Viewpoint: the declineand fall of Internetgrocery retailers

Lawrence J. Ring andDouglas J. Tigert

Introduction

As the year 2000 dawned, there were at leastseven, apparently healthy, pure play Internetgrocery companies operating in the USA. Allwere growing the business and entering newcities. Buoyed by numerous forecasts ofsignificant market demand (AndersenConsulting thought the market for the onlinegrocer business could be as big as 10 percentof the $450 billion US grocery market),several, including Streamline, Webvan, andPeapod, had successfully completed IPO’s bylate 1999 and had raised millions of dollars innew capital. Webvan’s initial public offeringin October 1999 raised $360 million aloneand the company announced ambitious plansto build 26 giant warehouses, over 300,000ft2

each, in 26 different cities.Lost in the late dot.com euphoria were

some ominous signs of trouble. First, none ofthe pure play US Internet grocers had evencome close to reaching breakeven, indicatinga suspect financial model. Second, there wereplenty of reasons to be skeptical about the sizeof forecasted market demand.

By December 2000, pure play Internetgrocery retailers in the USA were in totalchaos and a number of firms had alreadyclosed their doors or sold to other players.Here are a few headlines:

May 3, 2000 (from Wired News): ‘‘Asrecently as April, 2000, Peapod wasperched on the brink of collapse . . . thepicture brightened about two weeks ago,when grocery holding company RoyalAhold, which owns Stop And Shop and ahost of other supermarket assets, invested$73 million in Peapod in exchange for a52 percent stake in the online grocer.’’September 7, 2000 (from Wired News):‘‘Peapod Inc., an online grocery deliveryservice in the midst of a corporateturnaround, said it is shutting downoperations in four cities and opening upshop (via acquisition) in Washington,DC.’’October 26, 2000 (from E-CommerceTimes): ‘‘Six months after being rescuedfrom the brink of bankruptcy, onlinegrocer Peapod continues to see increasingfinancial losses. Peapod’s earningsshortfall comes just a week after fellowonline grocer Webvan reported a larger-than-expected quarterly loss, due in partto its takeover of Homegrocer.com.’’

The authors

Lawrence J. Ring is Professor of Business

Administration, Graduate School of Business

Administration, The College of William and Mary,

Williamsburg, Virginia, USA.

Douglas J. Tigert is Professor of Retail Marketing,

Babson College, Wellesley, Massachussetts, USA.

Keywords

Internet, Grocery, Retailing, USA

Abstract

Considers reasons for failure among pure play Internet

grocery retailers. Notes that two factors seem to be

significant. First, they did not achieve anything like a

competitive advantage over the traditional `̀ bricks and

mortar’’ food retailers on those dimensions that drive the

consumer store/channel choice process. Second, they did not

develop a business model that reaches profitability, perhaps

ever. They apparently did not foresee that total operating

costs per customer were substantially higher for Internet

grocery retailing than for `̀bricks and mortar’’ grocery stores,

and that this new channel would have to charge consumers

substantiall y more to reach breakeven operating levels. In

fact, many pure play Internet grocers tried to price

competitively against traditional food retailers and as a

result, did not even cover variable costs. Hence, the more

they sold, the more they lost. Eventually, they ran out of

cash and were unable to raise additional monies in the

market. Finally, there is some evidence that Internet grocers

dramatically overestimated the size of the market for grocery

shopping from the home. In the final analysis, pure play

Internet grocer retailers appeared sexy and were hot for a

short period of time because of the romance of the Internet .

In fact, they were nothing more than fancy grocery delivery

companies ± which have never made money in the mass

market and probably never will.

