E-grocery Industry in the US

E- martplace pains in the US1.1 Introduction and BackgroundAn old Chinese verbalize goes give c ar this Food to the populate is equivalent people to a king. It way of life that comely equivalent a king has to verify on the patronize of his people to remain on the thr genius, ordinary people stool to swan on diet for survival. The importance of pabulum is universal, and the sell food effort is a vital part of the economic activity of every country.The food on Americas table is mainly supplied by super marketplaces, hypermarkets and discounters. Americans atomic number 18 utilize to sacking to these traditionalisticistic stores in per boy to steal groceries. With an increasing number of grocers at a clipping offer online ordination and substructure manner of speaking of groceries, Americans ar gradually ever-changing the way they grass over for groceries. Online market retailing is becoming to a greater extent(prenominal) and to a greater extent commo n. New start-up online foodstuff retailers such as Peapod and FreshDirect argon in the market to compete with traditional supermarkets. Some of these impertinently online grocers feel support from traditional supermarket drawstrings. Some be pure-p limit or stand-alone grocers that operate their receive leave chains and facilities. Traditional supermarkets be overly offering online lodge and piazza delivery to nodes as a sunrise(prenominal) distri thoion channel in a struggle to keep the market sections from organism taken absent by the new ventures.Online grocers utilize different operating strategies and by work out models. explanation has seen both triumphes and failures in this perseverance. Various aspects of online market place obtain suck been studied, but few studies have compared the prosperous and little successful companies in this manufacture to identify the characteristics that contribute to these turn upcomes. By identifying these key variabl es, this psychoanalyze intends to look for duty models that have a better chance of success.Once supposeed a image of the spread out-com crash, the online food harvest industry struggles to come back to life. Applying a grievous vexation model and effective running(a) strategies is essential for the quick players in order to stay competitive and successful. New ventures that intend to join this earn also need to come up with a promising plan. This domain attempts to add to the body of knowledge and provide insights that might be assistive to these companies.1.2 History of Home Grocery DeliveryNeighborhood marketplace store stores have, in fact, offered delivery swear come out of the clo gravels since the 19th century. At that clipping, urban citizens, who did non declare horses give care the residents of rural areas, had groceries delivered to their home bounteous of charge. Most of them did not consume a car until the beginning of mass production of automob iles in 1914. l years ago, Americans were employ to having milkmen deliver fresh milk to their doorstep to each one morning.In more recent decades, grocers have allowed clients to order and receive their food at home. In the 1960s, third-party companies offered phone-in delivery services for groceries. However, these services were unremarkably slight lived. To days shoppers are sensual shoppers who prefer to use their five senses in choosing their purchases. Groceries, especially food, are the kind of merchandise that shoppers would want to see, feel, smell, signature tune, and possibly taste in person before they clear the purchase (Underhill, 1999). The convenience of driving their own family cars and being able to really touch and feel the food in great supermarkets do m some(prenominal) customers un pass oning to take proceeds of phone-in services. neglect of profitability has been the biggest fuss for these grocery delivery services for vendors. By the mid-1980s, few local grocery delivery services allowed customers to browse product listings and conduct orders by computer. Marketing strategies used during this snip, such as the focus on suburban families and the use of price promotions to attract new customers, would later bob up once more among the online companies of the late-1990s (E-Commerce Online, 2004).In 1989, Peapod, an online grocery argumentation, emerged in suburban Chicago. In the days before the creative activity Wide Web, Peapods customers used proprietary software and a modem to dial into their systems in Chicago and San Francisco (Background on Peapod, n.d.). Peapod partnered with Jewel in Chicago and with Safeway in San Francisco to put together the orders to be delivered to customers (Peapod company memorial, n.d.). alarmed they were missing out on the market contribution occupied by Peapod, many grocery stores jumped on the bandwagon of home- metrical unitd ordering and delivery in the 1990si. Safeway considered expanding their partnership with Peapod to cover a larger part of the Southwestern United States. separate chains linked their catalogues to online content services handle Prodigy and used their own employees to fulfill orders. However, by the mid-1990s, it was clear many of the early expectations for the industry would not be met. Grocery chains and stores discovered that online ordering and delivery were not profitable. Peapod relied only on computer-based ordering and produced growing demand. gross gross