an concur upon time requires a great deal of effort.Many new companies, as well as traditional grocers, have attempted to provide electronic grocery shopping to consumers. Various different approaches to establishing infrastructure, fulfilling orders, and making deliveries have been tried. Margins are very thin surviving in this industry is tough. Many failed companies litter the history of the industry. Grocers are desperately searching for the best formula for success.1.5 Purpose of This StudyAlthough grocery delivery is not a new idea, the electronic grocery shopping business is underdeveloped and still in a nascent stage. This is a very challenging business, yet it offers extraordinary opportunities. Despite the efforts made by the egrocers to implement non-homogeneous service concepts and the interest of consumers in online grocery, not much research has been done in this area. The purpose of this study is to identify successful operating strategies that can be employed by online grocers and less successful strategies that should be avoided.1.6 Major Research Questions of the StudyThis study will attempt to understand the factors contributing to online grocery success by finding answers to the following research questions How should an online grocers management function to ensure its success? How should an e-grocer expand its business and ascertain its bearing market? How should an e-grocer put together orders? Should it use central warehouses or the shelves of physical stores? How should an e-grocer deliver orders to customers and achieve operational efficiency? How should an online grocers website function, and how is customer relations management handled?1.7 Significance and LimitationsThe importance of the online segment in the overall retail food industry will be determined in the years to come. Although it presently only billhooks for one to two percent of food sales in the US, market share of online grocery shopping whitethorn increase due to social and demographic drivers and technological and operational improvements. It has the potential to account for a major percentage of retail food sales if business strategie s are chosen wisely in the right environments. Alternately, it may be relegated to the fringes of the grocery industry if the right business choices are not made. There have been many casualties in the history of the e-grocery industry. Todays survivors and newcomers are all hoping to find the strategies for success. By performing case studies on the successes and failures of a group of selected online grocers, this study hopes to find answers to the major research questions stated above and put together a big scenery view of the industry. Some of these companies are still operating, while others have failed. Various aspects of their business strategies will be compared, and an effort will be made to draw out the characteristics of these businesses that led to their success or downfall.This study intends to help the online grocery business learn from the mistakes of the past so that they can increase market share in the future.The study will be limited to e-grocers that offer onli ne ordering and home delivery/pick-up service with product selections correspondent to a traditional supermarket specialty food grocers and companies with restricted selections (such as teetotal food only) will not be examined.1.8 Structure of the ThesisThis thesis is made up of five chapters. The first chapter is the launch/thesis proposal. It gives a historical overview of the e-grocery industry, presents the problem and states the importance of the study. Major research questions are also identified in this chapter.The second gear chapter is the literature review which describes the order market of online grocers. The customer base will be reviewed based on demographic, geographic and psychographic characteristics. The literature review also provides information about the state of the market following a chronological and geographical order. The operational aspects of how different e-grocery businesses complete a typical transaction will be described as well.The third chapter presents the methods used. This study will primarily be an inductive qualitative analysis of the e-grocery industry. This research consists of casestudies of successful and not-so-successful e-grocers. A meta-analysis will be performed to compare various aspects of the e-grocers strategies in an attempt to identify patterns and variables that contribute to their varied success levels. The fourth chapter analyzes data. The fifth chapter confers research findings and draws conclusions. It also offers possible directions of future research. 