Electronic access

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The current issue and full text archive of this journal is

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Volume 29 . Number 6 . 2001 . pp. 264±271

# MCB University Press . ISSN 0959-0552

November 8, 2000 (from NetInter@ctive Investor): ‘‘Webvan driftslower following downgrade, policychange. Webvan stock hits $1.44 (downfrom IPO price of $30) after positing awider-than-expected loss in its thirdquarter, dropping $148 million on salesof only $54 million . . . Webvanannounced that it will begin charging afee on orders under $75, whilecontinuing to deliver free on orders over$75.00.’’November 13, 2000 (from Upsidetoday):‘‘Online Grocer Bags Operations . . .

Streamline.com said today it will ceaseoperations and discontinue service byNovember 22. In September, thecompany sold its services in Washington,DC and Chicago to Peapod . . . weeksearlier, Priceline-backed Webhouse shutdown after its name-your-own pricestrategy failed to translate in the onlinegrocery industry.November 22, 2000 (from CBS MarketWatch): ‘‘A few Net grocers have alignedthemselves with traditional grocers,resuscitating their online operations withwell-known anchor. Royal Ahold rescuedPeapod from imminent shutdown.Safeway picked up a 50 percent stake inGroceryWorks.com.’’December 21, 2000 (from YahooFinance): ‘‘Peapod’s stock hits 52 weeklow of $0.75 (down from IPO price of$15.00). For the nine months endedSeptember 30, 2000, revenues rose to$69 million but net losses rose to $91million.’’December 21, 2000 (from YahooFinance): ‘‘Webvan stock hits 52-weeklow of $0.22 (down from $30 high).’’January 4, 2001 (from Yahoo Finance):‘‘Webvan launches national value brandprogram, selecting Fleming’s ‘Best Yet’label.

The Wall Street Journal commented (April 1,2001):

In retrospect it seems clear that loading up10,000 consumer items in a van and truckingthem to a central location (known as a ‘‘store’’) ischeaper than sending 10,000 vans to deliver thesame goods individually to 10,000 doorsteps.

By the end of 2000, the only pure playInternet grocery retailers left in the USA wereWebvan, which had acquired Home Grocer,and Peapod, which had been acquired by

Ahold. A few traditional food retailers are stillexperimenting with Internet grocery deliverybut they are not expanding beyond one or afew markets. No company has ever made aprofit in this business.

What went wrong? Three key factors appearto be at the heart of the miscalculations by thepure play Internet grocery retailers. The firstis the concept of competitive advantage.

Do they (Internet grocers) win?

A useful model to examine how competitiveadvantage is achieved in retailing (or e-tailing) is the ‘‘pentagon and the triangle’’ –the eight ways to win – and appears inFigure 1. The pentagon represents what thecustomer can see can see either by visiting astore or watching the advertising for atraditional ‘‘bricks and mortar’’ retailer orby visiting the Web site of an e-tailer.There are five major ways in which retailersor e-tailers can differentiate themselvesfrom others in the marketplace. All fivecorners of the pentagon also have some sub-categories.

The customer cannot see the triangle,which represents all those activities going onbehind the scenes at a retailer or an e-tailerand which are focussed around systems,logistics and supplier relationships.

The pentagon is the retailer’s face to thepublic and to its customers. The corners ofthe pentagon hold few secrets fromcompetitors, because they are all very visible.In order to determine whether or not anInternet grocery retailer brings to the market asuperior offering to consumers, relative to atraditional food retailer, we need to answer

Figure 1 The eight ways to win in retailing ± the pentagon and the

triangle

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Viewpoint: the decline and fall of Internet grocery retailers

Lawrence J. Ring and Douglas J. Tigert

International Journal of Retail & Distribution Management

Volume 29 . Number 6 . 2001 . 264±271

five key questions about each corner (and

subcategory) of the pentagon:(1) Do they win?(2) By how much, a little or a lot?(3) Are they winning by more or less this year

than last year? (Momentum of strategy).(4) Does anybody care (are we winning on

the right corners, those that driveconsumer store/channel choice for food

shopping)?(5) Can we sustain our win into the future?

We begin with the place corner and examine

each in turn comparing the Internetexperience with the ‘‘bricks and mortar’’

experience.

