Published on: May 20, 2004
Yesterday, the “Your Views” section featured an email from MNB
user Dan Wallace on the subject of e-grocery. He wrote:There are two fundamental problems with e-grocery. First, it pretty much eliminates impulse purchases, a great source of margin for retailers. Second, it requires the retailer to pay for activities that traditionally are done for free by the consumer - order picking, loading, last mile delivery and unloading. In doing so, it replaces mostly fixed costs (stores) with mostly variable ones (delivery trucks). This means the profit picture won't improve as volume grows.
These facts are pretty obvious - one would have thought that Webvan and other failed e-grocers would have understood how unlikely it was that they would ever become profitable. Their only hope was in achieving a very high share of households, translating into high route density, which might have made the economics of delivery viable. Maybe.
The nature of on-line grocery limits its appeal to two specific segments. One is customers looking for high-margin, hard-to-find specialty items. The other, on which most e-grocery hopes are pinned, is customers who a) shop from a list and are not interested in impulse items and b) are willing to pay for the convenience of home delivery. The numbers in your story imply that after about 10 years of effort, Peapod has achieved perhaps a 1-3% share of households in its service area. This would seem to be the size of the latter segment.
This email generated a number of responses.MNB
user Glen Terbeek wrote:I would like to disagree with the comments about the "two fundamental problems with e-commerce."
Regarding impulse selling: First of all, the opportunity for the presentation of products based on the logical thinking of the shoppers rather than based on the like item "picking slot" categories of the physical store is great. Products can be "placed" in many locations virtually. In addition, products can be presented starting with the shopper's own core item, which make up 50-60% of their annual purchases. Then based on historical shopping, lifestyle and demographic factors, items and solutions can be suggested to anticipate the needs and desires of the shopper, and eliminate the "clutter" of items not of interest to the shopper. After all, shoppers go to the store to replenish their pantries and to buy meals; either the ingredients, solutions ideas, or even prepared. And last, much easier comparisons of products can be made, such as nutritional attributes as well as price.
Regarding "free" shopper labor: It is true that the industry shifted labor to the shopper; self service worked early in the industry but is most likely against the shopper's current stress of "not enough time." Let's face it, the store is a high priced distribution center, both in fixturing and location real estate costs. In addition, the labor to stock shelves in a presentable manner is expensive. The high cost front end space and labor is actually not appreciated by the shopper. But the highest cost of a store is that it serves as the "toll gate" that the retailers use to collect trade dollars from the manufacturer, estimated at about 16-18% of manufacturers' revenues, and 7.5% of retailers revenues, or about twice their pretax income.
The mistake that WebVan made is that it didn't change the model. It should have started with a truly consumer direct model, connecting the shopper directly to the manufacturers producing the items they want and collecting a fee for that service. The trade dollars savings and marketing information advantages that the manufacturer would achieve would more than make consumer direct the cheaper and more pleasant shopping experience, and perhaps would have kept WebVan in business today. Conversely, using a store as a pick/pack center is the highest cost solution. However, it demonstrates that there is real consumer direct demand.
We need to get the economic model corrected. Remember, the manufacturers have always followed the "Frictionless" or most direct route to the shopper. It is one reason they jumped on the Wal-Mart band wagon.
I suggest that the industry looks at the eBay model for guidance. It may be the next manufacturer move!
A provocative thought.MNB
user Mike Spindler (who, it should be noted, is president of MyWebGrocer.com) responded:Mr. Wallace is right in that online customers do "impulse buy" and in fact they value convenience much more than anything else (including price) and being "interrupted" by impulse opportunities is usually frowned upon.
However, online customers usually spend considerably more of their total grocery expenditures with their online grocer then they did in-store with the same grocer, or than they did with their prior primary grocer. That loyalty/share of stomach MORE than makes up for any impulse purchases missed over time. Further, most online customers are incremental to the grocer, and the reason for their move to that grocer IS the ability of the grocer to provide the convenience of online shopping.
Delivery can be expensive (unless the grocer already provides, as is the case in NYC). However, many of our grocer's offer at-store pickup, which generates as much if not more acceptance in markets where consumers are constantly on-the-go. Just don't make the shopper get out of their car!
Finally, Mr. Wallace is almost correct in his current market estimates of 1-3%. Our numbers indicate between 1-5% but lets not quibble. However, when the bulk of the online folks are incremental, when 40% of those incremental customers are trading up (from price brands, including W*M), when the rate of growth is 35-50% per year and when you look at the online comfort of the emerging client base (including "boomers) ,then one might think that this channel deserves a serious, serious look.
user, however, thought that Wallace had it right:You have got to look at the economics. One cannot charge regular store retail for on line purchases and expect to make money as the costs are totally different. What does a stop on a truck cost? There were (and probably are) good figures available. $50 is not an unreasonable place to start. Therefore you need high density to make it work. But retail clerks earning $15 an hour cannot pick orders from store shelves, check them out and then have them delivered to the home for regular retail. There is no margin to support that. And even if you pick from a special distribution center with low cost people, the margin is still slim to cover the delivery cost. And a delivery charge of $5 or 10 will not cover the delivery cost. I know as I studied this and decided to not get into the e-grocery business.
Perhaps the problem is that old-model economics were being applied, when a new model had to be invented.