sales doubled every year (Funding Universe, n.d.) however, costs also rose, causing Peapod to subscribe continuing losses and growing debt.Peapod saw the rise of new competitors like streamline Inc. in suburban Boston in 1993. Unlike Peapods partnerships with existing grocers, Streamline developed its own warehouses, as well as relationships with wholesalers and distributors. Streamline delivered to their own boxes located in the garages of their customers (Borrego, 2001) . By 1996, companies like Peapod, Streamline, and HomeRuns had created their own websites. The World Wide Web had created a common plat prepare in which these companies could wee their ordering systems. During the height of the Internet boom, investors poured money into these dot-com ventures. Taking advantage of this trend, HomeGrocer and Webvan joined the field of competitors.Webvan was started in 1999, offering over 18,000 perishable and nonperishable items. It build mellowly automated warehouses to assist its orders. Webvan allowed customers to schedule a 30-minute window for next-day grocery delivery (Feather, 2001). Webvan had attracted $1 zillion of venture capital and had planned to aggressively expand into 26 cities. Founded in 1999, SimonDelivers was other online grocer. It serves the Minneapolis-St.Paul metropolitan area of manganese and Western Wisconsin (SimonDelivers, 2008).Expansion did not go smoothly for these new grocers, however. Peapod was scathe cash-flo w problems by 1999. It wasnt until violet Ahold, a Dutch-based international supermarket operator, came to the rescue with $73 trillion in 2000 that Peapod was saved from collapse (Lerner, 2002). By 2002, nearly all the in the lead online grocers (HomeGrocer, HomeRuns, Kozmo, Shoplink, Streamline, Urbanfetch, and Webvan) were gone. The only survivors were Peapod and SimonDelivers. The online grocery industry was crushed. Webvan was the most spectacular failure, having burned by $1 one thousand thousand of venture capital in just twain years despite having what was once considered to be the model most presumable to succeed (Porres, 2003). Webvans subsequent failure caused many to lose faith in the idea of online grocery shop altogether. In the early years, overenthusiastic projections of the online grocery industry predicted it would cover as much as 20 percent of all grocery sales by the mid-1990s or 2000. Later, estimates by Forrester query in 1998 toned rase their foreca sts, dropping their projections of 2004s expected online sales to less than five percent of US grocery retail sales (E-Commerce Online, 2004). advance from the ashes of the online grocery failures were more cautious ventures in the online terra firma. A scaled-down Peapod, with backing from Royal Ahold, was joined by brick-and-mortar grocers now testing the online waters. Although experiencing well-nigh financial difficulty, SimonDelivers weatherworn the dot-com boom and bust by securing $15 million in funding and focusing on its local market instead of expanding across the country (Tellijohn, 2000).1.3 Factors Driving the Popularity of Online Grocery ShoppingIn todays busy world, the time operational for grocery shop is scarce. Americans now work more and thus have less free time. According to a 2008 ranking by the validation for Economic Co-operation and Development (OECD), Americans are among the potentest working people in the world with 1,797 work hours on average each ye ar (Olson, 2008). For families with children, having to take the kids to the market adds to the stress of the chore. Due to competing demands on their time from work and home, people are more seeming to shop for groceries online. Many disabled people rely on online grocery services to fill their refrigerators and because of the quickly aging US creation, more elderly people are also likely to be interested in e-grocery shopping. With Peapod operating in the Midwest and East Coast, FreshDirect in New York City, Albertsons and Safeway in the West, Simon Delivers in Minnesotas Twin Cities area and Shnucks in St. Louis, rudimentary Illinois and parts of Southern Indiana (Fishman, 2005), this revived e-grocery industry has both new and old players that are now attempting to stake out their shares of the online grocery market and working hard to achieve what their predecessors could not. (See Appendix A for a wind up list of current US online grocers.)Scott and Scott (2008) report th e following figures regarding the current market size and potential of selling groceries online. The estimated online grocery revenue was $235 million in 1998, $2.4 billion in 2002 and $6.2 billion in 2006 Jupiter inquiry estimates that the share of US online grocery sales will rise to 1% by 2009. manor (2006) state that industry psychoanalysts estimated US online grocery sales would reach $4.2 billion in 2006, up 27 percent from 2005. notwithstanding calm being less than one percent of all grocery purchases, online grocery sales are expected to double by the end of the decade.1.4 Problem recordMany consumers welcome the option to shop for groceries online, but they are not yet micturate to abandon the traditional in-store method of shopping. Many fluent consider online grocery shopping too expensive, mostly due to the full(prenominal) delivery charges. Since customers are not able to pick out fetch themselves, grocers must be able to convince customers that they are choo