PlaceShopping via the Internet, the consumer givesup the physical environment of the store and

therefore the ability to see, touch and smell the

merchandise. For many shoppers, seeing,touching, and smelling are important in

shopping for fresh foods, especially mealreplacement items (ready-to-eat, ready-to-heat,

and ready-to-bake). Consumers also give up the

opportunity to talk with store personnel and toask questions, or to make special requests for

specific cuts of meat, ‘‘deli’’, or fresh fish items.Most consumers also make impulse purchases

by walking the aisles, and select items there

were not on the pre-planned shopping list. Inaddition, consumers who shop the Internet face

constrained times for delivery. For example,Streamline only delivered to each street once a

week. Finally, many of the Internet grocers’sites were simply difficult to shop and to

navigate around.What does the customer gain on ‘‘place’’ by

shopping via the Internet? The key benefit hereis that someone else picks the order and delivers

to the home. The customer saves time and

transportation costs but may have to pay forthese advantages via higher prices, and/or a

delivery fee, and/or a monthly fee. An importantissue here is whether or not the consumer

perceives some ‘‘economic cost’’ for his/hertime, or for the costs of operating a car on a

specific shopping trip. Of course it does take the

customer time to place the order via a personalcomputer (and if constrained to a 56k modem,

the time is often long) or some other data entrydevice such as a palm unit attached to a

scanner.

ProductA consumer shopping at a large supermarketor super food/drug combo, can choose from atotal assortment that may be greater than30,000 stock keeping units (SKU’s) includinga huge variety of fresh foods. Companies suchas Shoplink and Streamline.com offered onlyabout 3-5,000 SKU’s. Webvan may representa breakthrough here. Their warehouse inSan Francisco is massive, about 300,000ft2 insize, providing customers with upwards of50,000 SKU’s (food and non-food) fromwhich to choose. Webvan almost certainlyoffers the largest assortment of any Internetgrocer.

Value for the moneyGetting an accurate picture of ‘‘how muchmore’’ the consumer pays for Internet deliveryof groceries is somewhat difficult. First is theissue of the actual prices charged versus theprices charged by a traditional supermarket.Only ‘‘Home Runs,’’ (formerly a division ofHannaford Brothers, now sold), hadannounced that they were an EDLP leader inthe market. Very few price basket surveyshave been published comparing Internetprices versus supermarket prices. Limitedanalysis by the authors suggests that Internetgrocery prices are at or above the pricescharged by the highest priced supermarkets ina specific city.

In addition, most Internet grocers chargeeither a monthly fee (Streamline, $30 permonth) or a picking fee, or a delivery fee, ora combination of these fees. Our ownestimate is that the Internet customer payssomewhere between 10-20 percent more forhome delivery, relative to the lowest pricedsupermarket in each city. This pricedifferential dramatically reduces the size ofthe total market for the Internet service.The authors have completed numerouslarge-scale research tracking studies in thesupermarket industry (Arnold et al., 1983).In those surveys, ‘‘low prices’’ is always thefirst or second most important determinantof store choice in grocery shopping. Moreimportant, many customers will switchstores for only a 3-4 percent differential inprices across leading competitors.

ServiceConsumers give up a lot of different servicedimensions if they choose to order groceriesover the Internet for home delivery. As

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Viewpoint: the decline and fall of Internet grocery retailers

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Volume 29 . Number 6 . 2001 . 264±271

previously noted, they cannot talk to storepersonnel. They cannot ask for many specificproducts, or special orders, particularly in thefresh area. They cannot combine a groceryshopping trip with other trips to the samegeneral geographic area, such as the bank, thepost office, the hardware store, the drycleaners, the pizza parlor, etc. They cannotcash a check or get a money order, or pick upa prescription, or return an item forimmediate replacement or refund. One day,in the distant future, many of these ‘‘cannots’’may be possible over the Internet, but for theforeseeable future they are not.

