Interesting article on PPOD:
business2.com
Why Peapod Is Thriving: First-Failure Advantage
The online grocer went down early, but with enough time -- and
Royal Ahold funding -- to stage a dramatic comeback.
By John Frederick Moore, August 14, 2001
Sometimes it pays to stand at the brink of
disaster. Where so many online grocers have
failed, Peapod (PPOD) is still, surprisingly,
standing tall -- even though the company
appeared ready to go the way of Webvan just
over a year ago.
Last week Peapod announced that it had
expanded its service in the Washington, D.C.,
area, taking over territory that had been the
domain of HomeRuns, which closed last month
after running out of cash. This is the second time
that Peapod, based in Skokie, Ill., has moved into
an area abandoned by a failed online grocer.
When Webvan went out of business last month,
Peapod began targeting the defunct company's
customers in Chicago -- a market in which Peapod
reached operating profitability earlier this year.
The catalyst behind Peapod's renewed vigor:
Dutch grocery giant Royal Ahold, which bought a
controlling share ($73 million) in Peapod in April
2000 and has since agreed to acquire the
remaining 42 percent of the company. Peapod
currently operates in five markets -- Washington,
Chicago, Long Island, Connecticut, and Boston --
and rang up more than $90 million in sales last
year.
Peapod "lucked out," says Kevin Murphy, an
analyst at Gartner (IT), because it was "the first
to fail." (Ironic, given that the company launched
in 1989, well ahead of the dawn of the commercial
Internet.) On the verge of bankruptcy in the
spring of 2000, it came at a bargain-basement
price to its new and deep-pocketed parent, long
before the greater dotcom disaster had been fully
realized.
In aligning itself with a major grocery concern,
Peapod received not only much-needed cash, but
a change in strategy as well. Instead of running
huge, expensive inventory warehouses, Peapod
now uses existing Royal Ahold stores -- such as
Stop & Shop -- for its inventory. It's a model
similar to that employed by Tesco, the U.K.
grocery giant that took a 35 percent stake in
Safeway's GroceryWorks.com.
"It would cost Webvan $30 million to build a
warehouse," Murphy says. Tesco, he says, buys
two trucks per store, and only for stores in
neighborhoods surrounded by enough good
customer prospects -- on-the-go, upscale,
suburban homeowners -- to ensure a decent
return on the capital expense.
Putting itself under the aegis of a brick-and-mortar grocer also helped Peapod
reduce marketing costs. Webvan spent between 25 and 35 percent of its
revenue on advertising, compared with about 1 percent for traditional grocery
chains, according to Rob Rubin, an analyst at Forrester Research (FORR).
The hybrid model also helps Peapod target its markets with greater precision.
Online grocers typically ramped up their inventories for demand that never
materialized. Also, as Rubin points out, only about 25 percent of households
that buy groceries online place two or more orders a month. By tapping into
Royal Ahold's in-store inventory, Peapod doesn't need an expensive
infrastructure built for a sporadic customer base.
"You put the URL on the shopping bags, you already know which of your stores
are in the upmarket neighborhoods where this kind of service would be viable,
and all of a sudden your cost of business goes down," Murphy says.
The future of this market, Murphy and Rubin agree, lies with the offline/online
model that has brought Peapod back from the brink. For the time being,
Peapod is nestled safely in the catbird seat. But as more brick-and-mortar
grocers join the online world, it's doubtful that a single dominant player will
emerge.
"The grocery chains in the U.S. are highly fragmented," Murphy says. "There
are at least a dozen big players, and their markets don't overlap much. All of
those guys will eventually have online grocery-delivery services, but there will
be few of them in each geographic area." |