19Keywords e-grocery, online grocery business, supermarket, business model, target market, store-pick, online order, warehouse-pick, delivery, customer demand, customer density, cost, investment, knowledge, experience, expansion, Peapod, Tesco, Safeway, FreshDirect, Webvan, StreamlineChapter TwoThe goal of this chapter is to lay out the operational and strategic groundwork for the analysis. E-grocers employ different business models. To make their business models work, online grocers use various strategies and target different markets. Each operational model varies along several dimensions, such as how orders are placed, assembled and delivered. The first part of this chapter presents statistics and descriptions of the electronic grocery industry in chronological and geographical order. The second part of this chapter presents a review of the online grocery industrys customer base and target market. The third discussion section describes the process of completing an online grocery transaction and how each business model functions differently to fulfill orders. The fourth part of this chapter offers opinions from previous studies regarding the factors contributing to the varied outcomes in the e-grocery industry.2.1 Industry OverviewAmericans are familiar with grocery home-delivery services. This concept has been around in one form or another for decades. In the early days, when not many people had a fridge at home, milk need ed to be delivered to customers daily. Milk delivery often occurred in the morning while people were still asleep. Glass bottles or cartons were left at the doorstep. Milkmen even delivered other dairy and farm products, such as eggs, cream, yogurt and butter (Milkman, 2008). Although demand for the service lessen significantly during the past 50 years, some people still prefer the old-fashioned way of getting their milk as they think milk tastes better in glass bottles. The milk delivery business is actually regaining some of its lost ground. The United States Department of Agriculture saw three-to-five percent of milk sold in the US delivered to homes in 1995, compared with only one percent in 1993 (Shih, 1995). In the 1950s, groceries could be ordered over the phone and delivered to a customers kitchen at heart an hour or so, free of charge (Underhill, 1999).American grocery stores used to place only dry grocery items, such as flour, baking soda, dry beans and canned foods. Pe ople bought fresh produce and meat from specialty food retailers like butchers and greengrocers. These stores were often located near one another for shoppers convenience. Starting in the 1920s, chain grocers experimented with consolidating smaller stores into larger ones with meats and produce along with the dry grocery items. As a result of this consolidating process, by the 1950s, there were much fewer resemblance stores but more larger supermarkets and shopping centers that people had to drive some distance to go to (A quick history, n.d.). Fewer grocers offered home delivery aft(prenominal) this period, as Americans enjoyed driving their family cars to shop in large, well-decorated supermarkets and spending some leisure time at the urban and suburban shopping centers.Even before the World Wide Web ever existed, getting groceries online was made possible by dialing into grocers servers with special modems provided to customers. Independent online ordering and home-delivery gro cery companies like Peapod began to emerge in the US retail food industry. Food retailers like these were referred to as pure-play e-grocers because they only sold groceries online and had no storefronts. The development of the web provided a whole new platform for online ordering of groceries. More pure-play e-grocers jumped into the market. Among these companies were Streamline, HomeRuns, HomeGrocer, Kozmo, Shoplink, Urbanfetch, Webvan and SimonDelivers. Fearing of missing out on the market share occupied by pure-play e-grocers, traditional supermarkets also began to offer grocery delivery service. For example, Sandoval (2002) described Safeways reentry into home-delivery, with experienced UK major e-grocer Tesco by its side. (In 1990, Safeway had started a delivery service, but discontinued it after just two years.) From the emerging of Peapod in 1989 to Webvan s grand entry in 1999, the online grocery retailing industry seemed to be very promising.Industry expectation for the e- grocery sector was optimistic at the time. According to LeClaire (2002), Forrester predicted that 14 million households would eventually buy at least some of their groceries online. Jupiter predicted that sales would reach $11 billion in a few years. Datamonitor reported that the online retail food and beverage market in the United States was worth $2.1 billion in 2001 after growing 43.5% that year (United States Online, 2002). The growth rate slowed from a high in 1999, when the market had grown by 131.6%. Datamonitor predicted the value of the market to increase to $49.9 billion by 2007 (United States Food, 2003). At the time, Webvan accounted for 30.9% of the market volume, followed by Peapod with 28.3% and GroceryWorks with 12.7%.However, problems with customer retention and revenue times in the pureplay businesses led to a big shakeout in the US online grocery industry. Most of the independent online grocers shut down their websites permanently by 2002. Only Peapod and Simon Delivers defy the dot com crash and survived. Brick-andmortar stores continued to offer online grocery service and soon took the lead. Later came some new players into the market. FreshDirect (founded in New York City in 2002) was one of them.2.2 Customer Base/Target Market2.2.1 Demographic CharacteristicsAccording to Buy4Now, an internet shopping service, 80% of online grocery shoppers were 29 to 50 years old in 2002. Seventy-four percent (74%) of the respondents were female shoppers (Typical Customer Profile, 2008). According to eGroceryUSA.com (Typical Customer Profile, 2008), three categories of people are the major