CommunicationSupermarkets engage in constantcommunication with the customer. Theyadvertise on television and in weekly flyers.They offer a lot of specials. They announcenew items. They offer various types of‘‘loyalty’’ programs. All of these activities havean impact on the actual and perceived pricesthat consumers pay, on their perceptions ofassortments, service and quality, etc. Once acustomer has been acquired, an Internetgrocer can certainly match traditional grocerson the communications corner with evenmore targeted e-mail and advertising. The bigproblem for the pure play Internet grocers iscustomer acquisition in the first place.

Technical problemsIn addition to the problems associated withthe traditional areas of evaluation, newproblems have surfaced specifically related toconducting business online. Companies likeStreamline.com admitted that they had towork through a series of technical glitches.Occasionally products are forgotten or thewrong size is delivered. In response, theInternet grocers sent out gift certificates orperformed other acts of buying forgiveness –all at a steep cost. Truck scheduling has beena problem with the result that trucks do notalways hit the delivery timetable at specifichouses.

Finally, the online business model relies ona population of Web ‘‘savvy’’ customers.While this customer base is growing, it is stillsmall and excludes a large portion of the totalpopulation base. Regardless of the aptitude ofthe customer, new types of shopping errorshave surfaced. For example, an erroneousentry – ten frozen OJ’s instead of one – wouldlikely be noticed if the customer was loading

them onto the conveyor belt in a store, butwhen they arrive at the customer’s doorstep itis a different story less easily remedied.

Overall, to become a pure play Internetgrocery shopper, the customer gives up(trades away) something on virtually everycorner of the pentagon. The two biggestdisadvantages of Internet grocery shoppingare price and assortment. Research on storechoice in food retailing shows consistentlythat price and assortment rank number twoand three, behind location/convenience tohome. While it might be argued that Internetgrocery shopping is more convenient becauseit is done from the home and saves time andthe use of the car, the grocery trip is seldomdone as a single trip, but often as part of amulti-stop trip. Unless the pure play Internetgrocers can close the price and assortmentgap, their appeal will be to a small percentageof total households, perhaps as small as1-3 percent.

The killer costs of the pure play Internetgrocer

Variable versus fixed costsAs we examine the specific cost/revenuemodel employed by pure play Internetgrocers, it is important to understand thedifference between variable costs and fixedcosts and how they affect the speed withwhich an online grocer might eventuallyapproach breakeven sales levels. Below is anexample of a traditional ‘‘bricks and mortar’’grocery retailer and a pure play Internetgrocery retailer (Table I).

First, in the typical model for traditionalsupermarkets, the total operating expensesper customer are about $6.90. This figurecovers all operating expenses below the grossmargin line. Costs include building leases,fixtures and fittings, warehousing,transportation, wages and salaries,advertising, information systems, etc. Almost

Table I Example of traditional and Internet grocers

Traditional grocer Internet grocer

Average customer ticket $30 $80

Gross margin percentage 25% 30% (?)

Gross margin/customer $7.5 $24.00

Net profit percentage pre-tax 2% (Negative?)

Net profit/customer $0.60 ?

Operating expenses/customer $6.90 ?

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Viewpoint: the decline and fall of Internet grocery retailers

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International Journal of Retail & Distribution Management

Volume 29 . Number 6 . 2001 . 264±271

all of these costs are fixed, meaning that theyremain fairly constant as the sales volumeincreases (and, decline on a per customerbasis as volume goes up). Consequently, thesehigh operating expenses per customer(relative to margin available) leave very littleroom for errors in strategy. Historically,traditional supermarkets have experiencednumbers moving from black to red with aslittle as a 5-10 percent decline in sales. Forexample, as a result of negative publicity andan aborted attempt to enter new markets,Food Lion experience a 7 percent decline insales per square foot in 1993 versus 1992.That 7 percent decline in sales per square footresulted in a nearly 100 percent decline inprofit per square foot (and Food Lion hadbeen among the most profitable supermarketsin the country until that year.)

