Web Grocers Not Quite Clicking With Consumers
As soon as HomeGrocer.com Inc. started service in Southern California last fall, Michele Glasky placed her order online. And the Irvine mother of two couldn’t have been happier. Even the bananas, she said, were delivered just the way she likes them--a tad on the green side.
But lately she’s reverted to in-store shopping because she doesn’t want to wait for deliveries.
Beth Mueller, a 30-year-old money-market trader in San Francisco, describes her experience with online grocer Webvan as “awesome.” Yet she still frequents her local Safeway. “It won’t totally replace me going to the supermarket,” Mueller said.
Throughout California, more people are turning to the Internet to buy groceries. And many have come away converts, especially the affluent, the working parent and the short of time.
But even as electronic commerce ceaselessly expands, Glasky and Mueller illustrate what may be the limits of online shopping. Unlike books or CDs, which easily can be handled and shipped anywhere, the logistics of delivering perishable foods pose unusual challenges. And there is a huge visceral barrier: Many consumers are reluctant to try it because they prefer to touch the fruit, want to use coupons or simply enjoy the trip to the neighborhood market.
“I like to get out and walk,” Angelo Artemas, an Internet-savvy Downey resident, said of why he probably won’t shop for groceries online.
Although online grocers have only recently made forays into California--a lucrative and important laboratory for the industry--expectations from analysts and consumers alike have been tempered by what they have seen so far regionally and nationwide.
As online grocers work out some of the kinks, Forrester Research predicts that U.S. online food and beverage sales will jump from about $500 million last year to $17 billion in 2004. But that would still represent just 3% of the country’s overall grocery sales.
By comparison, Forrester analysts believe that within four years 50% of all retail software sales will be made online, 25% of all music, 12% of gifts and flowers, 9% of apparel and 5% of tools and garden supplies. Groceries come in last.
“There may be great expectations,” said Jeff Siegel, an electronic-commerce analyst with Ormes Capital Markets in New York. “But it might not turn out as good as people think.”
Even so, online grocers have big hopes and are just starting to make their push into Southern California and elsewhere, building warehouses, offering free delivery in some cases and teaming with food makers and other e-commerce ventures.
At the moment, the business in Southern California is tiny and the availability spotty. HomeGrocer broke into Orange County last fall, and since the start of this year has been delivering to a few areas in Los Angeles County close to its Azusa warehouse, including Pasadena and West Covina.
Pink Dot, which operates out of Camarillo, covers much of L.A. County and portions of Orange County. The company, started 13 years ago, bills itself as a “super 7-Eleven.” In addition to groceries, it delivers prepared meals, alcohol and tobacco.
Whyrunout.com, a smaller player in south Orange County, doesn’t have its own warehouse, but picks up food, videos and other items from local shops and drops them off with customers for $5 to $10. Manhattan-based Kozmo.com has launched a similar service in the Los Angeles area.
Some of the nation’s biggest online grocers haven’t yet reached Southern California, although the Bay Area’s Webvan is negotiating to open a huge warehouse in south Orange County. Netgrocer.com ships food nationwide, but only nonperishable goods. Streamline.com, which is planning to expand into Los Angeles, provides customers with lockup refrigerators that can be stored in garages, so drivers can drop off orders any time.
For now, major supermarkets such as Safeway and Ralphs are watching the action from the sidelines, reluctant to plow a lot of money into a venture that may not fly. An exception is Albertson’s, which offers online ordering in Seattle.
“We’ll wait to see if anyone else develops a profitable business model,” said Gary Rhodes, a spokesman at Cincinnati-based Kroger, which owns Ralphs.
So far, nobody has made much of a breakthrough. The entire U.S. cyber food business amounts to less than Bakersfield’s overall grocery sales. And like much of e-commerce, the individual losses have been staggering.
HomeGrocer.com, a Seattle-area company whose initial public stock offering this month failed to excite investors, lost $78 million last year. The company is financially backed by e-commerce leader Amazon.com.
Peapod.com, which operates in Chicago, San Francisco and Long Island, N.Y., has skated close to bankruptcy. Last week, its chief executive resigned for health reasons and the company said it may consider selling the business after the cancellation of a $120-million investment from Los Angeles grocery magnate Ron Burkle and investor Leon Black, among others.
“I know most of the industry is unprofitable,” said Lauren Farrell, Streamline’s vice president of finance. But for now, she said, everybody is building warehouses and trying to attract customers.
Clearly online grocers have won plenty of adherents.