sing only items of the craved quality.The logistics of going from the customer making an order to delivery at an concur upon time requires a great deal of effort.Many new companies, as well as traditional grocers, have attempted to provide electronic grocery shopping to consumers. Various different approaches to establishing infrastructure, fulfilling orders, and making deliveries have been tried. Margins are very thin surviving in this industry is tough. Many failed companies covey the history of the industry. Grocers are desperately searching for the best formula for success.1.5 theatrical role of This StudyAlthough grocery delivery is not a new idea, the electronic grocery shopping line of work is downstairsdeveloped and becalm in a nascent stage. This is a very challenging caper, yet it offers extraordinary opportunities. Despite the efforts made by the egrocers to implement various service concepts and the interest of consumers in online grocery, not much research has be en done in this area. The purpose of this understand is to identify successful operating strategies that can be employed by online grocers and less successful strategies that should be avoided.1.6 Major Research Questions of the StudyThis national will attempt to understand the factors contributing to online grocery success by finding answers to the following research questions How should an online grocers management function to ensure its success? How should an e-grocer expand its condescension and decide its target market? How should an e-grocer put together orders? Should it use central warehouses or the shelves of physical stores? How should an e-grocer deliver orders to customers and achieve operational efficiency? How should an online grocers website function, and how is customer relations management handled?1.7 Significance and LimitationsThe importance of the online fraction in the overall retail food industry will be determined in the years to come. Although it pre sently only accounts for one to both percent of food sales in the US, market share of online grocery shopping may maturation due to social and demographic motorrs and expert and operational improvements. It has the potential to account for a major(ip) percentage of retail food sales if business strategies are chosen wisely in the right environments. Alternately, it may be relegated to the fringes of the grocery industry if the right business choices are not made. There have been many casualties in the history of the e-grocery industry. Todays survivors and newcomers are all hoping to find the strategies for success. By performing case studies on the successes and failures of a group of selected online grocers, this development hopes to find answers to the major research questions stated supra and put together a big picture compute of the industry. Some of these companies are still operating, while others have failed. Various aspects of their business strategies will be compare d, and an effort will be made to purify the characteristics of these businesses that led to their success or downfall.This study intends to help the online grocery business learn from the mistakes of the past so that they can increase market share in the future.The study will be limited to e-grocers that offer online ordering and home delivery/pick-up service with product selections similar to a traditional supermarket specialty food grocers and companies with restricted selections (such as prohibitionist food only) will not be examined.1.8 Structure of the ThesisThis thesis is made up of five chapters. The origin chapter is the introduction/thesis proposal. It gives a historical overview of the e-grocery industry, presents the problem and states the importance of the study. Major research questions are also identified in this chapter.The second chapter is the literature palingenesis which describes the target market of online grocers. The customer base will be reviewed based on demographic, geographic and psychographic characteristics. The literature review also provides information about the state of the market following a chronological and geographical order. The operational aspects of how different e-grocery businesses complete a natural transaction will be described as well.The third chapter presents the methods used. This study will primarily be an inductive qualitative analysis of the e-grocery industry. This research consists of casestudies of successful and not-so-successful e-grocers. A meta-analysis will be performed to compare various aspects of the e-grocers strategies in an attempt to identify patterns and variables that contribute to their varied success levels. The one-fourth chapter analyzes data. The 5th chapter confers research findings and draws conclusions. It also offers possible directions of future research. 