The costs of running an online grocery withhome delivery are as follows:

Picking the order in a warehouse or in astore $12.Delivering the order to the home (truckand driver) $15-30.Systems cost for building andmaintaining a Web site $1-2.Warehousing (building and workers)?Inventory holding costs?Advertising costs (Web sites and localmedia)?Head office costs (senior management,buyers, finance, MIS?

The first two costs above, picking anddelivery, are variable in nature. These costscontinue to be present as additional ordersplaced. In fact, wage costs and delivery costsnormally rise over time. Given the acuteshortages in the labor market and the recentincreases in fuel costs, these variable costsmay rise even faster than expected.

Consequently, unless the Internet grocercan produce gross margin dollars percustomer of at least $27-42, these variablecosts will not be covered and breakeven willbe a receding horizon. In an industry wheremargins are very thin, there are only a fewways that pure play Internet grocers will beable to achieve gross margin dollars percustomer in excess of $27. Clearly, the higherthe average customer ticket, the more likely$27 will be achieved. In our model above, an$80 order, combined with a 30 percent grossmargin percentage will result in a $27 of grossmargin. Alternatively, achieving a gross

margin percentage well above the grossmargin percentage attained by traditionalsupermarkets, or charging customers apicking fee or charging customers a monthlyfee would also work.

In our model above, we have shown theaverage customer ticket at the top of theInternet grocer column to be $80, a figureoften quoted (or wished) by Internet grocers.However, Hannaford Brother’s ‘‘HomeRuns’’ service in Boston charged no monthlyfee and no picking or delivery fee for all ordersover $60 and claimed that its prices werecompetitive with the lowest prices atconventional grocers in the Boston area.Streamline.com, on the other hand charged amonthly fee of $30 or about $7.50 per orderbased on four orders per month.

On the bottom line, it is clear that pure playInternet grocers need to generate ‘‘grossmargin dollars’’ per customer that are equal toor greater than the sales dollars per customerfor conventional supermarkets. In addition,Internet grocers lose on price by as much as20 percent. Yet customers will switchsupermarkets for as little as 3-4 percent pricedifferentiation. Internet grocers also lose onkey service dimensions, such as full servicedeli, fish, meat, and specialty fooddepartments at traditional grocers. It seemslikely that consumers who shop for groceriesusing the Internet will also visit traditional‘‘bricks and mortar’’ supermarkets forspecialty food items.

Overall, the big question still remains:‘‘What percentage of households will paysubstantially more for an inferior assortment(and perhaps quality) of groceries just for theconvenience of having them delivered to theirhome?’’

Solving the twin killer costs problem

The two killer costs facing the pure playInternet grocer are the picking costs and thedelivery costs. Both are variable, i.e. they donot come down as the customer count goesup. What are the possible alternatives forreducing these costs per delivery? Severalapproaches have been tried.

GIB (Belgium)GIB, in Belgium, tested a new delivery systemduring the past year. Rather than deliveringgroceries to the home, GIB delivered to 18

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Viewpoint: the decline and fall of Internet grocery retailers

Lawrence J. Ring and Douglas J. Tigert

International Journal of Retail & Distribution Management

Volume 29 . Number 6 . 2001 . 264±271

‘‘pickup’’ points in the greater Brusselsmarket. Each day at 3.30 p.m., 18 truckswould leave the GIB warehouse with orderspicked for that day. Each truck could holdapproximately 45 orders. The trucks werespread out in a hub and spoke design and thepickup points were designed to intercept theconsumer on the way home from work. Thetrucks would stay ‘‘on station’’ from 4 p.m.until 9 p.m., or five hours.

