EMERGING BUSINESS MODELS IN THE E-GROCERY INDUSTRY Y.L.

DUVAL Washington State University (USA) and Asian Institute of Technology (Thailand) Email : ylduval@yahoo.com

ABSTRACT E-grocers are making food grocery shopping more convenient and less time-consuming by offering online ordering, and home delivery services. Information has been gathered through company websites and informal phone calls to online grocery store employees and managers. Five different e-grocery business models have been identified: the integrated model, the thirdparty shipper model, the delivery-only model, the drop-shipping model, and the multi-channel model. The five models are compared and advantages and disadvantages of each model are presented. INTRODUCTION The online grocery industry in the U.S. accounts for about 0.55% of the $435 billion in total U.S. grocery sales, and has a following of about 3.4 million American consumers according to the American Institute of Food Distribution (TheStandard.com, 2000). Five e-grocery business models have been identified during the course of this study: the integrated model, the third-party shipper model, the delivery-only model, the drop-shipping model, and the multichannel model. The five models are compared and advantages and disadvantages of each model are discussed. All online food retailers have one common goal: to provide customers with the ability to order food and other grocery products via the Internet for home delivery. Grocers recognize that the principal competitive factors that affect their business are product selection, product quality, customer service, price and convenience. For traditional grocers, customer convenience is largely a function of location and hours of operation. For online grocers, it is primarily determined by ease of use of the website and availability of delivery times. In addition, six specific risk factors can prevent widespread customer acceptance1: • Prolonged delivery time compared to the immediate receipt of products at a traditional store. • Perceptions that online delivery services are premium services and therefore may be more expensive than traditional grocery stores. • Customers’ desire to see and touch products, particularly fresh produce, prior to purchase. • Product selection that is less varied than customers desire. • Perceived or actual lack of security or privacy of online transactions. • Difficulties in making accurate and timely deliveries to customers.

These risk factors were included in Homegrocer.com prospectus for its March 15, 2000 initial public offerings. 427

which we summarize below. In addition. Online prices are competitive with traditional supermarket prices. a strategy successfully adopted by Netgrocer. This business model requires strong financial support to build and stock the warehouses and purchase a fleet of delivery trucks. In addition. The order is delivered to the customer’s home by the e-grocer’s own fleet of refrigerated trucks. The order is then typically processed and shipped from a highly-automated warehouse located near the densely populated urban area that the e-grocer serves. argues that the money saved by building and running distribution centers in low-cost real estate areas allows his company to develop a (long-term) cost advantage over the traditional food retailers. Many e-grocers and e-commerce companies.These risk factors apply to all online retailers. Terry Drayton. which shows that some e-grocers specialize in dry foods while some others offer dry foods and produce as well as fresh prepared meals.000 depending on the e-grocers.com. and delivery charges are low. THE INTEGRATED MODEL The integrated e-grocers business model involves the delivery of “most everything your local supermarket offers” (Peapod. e-grocers such as Peapod. This can be seen by examining Table 1. these companies generally cannot provide same-day delivery for orders placed after 11 a. since the average purchase in a traditional grocery store is less than $30 (Vickers. 2000).000 to over 20. these companies can offer a larger variety of dry goods than typical supermarkets.com which stocks and ship 9. It has been implemented by leading U. some e-grocers deliver online orders in less than one hour after the order has been placed while others take up to five days.S. The number of items offered online varies from 1. The companies also cannot replicate the fresh or frozen product offerings of a local supermarket. they can deliver products nationwide or even worldwide rather than being restricted to local customers as in the previous model. However. prefer to rely on the services of specialized shipping companies such as UPS and FedEx. 428 . co-founder of Homegrocer. This model is characterized by high fixed costs that require e-grocers to build quickly a large customer base through expensive promotion and advertising programs. who build 330. 2000).000 square-foot warehouses about 20 miles from downtown areas to service the same area as 18 supermarkets (Carlton. These differences in product and service offerings are explained by e-grocers’ differences in their underlying organizational structures and business models.com. 2000). which may ultimately affect loyalty. However. Webvan spends between $140 and $210 luring each customer. Similarly.700 nonperishable items via FedEx. THE THIRD-PARTY SHIPPER MODEL One of the most complicated and expensive tasks a grocer performs under the integrated model is that of shipping and delivering. Webvan and Homegrocer. Customers order and often pay for groceries online. packaging and delivery can cost up to $40 an order. Indeed. and customers ordering less than $100 worth of groceries at a time are not profitable.m. such as Netgrocer. but to differing degrees because the companies differ in the way they are implementing the idea of capturing the “convenience” market for online food and grocery products. This may present a real challenge to online retailers. some accept coupons like traditional retail stores and have local service areas while others serve the national and international markets. A company adopting the third-party shipper model loses an opportunity to make person-to-person contact with the customer.