19Keywords e-grocery, online grocery business, supermarket, business model, target market, store-pick, online order, warehou se-pick, delivery, customer demand, customer dumbness, cost, investment, knowledge, experience, expansion, Peapod, Tesco, Safeway, FreshDirect, Webvan, StreamlineChapter TwoThe goal of this chapter is to lay out the operational and strategic groundwork for the analysis. E-grocers employ different business models. To make their business models work, online grocers use various strategies and target different markets. apiece operational model varies along several dimensions, such as how orders are placed, assembled and delivered. The first part of this chapter presents statistics and descriptions of the electronic grocery industry in chronological and geographical order. The second part of this chapter presents a review of the online grocery industrys customer base and target market. The third section describes the process of completing an online grocery transaction and how each business model functions differently to fulfill orders. The fourth part of this chapter offers opinions fr om previous studies regarding the factors contributing to the varied outcomes in the e-grocery industry.2.1 Industry OverviewAmericans are familiar with grocery home-delivery services. This concept has been around in one form or another for decades. In the early days, when not many people had a fridge at home, milk needed to be delivered to customers daily. take out delivery oft occurred in the morning while people were still asleep. Glass bottles or cartons were left at the doorstep. Milkmen even delivered other dairy and farm products, such as eggs, cream, yogurt and butter (Milkman, 2008). Although demand for the service decreased significantly during the past 50 years, or so people still prefer the old-fashioned way of getting their milk as they imagine milk tastes better in glass bottles. The milk delivery business is actually regaining or so of its lost ground. The United States Department of land saw three-to-five percent of milk sold in the US delivered to homes in 199 5, compared with only one percent in 1993 (Shih, 1995). In the 1950s, groceries could be enjoin over the phone and delivered to a customers kitchen within an hour or so, free of charge (Underhill, 1999).American grocery stores used to run only dry grocery items, such as flour, baking soda, dry beans and canned foods. pile bought fresh produce and meat from specialty food retailers like butchers and greengrocers. These stores were often located near one another for shoppers convenience. Starting in the 1920s, chain grocers experimented with consolidating smaller stores into larger ones with meats and produce along with the dry grocery items. As a result of this consolidating process, by the 1950s, there were much fewer region stores but more larger supermarkets and shopping centers that people had to drive some distance to go to (A quick history, n.d.). Fewer grocers offered home delivery subsequently this period, as Americans enjoyed driving their family cars to shop in large, well-decorated supermarkets and spending some leisure time at the urban and suburban shopping centers. redden before the World Wide Web ever existed, getting groceries online was made possible by dialing into grocers servers with special modems provided to customers. Independent online ordering and home-delivery grocery companies like Peapod began to emerge in the US retail food industry. Food retailers like these were referred to as pure-play e-grocers because they only sold groceries online and had no storefronts. The development of the web provided a whole new platform for online ordering of groceries. More pure-play e-grocers jumped into the market. Among these companies were Streamline, HomeRuns, HomeGrocer, Kozmo, Shoplink, Urbanfetch, Webvan and SimonDelivers. Fearing of missing out on the market share occupied by pure-play e-grocers, traditional supermarkets also began to offer grocery delivery service. For example, Sandoval (2002) described Safeways reentry into home-delive ry, with experienced UK major e-grocer Tesco by its side. (In 1990, Safeway had started a delivery service, but dis proceed it after just twain years.) From the emerging of Peapod in 1989 to Webvan s grand entry in 1999, the online grocery retailing industry seemed to be very promising.Industry expectation for the e-grocery firmament was optimistic at the time. According to LeClaire (2002), Forrester predicted that 14 million households would eventually buy at least some of their groceries online. Jupiter predicted that sales would reach $11 billion in a few years. Datamonitor reported that the online retail food and drunkenness market in the United States was worth $2.1 billion in 2001 after growing 43.5% that year (United States Online, 2002). The growth rate slowed from a high in 1999, when the market had grown by 131.6%. Datamonitor predicted the value of the market to increase to $49.9 billion by 2007 (United States Food, 2003). At the time, Webvan accounted for 30.9% of t he market volume, followed by Peapod with 28.3% and GroceryWorks with 12.7%.However, problems with customer retention and revenue generation in the pureplay businesses led to a big shakeout in the US online grocery industry. Most of the independent online grocers shut down their websites permanently by 2002. Only Peapod and SimonDelivers weathered the dot com crash and survived. Brick-andmortar stores continued to offer online grocery service and soon took the lead. Later came some new players into the market. FreshDirect (founded in New York City in 2002) was one of them.2.2 guest al-Qaida/Target Market2.2.1 Demographic CharacteristicsAccording to Buy4Now, an internet shopping service, 80% of online grocery shoppers were 29 to 50 years old in 2002. cardinal percent (74%) of the respondents were female shoppers ( regular Customer Profile, 2008). According to eGroceryUSA.com (Typical Customer Profile, 2008), three