We had a story yesterday about how Best Buy CEO Brad Anderson decided to accept his $3.2 million salary but reject 200,000 stock options and instead give them to non-executive employees who work for the electronics retailer. The options have a potential price of better than $7 million.
We applauded Anderson’s move, saying that he clearly realized that the success of a retailing company doesn’t emanate down from the executive suite but up from the sales floor.
user responded:I think Best Buy is putting stores like Media Play and Circuit City out of business. The employees' attitude in general (toward the customer and toward their work) greatly improves when they are treated well and respected. I don't necessarily see any difference in customer service or in product selection regarding electronics, music and video/DVD selection or price between these three but something is happening to drive customers to Best Buy rather than the other two. Perhaps an unconscious positive vibe from the employees keep people going back to Best Buy.MNB
user Marysia McFann wrote:Lead the way Mr. Anderson! Corporate America may think you're crazy, but the average working class citizen is bowing at your feet. This sounds like the type of leader that every company in America needs -- one who leads by example. If I wasn't already working for a top notch corporation, I would beat a path to Best Buy!
And another member of the MNB
community noted:I don't believe I've ever shopped at "Best Buy" - but you can believe I will from now on. Can't wait to see what this does to the bottom line.
Kudos to this one Brad Anderson! Think of how many people this could impact - if all CEOs would follow his lead. The disparity between the least and top employee is so out of whack these days. How many jobs could $7 Million "potentially" save?
I'm overjoyed for all the "non-executive" employees who work at Best Buy and Brad Anderson is my new "Hero"! Hopefully this will get a lot of press coverage - but I doubt it! After all "It's Great News".
We had a piece yesterday about how Nash Finch will shutter both its Avanza and Buy n Save retail formats, saying that “prospects for improvement at these locations and formats within an acceptable time frame are not sufficient to justify continued investment.”
According to a statement released by the company, “exiting these underperforming assets is consistent with the company’s commitment to continue to lower operating costs, improve its balance sheet, and focus investment and attention on core areas of its business that offer a better return to shareholders.”
In addition to three highly touted Avanza units in Chicago and three in Colorado – which were designed to appeal to the fast-expanding Hispanic demographic – Nash Finch said it would shut down five Buy n Save units in Minnesota, one Sun Mart in Nebraska, and nine EconoFoods stores in Iowa, Minnesota and South Dakota. MNB
user Bill White observed:It has really become a sad state of affairs in the grocery business, both wholesale and retail. I spent the majority of my career (at wholesale and retail) in this wonderful industry that "gets into your blood" easily. There has been much consolidation in the industry over the past 15 years or so, as we all know, some good and some bad, most of which recently has had a lot to do with attaining size to compete with Wal-Mart. They have turned this formerly wonderful, yet competitively friendly, industry upside down, and continue to add square footage daily in their unquenchable desire to "own" this industry that was built by "Mom and Pop." Meanwhile, a company such as Nash Finch, that is on the leading edge in developing their Avanza concept, is under so much pressure from Wall Street (due in large part to the items mentioned above) that they must close those stores, without adequate time to tweak the format and make it a profitable venture. The question should be asked: "Would they have such pressures if the Street wasn't worried about Wal-Mart's effect on the industry? In the old days, "Mom and Pop" didn't have those pressures, and were willing to take chances and try new formats, new departments, etc., which made this industry what it is today (or at least what it was pre-Wal-Mart). How low we have sunk - how did we as an industry allow this to happen? And where is it all ultimately heading? What has happened to old-fashioned "fair" competition?
user wrote:I just want to say, "That I told you so, when it came to the Avanza stores in Chicago!"
I know some complained and said I was being too general when I said it wouldn't work and that the customers would rather shop at stores and businesses owned by other Hispanics.
I was right!
Just because you are a chain that caters to Hispanics, it does not mean that they will stop shopping and run to your "concept store."MNB
user David J. Livingston wrote:The Avanza stores were an insult to everyone from day one. The only thing Hispanic about these stores was the name. Merchandising really was no different than most of the other Nash Finch stores - which are basically 20 years behind the times anyway. This is probably just the beginning of the problems Nash will be announcing over the next several months. After Nash bragged about how well they were doing, I don't think I can ever believe anything they say. Buy n Save suffered from the same thing that Avanza did. Both formats had no execution. It was like they had this great idea but only made minimal attempts to perfect it.
Finally, we had a brief mention of Tony Randall’s passing yesterday…which prompted the following email from MNB
user Glenn J. Rosati:About 30 years ago, my parents and I went to LaGuardia Airport to pick up my Grandaunt who was coming home from a six-month visit with cousins in Boston.
There was no sight of Aunt Amelia after all the passengers had deplaned. We were curious because our cousin had called to confirm that she had boarded the plane and that it took off on time. After a few minutes Aunt Amelia came out in a wheelchair being pushed by one of the flight attendants.
She immediately proceeded to tell us all about the very nice young man who sat next to her, talked with her, made sure she was comfortable and asked all about her family. She mentioned that the young man looked a lot like Tony Randall. We all chuckled thinking she was smitten with the attentions of a nice gentleman. As we gathered her bags out from the jet way comes Tony Randall who walks over to Aunt Amelia to say good-bye one last time.
We just stood there speechless! Aunt Amelia sat there glowing. God bless Tony Randall.