where the company owns or manages only the website and the delivery system. Thedeliveryboy. the image of the company is ultimately in the hands of the supplier-shipper who may or may not be consistent in delivering products and services ordered through the website. All orders are automatically forwarded to manufacturer and wholesaler (“partners”) who take care of shipping the requested product to the customer. they are not able to differentiate their product offering from local supermarkets as opposed to integrated egrocers who can offer different products from their proprietary warehouses. They may be able to compete on convenience. Delivery-only e-grocers are not able to compete on price. Also. Many specialty food e-tailers. Hence. The drop-shipping model is a popular e-tailing business model because of its small start-up capital and human resources requirements. Because its customers are more concerned with product availability and quality than with price.com has implemented this model and is only responsible for managing the website and forwarding email and other electronic orders to manufacturers. but the e-grocer does not generally own or store the products that he/she sells. in particular. For example. by offering additional delivery services such as delivery from local restaurants.com buys the groceries ordered by its online customers in existing Rosauers supermarkets and delivers them in exchange for a $6 to $10 delivery fee and a percentage of the total cost of the groceries (3%). In addition. handling and delivery costs to the customer’s grocery bill. TheFoodStores.An extension of the third-party shipper model is the third-party logistic (3PL) model. 429 . Because success ultimately depends on consumer satisfaction and loyalty. its drop-shipping model allows it flexibility in terms of selecting and changing products to be sold on the site. where a company relies on a 3PL provider for warehousing. and where the food and other products are collected from existing supermarket stores. They accept coupons like any local supermarkets and customers know what to expect since the company gets the products at the place they usually shop off-line. However. For example. 2000). THE DELIVERY-ONLY MODEL Some e-grocers have adopted a delivery-only online model. However. and by delivering faster than the integrated e-grocers who often offer only next-day delivery. have adopted this model to offer high-margin specialty and premium food products that are hard to find in the typical food and grocery retail stores and to develop virtual niche markets. The model offers at least the same level of convenience to customers as the integrated model. TheFoodStores. the drop-shipping model requires that the online grocer adequately monitor the performance of its drop-shipper and develop contingency plans for replacement of under-performing partners. the model simply adds online shopping.com has remained profitable regardless of the hefty fees charged by wholesalers and manufacturers to handle small size orders. Customers order through the e-grocer website. shipping and delivering. THE DROP-SHIPPING MODEL An online food retailer adopting a drop-shipping model is little more than a broker maintaining a website. Contracting with a 3PL provider can be a very effective solution for fast growing online companies that lack the expertise or the capital necessary to own and manage an efficient warehousing operation (Maloney.