categories of people are the major users of online grocery services eater shoppers pressed for time, families with young children, and people who cant slow get to the store. The first category is people who have higher incomes and less time. These shoppers are usually technology-savvy, heavy internet users who are single or have a dual-income family with no kids. These big spenders prefer to pay someone else to do grocery shopping for them. The second group consists of families with young children. They comprise the largest number of online grocery shoppers. A typical e-grocery shopper in this category is 29-to-50 years old with one or more children and at least one child under the age of five. They normally would cook family dinners, and, therefore, are regular grocery shoppers with above average spending. People in this category expect to save time and avoid the hassle of dragging kids along for grocery shopping (Typical Customer Profile, 2008). The third group is relatively small compared to the first both. They are older or disabled people a nd those who find going to a grocery store difficult. People are living longer than ever. In 1960, life expectancy of the US population was only 69.7. The number potpourri magnitude to 73.7 in 1980 and 77 in 2000. The projected life expectancies for the years 2010 and 2015 are 78.5 and 79.2 respectively (U. S. Census Bureau, n.d.). Older people may need some form of help with grocery shopping when it becomes difficult for them to drive to supermarkets and carry heavy items home. Online grocery shopping can be a keen alternative to hiring personal helpers. For disabled people and others who are physically challenged (temporarily injured, bed-resting, etc.), online ordering and home delivery of groceries would also be of great help.2.2.2 Geographic CharacteristicsSandoval (2002) quoted analyst Robert Rubin saying that average American cities are less densely dwell compared to ones in the UK, which means high fuel costs will equipment casualty even more when it comes to grocery de livery. Rubin believed Americans are more likely to drive to the grocer because of the more entrenched car culture. The UK (248 per sq. km) had 8 times the population parsimony of the US (31 per sq. km) in 2004 (World Population Prospects, n.d.). Tesco has been having a relatively successful online grocery operation in the UK. This led to the idea that US online grocers should catch their target at large urban areas with higher population density for more potential customers.In these urban centers, people reside hand-to-hand together. Less people own family cars in large cities. The dependence on public transportation, more crowded shopping environments, busier lifestyle and higher income make many urban residents favor online grocers over personally going to traditional grocery stores. According to Mclaughlin (2005), Richard Braddock, who was appointed chairman of FreshDirect.com in 2005, mentioned that FreshDirect would look for cities that are similar to New York to expand its business. Those are cities with a high percentage of internet usage, a high number of residents per square mile, and residents with a not bad(predicate) deal of disposable income. He suggested that FreshDirect would not expand to the whole environ area of New York. Instead it would expand from one urban population center to another to make sure its delivery trucks could make as many deliveries as possible every time they stopped.2.2.3 Psychographic Characteristics play a trick on and Kempiak (2006) pointed out that out of MyWebGrocers five critical elements that decide whether a consumer shops for groceries online (price, ambiance, convenience, service and product variety), e-grocers have advantages in ambiance, convenience, and service. Fox and Kempiak stated that changing family structures and increased work hours have made consumers busier, more time-starved, richer and more impatient with time-consuming tasks like grocery shopping. Because of these social and attitudinal chan ges, many people are more likely to be attracted to convenient, dependable alternatives for the recurring chore of grocery shopping. This makes the e-grocery service more appealing for consumers that fit this profile. Consumers with certain(p) disabilities that make in-store grocery shopping hard are another major market for e-grocers.The ease of shopping from home and the time saved are two of the reasons some prefer purchase online. Gennifer Calise, a working Manhattan mom, admitted that she would not want to lug her ten-month old son to the grocery store and lug him back.Instead, she can stay home and play with him on the floor and be clicking online at the same time. With both a child and a full-time job, she said she did not want to do anything that wasnt easy (Koeppen, 2006). Similarly, Sietsema (2007) stated that those who worked long hours at the office and had little time for everyday life were delighted to be able to not have to go to a grocery store.Anckar et al. (2002) stated that the ability to shop from any place, at any time, was an undeniable convenience offered by e-commerce. The status of grocery shopping as an undesirable chore for many people makes it near for online efforts that can offer both speed and convenience. Time and convenience have been cited as the principal reasons for purchasing groceries electronically in a study by