Online Grocers: Take Two

After Webvan’s spectacular flare out in 2001, the era of online grocers—at least, on a grand scale—seemed to come to an end. Webvan, with its state-of-the-art automated material handling system featuring 26 miles of conveyors, became a very public poster child of the dot-com bust.

Most other online grocers failed as well, especially the pure plays, and the few that did survive continue to struggle to turn a profit. The problem was that these entrepreneurs took an “if you build it, they will come” attitude, and consumers weren’t biting. But, that hasn’t stopped others from trying.

n this month’s cover story, “Online Grocers Rise Again,” [page 20], we look at how the segment is faring today, and we’re happy to report that it’s picking up steam. The online grocery market grew 29 percent last year, posting $3.3 billion in sales, and analysts expect it to triple by 2008.

What’s driving growth this time around? For the most part, it seems that consumers have become more comfortable with the idea of buying perishable foods via the Internet. Traditional supermarkets relying on name recognition, such as Safeway Stores, which allows customers to order online for home delivery or pickup, are helping build the market. In addition, online grocers are doing a better job of targeting the right types of consumers in the right locations—dual income households in urban areas looking for a more convenient way to do their normal grocery shopping.

Order fulfillment, however, still remains a problem. Peapod, one of the few online grocers that has weathered the storm for more than a decade, is currently dividing its operations between free-standing distribution centers and “warerooms”—dedicated picking areas adjacent to partner stores like Stop & Shop. Relative newcomers to the pure play market, such as FreshDirect and SimonDelivers, are using facilities designed specifically for consumer direct order fulfillment.

Analysts credit the success of FreshDirect with raising the segment’s profile. The company serves New York and the surrounding suburbs. Launched in 2002, it delivers more than 5,000 orders a day. I’m a few zipcodes away from being able to order from FreshDirect, which is taking a different approach by offering an in-house bakery, catering services and ready-to-cook and heat-and-serve meals prepared by local chefs.

The big lesson that FreshDirect and other online grocers learned from Webvan’s demise is that growth really needs to match demand. These companies are rolling out their services block by block, methodically building penetration in the neighborhoods they serve. And when FreshDirect gets to my neighborhood in the near future, I’ll be one of the first to check it out.

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