If all 45 customers picked up their groceriesduring this five-hour time period, the numberof orders ‘‘delivered’’ would be nine per hour.This fulfillment ratio is about two-and-a-halftimes higher than the three to four deliveriesmade per hour by delivering directly to thehome. Thus, the delivery cost comes down toless than half per household or about $6-7 percustomer.

GIB also worked on the design of anoptimally automated warehouse, with theobjective of reducing the picking time to lessthan 30 minutes. The new, automatedwarehouse design concept was at least one totwo years away. If successful on both fronts,GIB had the potential of reducing the pickingand delivery costs to a combined number ofabout $12.00. If they could have achieved ahigh average customer ticket in the range of$100.00 and a gross margin of $25.00 percustomer, then they had a chance to achievebreakeven, if they could maintain 45 delivery/pickups per truck per day. Unfortunately,losses were so high at the GIB operation thatthe business was closed down in November2000. Something in the formula did not workout, most likely the inability to generate 45orders per day per truck plus a still highpicking cost.

Disco (Buenos Aires)Disco, a division of Ahold (The Netherlands)has already solved both the picking anddelivery cost problems. The chain operates alarge number of small stores (5-10,000ft2) inthe inner city areas of Argentina, includingBuenos Aires. While the customer can ordergroceries over the Internet, most customerscome to the store and pick their own orders.But after they run their groceries through thecheckout lines, they leave the store withoutthem. Their groceries are then packed intoplastic crates for delivery to their homes,within 30 minutes after they leave the store.Delivery boys put the plastic crates onto littledollies and push them the one-to-five blocks

to the high-rise apartments where theconsumers live. Most stores do not pay muchof a salary to these delivery boys. They receiveabout $1.00 per hour in wages and the rest oftheir income comes in the form of tips fromthe customers. The customer does not pay fordelivery, above and beyond what they wish totip the delivery boy. Thus, Disco has nopicking costs and virtually no delivery costs.Yet about 70 percent of all customers choosethis delivery option. In densely populatedurban areas the Disco solution seems to work.

Safeway (UK)/IBMThis Internet test, currently being run bySafeway, in a joint venture with IBM, hassome rather interesting features. Thecustomer uses a palm unit, hooked up to ascanner, in the home. The customer scanscertain pantry items or other products as shethrows away the package. Items not currentlyin the household’s inventory are manuallyadded through a keypad, to make up the totalorder. The order is transmitted to a specificSafeway store near the customer’s home. Theorder is picked by store personnel and helduntil the customer arrives to pick it up. Whilein the store, the customer often buysadditional items, often in the fresh area. Thecustomer then checks out the total order. Thissystem eliminates all delivery costs for trucksand drivers. Safeway indicates that theaverage customer ticket for this type ofshopper is substantially higher than theaverage customer ticket for a regular shopper.The extra gross margin dollars per customerwould help defray the picking costs.

Shoplink (Boston)Shoplink worked on a variation of the GIB‘‘intercept’’ model. This grocery e-tailer wasdelivering to large businesses at the end of theday. The employees of the business put intheir orders the night before and then pickedup their orders from the Shoplink truck afterwork, in the parking lot of their officebuilding. Again, the objective here was tosignificantly reduce the delivery time orincrease the number of deliveries per hour.Shoplink also claimed that this deliverymethod improved the quality of the ‘‘coldchain’’, i.e. maintaining fresh and frozen itemsat the right temperature. Unfortunately,Shoplink closed its doors in Boston at thesame time as Streamline, in November 2000.Most of its deliveries were to the home.