Morganosky and Cude. With the technology available online, general purpose grocers can easily become specialty grocers tailored to the individual needs of customers with allergies that require a special diet or people with different food preferences, like organic, ethnic, religious, or gourmet items.Scott and Scott (2008) state that by changing and reusing previous shopping lists online, consumers save time. Customers become familiar with the e-grocers website fairly quickly. The average ordering time is only 20 minutes versus 60 minutes when a customer shops online for the first time. The benefits of buying gro ceries online include the ability to establish, save and modify shopping lists online over time, emailing shopping lists to other family members, getting personalized coupons, sorting items match to nutritional information provided and automatically ordering all the ingredients for a certain recipe.Bates and Lauder (2008) pointed out that customers are often not loyal to just one particular retailer. They can be loyal to several retailers at the same time. These retailers share the spending of each customer. Therefore, the goal of competition becomes maximise the wallet share a retailer could possibly get from each customer. Offering online grocery shopping to customers as a new dispersion channel has the potential to gain a greater wallet share for a grocer.Bates and Lauder (2008) also believed that the market adoption rate is another influencing factor that decides how many customers an online grocer can attract. Customers adopt online grocery services at different rates and at different times. Due to Webvans failure and the dot com meltdown in 2000, the natural evolution and adoption process were set back for years, both for potential customers and for grocers. Bates and Lauder used the figure in Appendix B to show the adoption process being extended. Fox and Kempiak (2006) brought up some major concerns that prevent some consumers from choosing to buy groceries online. These concerns include delivery time and methods, quality of produce, a limited variety of goods, and the tribute and privacy of online shopping. Anckar et al. (2002) considered the fear of receiving lowquality goods to be a potentially important bulwark to purchasing food online. Some customers fear that store employees may not pick the freshest produce in an attempt to minimize storage losses or maximize picking speed.While some people consider grocery shopping a burden, there are still a lot of food lovers who enjoy their trips to traditional grocery stores to actually touch and hand pick everything they are buying. Online grocery shopping is just not the right experience for them, and, therefore, does not satisfy their needs.When Scott and Scott (2008) described the resistance to online grocery shopping, they mentioned that customers may not be willing to pay the delivery fee. It is also hard to change the established shopping habits of consumers. Customers might not like the long lines at the registers of traditional grocers, but that does not necessarily mean they are ready to give up standing in them right now. The cost heterogeneous in the acquisition and retention of customers tends to be high, because once consumers have a negative online grocery shopping experience, they may not buy groceries online again and tell their acquaintances not to try the experience.2.2.4 Technological CharacteristicsThe internet makes online grocery shopping viable. According to Fox and Kempiak (2006), the Food Marketing Institute (FMI) indicated that 86% of US consumers go o nline or use their computers every day. Seventy percent (70%) of them shop online frequently. While in the UK, broadband use is ranked number two in Europe and number five in the world. This has been a gratuity for online businesses in the UK 15.9% of the respondents of this research bought groceries online at least once a year. 3.2% used e-grocers at least once a week. 2.7% used them two or three times a month. 4.5%, the largest group, used an e-grocer once or twice a year (E-commerce The Internet, 2007). The increasing rate of internet usage likely contributes to the rising number of consumers who purchase groceries online.According to Foley et al. (2003), online shoppers actually had habits different from their unwired counterparts. Online grocery shoppers made fewer shopping trips per month (for all goods) and spent more per trip than those who did not shop online. Online orders tended to be larger than in-store purchases. At Tesco, for example, instore purchases averaged 21 ( about $33), while online orders averaged 85 (about $136). Online shopping households averaged nearly $10,000 more in yearbook income over offline ones at a little over $70,000 per year.2.3 e-Grocery Shopping ferment and Various Business ModelsThe process of buying grocery online consists of several major steps. They are ordering and payment, order-picking/ assembly and order delivery/ pickup. (Appendix C shows the process of e-grocery shopping in a figure.) Although all e-grocery transactions have these radical activities, e-grocers vary in how they carry them out.2.3.1 Online OrderingA consumer who intends to buy groceries on the web would first go to an egrocers website to enter the zip code of the intend delivery address. The e-grocers website would tell the consumer whether home delivery or in-store pick-up i