GSIC Vs. PPOD-Food Chain Gets Wired
Grocers Go On Line to Satisfy Basic Needs
by Dale D. Buss
In the world of bricks and mortar, grocery retailing is about as mundane as it gets. The industry is notorious for its conservatism, which doesn't just stem from the tight profit margins that rarely stray above 1%. And management tends to be stodgy. Case in point: Only now, long after most other businesses, even most retailers, have learned about economies of scale, are we seeing the creation of truly national supermarket chains through a series of ongoing mega-mergers.
But move the delivery of groceries to the on-line arena, and the game changes immensely into one of the most treacherous and exciting markets on the fast-shifting Internet. And in that market, a handful of small companies, including Peapod Inc. (PPOD), Whole Foods Market Inc. (WFMI) and Catalina Marketing Corp. (POS), are blazing many of the trails.
Market Specialists
The small-cappers are relatively free to do what they want in the on-line grocering market right now partly because the big names in conventional food retailing either are only dabbling online or are simply lying low as they wait for the market to clarify. Albertson's Inc. (ABS), for example — the Boise, Idaho-based chain that is becoming the country's largest supermarket player as it acquires American Stores Co. — has started an experiment in the Dallas/Fort Worth area. Pat Steele, senior vice president of information systems and technology, says that on-line shopping "is vital to our future."
But Salomon Smith Barney analyst Jonathan Ziegler says that, with Albertson's on-line venture, the "emphasis [is] on experimental."
In New York City and Detroit, The Great Atlantic Pacific Tea Company Inc. (GAP) has rolled out its CyberMeals delivery service, which will simply reverse the logistics of the traditional take-out restaurant but not delve into delivery of run-of-the-mill groceries. "At this point, we're not ready to enter the delivery business," says Andy Carrano, vice president of marketing for A&P, the Montvale, N.J.-based giant. "Let the trailblazers find all the problems and we'll get in once they're all worked out."
And there are trailblazers aplenty because, as everyone agrees, the potential for this business is vast. A study conducted earlier this year by Andersen Consulting predicted that the number of U.S. households using on-line services to buy food and other household goods and services will grow from a current estimate of fewer than 200,000, to 15 million to 20 million by 2007.
"Groceries are a $400-billion-a-year business in this country," says Fred Horowitz, the new president and CEO of North Brunswick, N.J.-based NetGrocer Inc. "If we get even 1%, that's a $1-billion business!" Due to its exclusive marketing partnership with America Online Inc. (AOL), the company is one of the front-runners in the on-line grocering game..
Yet there's no better illustration than NetGrocer of the perils of this emerging market. Horowitz, an initial investor in the company, grabbed the helm this fall after growth began to lag in demand for the company's one- to three-day nationwide service that delivers dry groceries to customers' doorsteps via UPS. He fired top management, laid off nearly all the staff and scrapped a planned IPO, then unveiled a new strategy that relies on improved on-line merchandising, supplier discounts and a product line that is broader than just groceries.
Hand Picked
Skokie, Ill.-based Peapod is the niche's best-known brand and the only public company in the broad on-line grocering market. (The company regarded as the best performer in this segment to date, Westwood, Mass.-based Streamline Inc., is backed by multimillion-dollar investments by blue-chip companies including Nordstrom Inc. (NOBE) and General Electric Co. (GE).)
Peapod began in 1995 as a service that accepts call-in and faxed orders "picked" by staffers at local supermarkets in metro Chicago. Consumers paid an average of $16 more per order than the price of the groceries. Peapod made its money largely from supermarkets' price discounts.
"As a startup without money, we were trying to take advantage of resources that retailers might have, like their expertise in acquiring and inventorying products, and their real-estate assets," CEO John C. Walden says. "And we were just trying to understand whether the consumer really wanted this service. We are trying to replace the trip to the grocery store, which is the ultimate convenience for consumers."
Peapod already has about 30,000 customers and nearly $30 million in annual revenues from the Chicago market alone, as well as growing consumer bases in Boston, San Francisco, New York City and other metro areas. Overall, the company has just over 100,000 subscribers who spend more than $120 every two weeks. With average revenues per order rising 6% for third-quarter 1998 compared with a year earlier, says James P. Stoeffel, analyst for Salomon Smith Barney, Peapod is demonstrating "strong demand from core customers."
Yet about a year ago, Peapod concluded that robust consumer demand had outstripped the capabilities of its old business model and the company needed to come up with a new one quickly. Executives decided to build a central warehouse in each market, cutting 20% to 30% of the cost of fulfilling orders out of the aisles of a supermarket — and allowing order fees to drop to under $10 apiece. The first warehouse opened this month in Chicago; the second permanent warehouse is to open early next year on Long Island.
Natural Choice
Austin, Texas-based Whole Foods is an example of the type of food retailer that might most quickly succeed online because it is a specialist. In the physical retailing world, the company has become a national leader in the natural and organically grown foods segments and has consolidated a number of smaller regional and local chains across the United States as well. Now, confident of success, it is jumping onto the Net with WholeFoods.com.
"We think we can be successful in this [on-line] business where some others aren't," says Carl Morris, president of WholeFoods.com. "One reason is that we're not a straight grocery. . . . Natural foods are a good product to be selling online in part because the kind of people who shop in our stores have a profile that more closely matches most Net users than the standard Kroger's customer."
The Internet is a friendly environment for Whole Foods also because its merchandising tends to be information-intensive, playing to the fact that its customers are highly analytical about the healthfulness of what they consume; WholeFoods.com mimics the stores' data-rich environment. And Whole Foods' customer base also skews heavily toward another value that is easy to build into a Web site: community-building.
"Our stores tend to be a community focus where people come and even want to hang out, and they have common interests such as the environmental movement and organic agriculture," Morris says. WholeFoods.com "will extend that base."
Piper Jaffray analyst Allan Hickok says that WholeFoods.com "is set to start peddling over 6,000 SKUs in late spring" and to grow to more than 10,000 SKUs for non-perishable items within a year. He says management also expects to turn a profit within two years, which would be outstanding for Internet-based efforts. "Long term, we are reluctant to speculate what the potential of this business is until we see how [it] develops," Hickok says.
Personal Savings
St. Petersburg, Fla.-based Catalina doesn't sell groceries in big buildings or online. But it does own the business of providing proprietary, point-of-sale coupons in grocery stores nationwide — more than 11,600 of them at last count. And it has become the first company to deliver secure coupons via the Net that consumers can redeem in bricks-and-mortar stores, says David Rochon, president and CEO of Supermarkets Online, the Greenwich, Conn.-based on-line subsidiary of Catalina.
Consumers can download a sheet of bar-coded coupons that are particular to their local Catalina client and then use the coupons, which have no cash value, in the store. "We're giving people the ability to go to the Internet to save on branded goods," Rochon says.
Some analysts already like Supermarkets Online, with Jeffrey J. Nelson, for GS/2 Securities, estimating that the venture's "revenue more than doubled in the [second] quarter." Olde Discount analyst Matthew Koellner believes that Supermarkets Online "has solid potential for the future as on-line advertising, and general on-line user numbers, continue to climb. Further, [its] dependence on the installed [network of Catalina clients] could lead to increased core domestic-network installations" for Catalina.
M$ney
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