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Viewpoint: the decline and fall of Internet grocery retailers

Lawrence J. Ring and Douglas J. Tigert

International Journal of Retail & Distribution Management

Volume 29 . Number 6 . 2001 . 264±271

WebvanAs a pure Internet player, Webvan has one ofthe most aggressive distribution models in theindustry. Without the advantages of a bricksand mortar storefront, Webvan is beingassertive in its solution to reduce its pickingcosts. Webvan plans to build a hub and spokedistribution system in each market it enters.At the cost of $25 million per region, eachsystem will consist of a highly automateddistribution center feeding 10 to 12substations situated within a 50-mile radius.Each centrally located mega-warehouseincludes four-and-a-half miles of conveyorbelts, and stocks 50,000 products(Himelstein, 2000). Instead of stockingshelves, Webvan employees stock rotatingcarousels of in-stock goods. Instead oftraipsing down endless aisles, the ‘‘pickers’’travel no more than 19ft in any one directionto reach 8,000 bins of goods that are broughtto the employee on rotating carousels. ‘‘When85 percent to 90 percent of a person’s time [ata traditional store] is spent traveling to locateand assemble orders, you realize why thismakes sense,’’ says Gary Dahl, formerly asenior executive at American Stores Co. andnow Webvan’s vice-president for wholesale.This carousel system lets workers pickroughly two-and-a-half times faster than theycould manually. Due to the increasedefficiencies, Webvan hopes this innovationwill lead to lower wage and employee benefitscosts.

To complete the distribution process, oncea picker has finished his portion of the task,the order is then transported via conveyor beltto other areas of the facility housing differentitems. After an order has made the rounds, itis loaded onto trucks refrigerated at 35Fahrenheit. The order is then transportedfrom the mega-warehouse to one of the 10-12sub-stations located throughout the regionalarea. From there, the orders are broken-downand loaded onto one of the company’s 60vans so that drivers can take the ordersdirectly to customers’ homes. No van travelsmore than 10 miles in any one direction.(Himelstein, 1999).

Let us assume that Webvan’s distributionmodel is successful and the company hasachieved cost reductions in both operatingexpenses and picking expenses. We will evengo a step further and assume that thecompany is earning 2-3 percent marginsstandard to the grocery industry. Making $25

million capital investments in each of the 26markets it plans to serve, still means thatWebvan has to sell a lot of groceries to breakeven. This translates into the following goals.A Webvan distribution center needs to beoperating at capacity, which means it musttake 8,000 orders a day, seven days a weekwith an average ticket of $103. This situationneeds to occur for five consecutive quartersfor one distribution center to be cash flowpositive. So how is Webvan doing? As ofDecember, 2000, Webvan’s sales for thetrailing 12 months were $105 million and netlosses were $329 million or approximatelythree times sales. The firm had $376 millionin cash left, or about equal to one year’slosses. By January of 2001, Webvan’s stockclosed below a dollar for 30 consecutivetrading days and was in danger of beingdelisted by Nasdaq.

Tesco (UK)The UK grocer Tesco claims to be nearingbreakeven on its Internet grocery site withsales in 2,000 of over $350 million. Thecompany has a relatively simple online modelthat does not require major capitalinvestment. It relies on its existing network ofstores. Once a computer system has collectedorders online, they are sent to the storenearest the customer where orders are pickedby employees roaming the aisles with specialcarts mounted with computer screens. Thecomputer guides the picker to the items to bepicked and once the order is assembled, vanscarry it to the customer’s home. There is a $7delivery charge regardless of order size.

Why does this model seem to work in theUK? First, net margins there are much higherthan in the USA – 5-6 percent versus1-2 percent here. Second, both thepopulation and the industry are much moreconcentrated in the UK than in the USA. Theconcentrated population allows moredeliveries per hour and the national nature ofthe UK chains make it economical to promotethe service using national media (while mostUS chains are regional).

However, Tesco recently announced that itwas converting from in-store picking towarehouse picking, to improve theproductivity of the picking process. Onemight question whether the assortmentavailable to the Internet customer will remainthe same from a warehouse compared to whatis available in a large store.