users of online grocery services eater shoppers pressed for time, families with young children, and people who cant easily get to the store. The first kinsperson is people who have higher incomes and less time. These shoppers are usually technology-savvy, big(a) internet users who are single or have a dual-income family with no kids. These big spenders prefer to p ay someone else to do grocery shopping for them. The second group consists of families with young children. They comprise the largest number of online grocery shoppers. A typical e-grocery shopper in this category is 29-to-50 years old with one or more children and at least one child under the age of five. They normally would cook family dinners, and, therefore, are regular grocery shoppers with above average spending. People in this category expect to save time and avoid the hassle of dragging kids along for grocery shopping (Typical Customer Profile, 2008). The third group is relatively small compared to the first two. They are older or disabled people and those who find going to a grocery store difficult. People are living hourlong than ever. In 1960, life expectancy of the US population was only 69.7. The number increased to 73.7 in 1980 and 77 in 2000. The projected life expectancies for the years 2010 and 2015 are 78.5 and 79.2 respectively (U. S. Census Bureau, n.d.). Older people may need some form of help with grocery shopping when it becomes difficult for them to drive to supermarkets and carry tough items home. Online grocery shopping can be a good alternative to hiring personal helpers. For disabled people and others who are physically challenged (temporarily injured, bed-resting, etc.), online ordering and home delivery of groceries would also be of great help.2.2.2 Geographic CharacteristicsSandoval (2002) quoted analyst Robert Rubin saying that average American cities are less densely populated compared to ones in the UK, which means high fuel costs will hurt even more when it comes to grocery delivery. Rubin believed Americans are more likely to drive to the grocer because of the more entrenched car culture. The UK (248 per sq. km) had 8 times the population density of the US (31 per sq. km) in 2004 (World Population Prospects, n.d.). Tesco has been having a relatively successful online grocery operation in the UK. This led to the idea that U S online grocers should aim their target at large urban areas with higher population density for more potential customers.In these urban centers, people reside closer together. Less people own family cars in large cities. The dependence on public transportation, more crowded shopping environments, busier lifestyle and higher income make many urban residents favor online grocers over personally going to traditional grocery stores. According to Mclaughlin (2005), Richard Braddock, who was appointed chairman of FreshDirect.com in 2005, mentioned that FreshDirect would look for cities that are similar to New York to expand its business. Those are cities with a high percentage of internet custom, a high number of residents per square mile, and residents with a good deal of disposable income. He suggested that FreshDirect would not expand to the whole surrounding area of New York. Instead it would expand from one urban population center to another to make sure its delivery trucks could m ake as many deliveries as possible every time they stopped.2.2.3 Psychographic CharacteristicsFox and Kempiak (2006) pointed out that out of MyWebGrocers five critical elements that decide whether a consumer shops for groceries online (price, ambiance, convenience, service and product variety), e-grocers have advantages in ambiance, convenience, and service. Fox and Kempiak stated that changing family structures and increased work hours have made consumers busier, more time-starved, richer and more yearning with time-consuming tasks like grocery shopping. Because of these social and attitudinal changes, many people are more likely to be attracted to convenient, dependable alternatives for the recurring chore of grocery shopping. This makes the e-grocery service more appealing for consumers that fit this profile. Consumers with certain disabilities that make in-store grocery shopping hard are another major market for e-grocers.The ease of shopping from home and the time saved are tw o of the reasons some prefer buying online. Gennifer Calise, a working Manhattan mom, admitted that she would not want to lug her ten-month old son to the grocery store and lug him back.Instead, she can stay home and play with him on the floor and be clicking online at the same time. With both a child and a full-time job, she said she did not want to do anything that wasnt easy (Koeppen, 2006). Similarly, Sietsema (2007) stated that those who worked long hours at the office and had little time for everyday life were pleased to be able to not have to go to a grocery store.Anckar et al. (2002) stated that the ability to shop from any place, at any time, was an undeniable convenience offered by e-commerce. The status of grocery shopping as an undesirable chore for many people makes it ripe for online efforts that can offer both speed and convenience. date and convenience have been cited as the principal reasons for purchasing groceries electronically in a study by Morganosky and Cude . With the technology available