“It’s been great,” said Linda Barkley of Laguna Beach, who switched to online grocery shopping to simplify her hectic life, which includes launching a home business and home schooling her son.
At first, Barkley struggled navigating HomeGrocer’s Web site. Finding products was as hard as shopping in a new supermarket for the first time. She couldn’t find canned tomatoes, for example, learning later that she could simply type the product name into a search engine on the site.
Barkley’s weekly grocery shopping on the Net now takes just 10 minutes, helped by a HomeGrocer program that maintains a list of her frequently ordered items. She spends $300 a month on HomeGrocer.
Ease of use, speed, quality, price and variety all weigh heavily in consumers’ decisions. And thus far, few online grocers have mastered them all--and found a way to make money.
Pink Dot, for example, has a relatively small selection of groceries. But the company promises speedy delivery--under half an hour--for which it charges $2.99.
“When customers call, they want it, and they want it now,” said Karen Sophiea, chief marketing officer. Pink Dot, which operates in much of Los Angeles County and parts of Orange County, says it has 100,000 regular customers and fills 3,000 orders daily from its network of stores and warehouses.
Webvan, the nation’s best-capitalized online grocer, is looking at spending $38 million for each new market it enters. That cost includes a huge automated warehouse and smaller transfer centers. The Foster City, Calif.-based company promises a wide variety of brand-name products at everyday prices. It also supplies personal shopping lists and recipes.
Webvan spokesman Bud Grebey says the company’s hub-and-spokes distribution system gives it an edge over rivals. Since starting in June in the Bay Area, Webvan’s client base has doubled to 47,000, and its average order is about $81. But the company says it needs average orders of $103 to break even on the cost of distribution.
Webvan has invested a lot of money in technology, said Arvind Bhatia, an analyst at Southwest Securities. But, he said, “They are in completely uncharted territory.”
Webvan and others have been going into generally upscale areas. HomeGrocer’s first venture outside the Pacific Northwest was Orange County, where the average household income was $95,000 in 1998 and which has a large share of dual-income families and high Internet access. In L.A. County, competition figures to get heated in affluent areas such as the Westside and Pasadena.
To further boost their chances, online grocers have formed marketing pacts with food makers such as Pillsbury Co. and Kellogg Co., enabling grocers to give away samples and specials and food manufacturers to get more information on who’s buying their products. Online customers are said to be intensely brand-loyal and typically spend more per trip than customers of traditional supermarkets.
Jann Reardon, a stay-at-home mom in La Canada, was among the first to try HomeGrocer when it came to Los Angeles. Reardon played it safe, ordering dry goods such as soft drinks, detergent and dog food. With her second order, the deliveryman in the truck emblazoned with the big peach dropped off a complimentary bag of fruits and vegetables.
“They were beautiful,” she said. Even so, Reardon hasn’t changed her online buying habits. She prefers the Internet for nonperishables, things she calls “the drudgery part of the store.” For fish and meat, she goes to a nearby specialty shop.
For other consumers, convenience is king.
Michele Tucker, 29, an Irvine speech therapist who is expecting her third child in June, recently plopped in a video to entertain her two small children while she went clicking through HomeGrocer’s virtual aisles. Fifty minutes later, with plenty of interruptions in between, Tucker rang up a sale of almost $110.
With no delivery charge, that was still $9 more than what she would have paid at the nearest Albertson’s a mile away, which that day had specials on red grapes and a few other items. She shrugged when she learned that.
“I’m into convenience at this point in my life,” she said.
One of Tucker’s friends, Karen Eger, 34, figured she made the ultimate use of online shopping. While vacationing in Michigan, Eger placed an order with HomeGrocer so she and her family wouldn’t come home to an empty refrigerator.
The deliveryman came right on time, just as the Egers were unpacking at their home in Irvine. But Eger had one complaint. When she ordered 8-ounce liners for her baby’s milk bottles, HomeGrocer was out of stock, so it substituted two 4-ounce liners instead. (Such substitutions are typical, though customers don’t have to accept it.)
That made her unhappy, and her enthusiasm for online grocery shopping has waned.
“I guess it depends on how much your time is worth,” she said recently. “Today, on a rainy day, [it beats] putting two kids in a stroller. I think it’s worth it.”
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Small Slice
Purchases over the Internet make up a small part of food sales overall--a trend that is expected to continue. Estimated online sales in 2004, as a percentage of overall sales in each retail category:
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Source: Forrester Research