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Viewpoint: the decline and fall of Internet grocery retailers

Lawrence J. Ring and Douglas J. Tigert

International Journal of Retail & Distribution Management

Volume 29 . Number 6 . 2001 . 264±271

SummarySupermarket chains in most cities havedeveloped a loyal customer base throughyears of service and convenient locations.Supermarkets are extremely efficient, withtotal cost per customer served ofapproximately $6-7. They are constantlyadvertising to maintain high levels ofawareness about prices, assortments, service,quality, specialty products and loyaltyprograms. The new players in the Internetworld are challenged with letting people knowthat they exist. In addition to high picking anddelivery costs, Internet grocers face very highup-front marketing costs, and these costsremain high as a result of competition in boththe online and traditional grocerymarketplaces.

Despite the significant efforts of the severalpure play Internet grocers, as well as muchattendant publicity, not many customers havebeen lured away from the local grocery storesinto the virtual markets. When customers stillneed to visit their local grocer to purchasesome of their perishable goods, it is difficultfor them to see the advantage of doing the restof their grocery shopping online. The groceryshopping trip is often combined with a trip tothe bank, the dry cleaners, the hardware store,the beauty parlor, etc. In other words,customer will shop the way they want to shop,regardless of the presence high technology.

If Internet use becomes more prevalent inevery home (and it may, eventually); and ifconsumers begin to trust others to choosetheir perishable goods; and if the value inservices can be transferred to the productprice; and if the Internet grocers can solve thetwin killer costs problems of picking anddelivery, it may one day be possible for onlinegrocers to see profits. Anthony Perkins,editor-in-chief of Red Herring, states thatPeapod, NetGrocer, and Streamline.com(already closed) may, however, not be aroundto reap the benefits of the seeds they havesewn. Many argue that the traditional retailersare hovering, merely waiting for thesecompanies to carry the industry out of itsinfancy, and then swoop down and win thegame. To quote WholeFoods’ CEO, JohnMackey: ‘‘If you can ever prove it works,

Wal-Mart’s going to come in and blow youout of the water’’. For now, whether youmeasure by profits, revenue growth, or WallStreet’s reaction, it is safe to say that theonline grocery industry has not achievedsuccess. Once the remaining online groceryupstarts fail, the return of home delivery willgo down as one of the biggest and mostexpensive Internet disasters in history.Ultimately, whatever home delivery servicessucceed, whether groceries are ordered byInternet, phone, fax, or by carrier pigeon, willnot be either a bricks or a clicks phenomenon.The line between Internet retailers and‘‘bricks and mortar’’ retailers is likely todisappear and what will be left are retailersthat serve customers however those customerswant to be served, whether by store, by mailorder, or by the Internet.

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E-Commerce Times (2000), `̀ More troubles for Peapod’’,October 26,http://www.ecommercetimes.com/news/articles2000/001026-3.shtml

Himelstein, L. (1999). `̀ Can You Sell Groceries LikeBooks?’’, Business Week, July 26.

Upsidetoday (2000), `̀ Online grocer bags operations’’ ,November 13, http://www/upside.com/News/3a1024eell_yahoo.html

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The Wall Street Journal (2001), `̀ The dot-com meltdown’’,January 4.

The Wall Street Journal (2001), `̀ Webvan launchesNational Value Brand Program, selecting Fleming’sbest yet label, January 4.

Wired News (2000), `̀ Troubled Peapod’s big plans’’,May 3, http://www.wired’’ news.com/news.print/0,12194,36054,00.html

Yahoo Finance (2000), `̀ Profile ± Peapod, Inc.’’, December21, http://biz.yahoo.com/p/p/ppod.html

Yahoo Finance (2001), press release, January 4.ZD Net Inter@ctive Investor (2000), `̀ Webvan drifts lower

following downgrade, policy change’’, November 8,http://www/zdii.com/industrylist.asp?mode=news&doc_id=ZE506431

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Viewpoint: the decline and fall of Internet grocery retailers

Lawrence J. Ring and Douglas J. Tigert

International Journal of Retail & Distribution Management

Volume 29 . Number 6 . 2001 . 264±271