online, general purpose grocers can easily become specialty grocers tailored to the individual needs of customers with allergies that require a special diet or people with different food preferences, like organic, ethnic, religious, or gourmet items.Scott and Scott (2008) state that by changing and reusing previous shopping lists online, consumers save time. Customers become familiar with the e-grocers website fairly quickly. The average ordering time is only 20 minutes versus 60 minutes when a customer shops online for the first time. The benefits of buying groceries online include the ability to establish, save and modify shopping lists online over time, emailing shopping lists to other family members, getting personalized coupons, sorting items according to nutritional information provided and automatically ordering all the ingredients for a certain recipe.Bates and Lauder (2008) pointed out that customers are often not loyal to just one particular retailer. They can be loyal to several retailers at the same time. These retailers share the spending of each customer. Therefore, the goal of competition becomes maximizing the wallet share a retailer could possibly get from each customer. Offering online grocery shopping to customers as a new distribution channel has the potential to gain a greater wallet share for a grocer.Bates and Lauder (2008) also believed that the market adoption rate is another influencing factor that decides how many customers an online grocer can attract. Customers adopt online grocery services at different rates and at different times. Due to Webvans failure and the dot com meltdown in 2000, the natural evolution and adoption process were set back for years, both for potential customers and for grocers. Bates and Lauder used the figure in Appendix B to show the adoption process being extended. Fox and Kempiak (2006) brought up some major concerns that prevent some consumers from choosing to buy grocerie s online. These concerns included delivery time and methods, quality of produce, a limited variety of goods, and the security and privacy of online shopping. Anckar et al. (2002) considered the fear of receiving lowquality goods to be a potentially important obstacle to purchasing food online. Some customers fear that store employees may not pick the freshest produce in an attempt to minimize storage losses or maximize picking speed. slice some people consider grocery shopping a burden, there are still a lot of food lovers who enjoy their trips to traditional grocery stores to actually touch and handpick everything they are buying. Online grocery shopping is just not the right experience for them, and, therefore, does not satisfy their needs.When Scott and Scott (2008) described the resistance to online grocery shopping, they mentioned that customers may not be willing to pay the delivery fee. It is also hard to change the established shopping habits of consumers. Customers might no t like the long lines at the registers of traditional grocers, but that does not necessarily mean they are ready to give up standing in them right now. The cost involved in the acquisition and retention of customers tends to be high, because once consumers have a negative online grocery shopping experience, they may not buy groceries online again and tell their acquaintances not to try the experience.2.2.4 Technological CharacteristicsThe internet makes online grocery shopping viable. According to Fox and Kempiak (2006), the Food Marketing Institute (FMI) indicated that 86% of US consumers go online or use their computers every day. Seventy percent (70%) of them shop online frequently. While in the UK, broadband use is ranked number two in Europe and number five in the world. This has been a boon for online businesses in the UK 15.9% of the respondents of this research bought groceries online at least once a year. 3.2% used e-grocers at least once a week. 2.7% used them two or three times a month. 4.5%, the largest group, used an e-grocer once or twice a year (E-commerce The Internet, 2007). The increasing rate of internet usage likely contributes to the rising number of consumers who purchase groceries online.According to Foley et al. (2003), online shoppers actually had habits different from their unwired counterparts. Online grocery shoppers made fewer shopping trips per month (for all goods) and spent more per trip than those who did not shop online. Online orders tended to be larger than in-store purchases. At Tesco, for example, instore purchases averaged 21 (about $33), while online orders averaged 85 (about $136). Online shopping households averaged nearly $10,000 more in annual income over offline ones at a little over $70,000 per year.2.3 e-Grocery Shopping Process and Various Business ModelsThe process of buying grocery online consists of several major steps. They are ordering and payment, order-picking/ assembly and order delivery/ pickup. (Append ix C shows the process of e-grocery shopping in a figure.) Although all e-grocery transactions have these basic activities, e-grocers vary in how they carry them out.2.3.1 Online OrderingA consumer who intends to buy groceries on the web would first go to an egrocers website to enter the zip code of the intended delivery address. The e-grocers website would tell the consumer whether home delivery or in-store pick-up i