secure loyal customers and rapidly expand nationwide.Because of the decreasing importance of prices relative to quality and convenience for the U. this model may be an affordable way to build an online brand name. 2000). CONCLUSION This paper described and discussed five broad business models applicable to e-grocery and etailing. Internet grocery industry winners will differentiate themselves by developing unique selling propositions and focusing on customer satisfaction. grocery retailers have yet developed a full-scale online distribution channel. Their success will depend on management’s commitment to change and thier ability to scale activities based on demand for product and services. However. 2000). Also.S. In fact. Pinkdot. Tesco. Tesco assembles online orders placed on Tesco. 430 .S.com already covers 90% of the British territory and holds 80% of the e-grocery market with 500. which is typical of brick-and-mortar retailers who want to secure a share of the online retail market and increase offline customer’s satisfaction by offering them a choice of online ordering and home delivery services. cutting delivery times and delaying investments in huge Webvan-like warehouses until a stable online customer-base has been secured. For example.com broadly fits in the integrated business model category. The company will not build specialized distribution facilities until online sales reach $2. Indeed. the Internet may be a key ingredient in the survival of small food retail and independent grocery stores. As of now. Louise Curcio. The most successful multi-channel grocery company is Tesco PLC. technology. providing these companies are willing to cooperate with each other. with its giant automated distribution centers. Pinkdot stores goods in small warehouses located very close to its customers. consumers (Jones. some managers are afraid that the success of the new online channel may significantly reduce sales in their brick-and-mortar stores — “channel conflicts” problem. a British supermarket chain with $30 billion in sales (Beck. Online sales for the year 2000 are forecast at $300 millions (Dawley and Ferguson. Note that the multiple-channel approach is also appealing for smaller food retail chains that can develop consortiums and cooperatives to develop and manage a joint e-commerce infrastructure allowing customers throughout a city or throughout the United States to order via a unique website. 2000). and profitability. thinks brick-and-mortar grocery companies have an advantage. this model seems very appropriate in rural areas and small and medium size metropolitan areas where the construction of new warehouse facilities cannot be justified. Pinkdot Vice-president.2 billion. as opposed to Webvan. These business models are not exclusive of each other and can be implemented jointly or over time. allowing it to promise delivery only 30 minutes after the order has been placed while Webvan can only offer next morning in most cases.000 registered customers. few traditional U. THE MULTI-CHANNEL MODEL The multi-channel model is characterized by the sale of groceries both online and offline.com from its existing stores. Success or failure of each company will likely depend on the details of implementation of each model.

com Webvan.co Peapod.com m * oy. 4-5 days Variable with Delivery Fee $5.000 depending on location Web Same as in Rosauers Supermarkets* Web/Phone na Adjusted on weekly basis* 9.000 Web Yes Web/Phone/Fax Yes (sandwiches and salads) Yes No Yes Los-Angeles & Orange county No Self-managed Self-managed Yes No / on Spokane Area (WA) Worldwide Yes No Yes National of UK) No Self-managed (90% Web/Phone/Fax Dry/Fresh Dry/Fresh Dry/Fresh Mostly Dry.95 for orders less than $60 and nothing for larger orders Variable $9.000 Dry/Fresh Dry only Food Products Offered Number of Items offered 7.000 Web/Phone/Fax Yes Dry/Fresh 10.com Thedeliveryb TheFoodStor Tesco.700 Web/Phone Web Yes if it is in Seattle Area na No Yes No Yes Order Methods Available Fresh Prepared Meals Availability Liquor/Tobacc o Availability Service Area San Francisco and 7 US urban areas Yes Self Contracted Standard bags and boxes Within minutes Waived if the value of amount ordered is more than $25 2.com Dry/Fresh 13.com es.000 to 20.com NetGrocer.95 for orders below $60 and up to $120 for orders above $1200 No No No No No No No No Minimum order size *Up to 25. Seattle and 10 other US urban No Self-managed Delivery Operation Self-managed Contracted Orders delivered in Time delivery Variable to Insulated container ice Next day with Standard bags and boxes Contracted Merchant managed Depending Merchant Standard bags and boxes Within 4 business days Insulated container with ice Within 4 business days 4 days 5 pounds for all order sizes Insulated container ice Next day Depending on merchants.99$ per order $50 No 30 Insulated container with ice Within 2 hours / State of Texas & Seattle area Nationwide Coupons Accepted No No San Francisco.95 for orders under $75 Phone/Fax Fee No $5.com Pinkdot.000 items No 431 . Fine foods less than 1.com/ Homegrocer.000 20.Table 1 .Product and Services of Selected Online Food Retailers and Grocers Albertson's.

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