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Finally, an E-Grocery Business Model That Makes Economic Sense

Finally, an E-Grocery Business Model That Makes Economic Sense

Canadian Grocer Blog Entry: July 21, 2014 (here)

The number of companies that support online Internet ordering of grocery merchandise in North America is small relative to the size of the $1.1 Trillion food retail market .  Estimates of the size of the online grocery market vary but Forrester Research pegs the U.S. market at $15.4 Billion in 2013.   Other published estimates indicate that the current market share for online grocery shopping in the United States is closer to 3.3% and that 10% of U.S. Grocery shoppers regularly buy food and produce online.  Regardless of which figure is correct, the e-grocery market is still currently small, however it is anticipated to increase to 11.0% in the United States by 2023.

Online grocery is definitely a hot topic these days. Many companies are seeking the right formula to provide Internet grocery ordering combined with a home delivery and/or customer pickup service with the anticipation that this will be critical to increasing market share in the near future. 

A few fundamental challenges to the e-grocery business model are:

  1. Designing an online grocery ordering service that saves consumers time.
  2. Overcoming the negative perception of online grocery shopping (e.g. it is difficult to select produce and meat products without seeing them in person; product substitutions are not what the consumer wanted; etc.).
  3. Ensuring that the customer does not have to be at home when the delivery arrives, or at a minimum providing the customer with a short time window for delivery.
  4. Providing online product pricing that is the same as or comparable to in-store shopping.
  5. Providing a home delivery service to customers at a reasonable cost without incurring the risk of losing money on the order.

To tackle these challenges is a tall order for any company, especially given the initial high cost of entry to establish an  online service.  A few companies that are already competing for the online grocery market in the US include:

  • Ahold USA’s subsidiary Peapod which charges $7 for home delivery for orders over $100 and $10 for orders less than $100. Peapod services markets in Chicagoland, Milwaukee, S.E. and Wisconsin.  In partnership with Stop and Shop and Giant Foods, Peapod also services the Eastern Seaboard from Southern New Hampshire to New Jersey, as well as Washington DC and parts of Maryland and Virginia .  Peapod is now estimated to be the largest Internet grocer in America with revenues exceeding $550 Million in 2013.
  • FreshDirect services the major metropolitan areas of New York City, Jersey City, and Philadelphia, as well as high-population counties in Long Island, upstate New York and Connecticut.  The company estimates that they have over 600,000 customers in their service area, with 25,000+ orders processed per week.  Revenues are reportedly north of $400 Million.
  • AmazonFresh is currently active in Seattle, parts of Los Angeles and San Diego, and most recently in the San Francisco Bay area.  AmazonFresh is also reportedly going to service New York City from their Woodbridge, NJ distribution center. Amazon charges $299/year for its home delivery service which requires a minimum $35 order size.   Amazon does not specifically break out sales figures for its AmazonFresh business.
  • Traditional brick and mortar companies are also getting into the act.  For example, Walmart  has been testing home delivery of grocery merchandise in San Jose, San Francisco,  and most recently Denver.  Walmart charges $5-$7 per order with a minimum $30 order size for home delivery. It is free if the customer picks up their order at their local participating store.   Other grocery supermarket retailers like Harris Teeter, H-E-B Grocery Company, Kroger and Whole foods have also mobilized to offer online grocery shopping services.
  • There are many other upstart online grocery firms and service providers that are too numerous to mention.  For example, Instacart provides home delivery courier services to San Francisco Bay, Chicago, Boston, Washington DC, Philadelphia, New York City, Los Angeles, Connecticut, Austin, Seattle, Denver, and Atlanta. Instacart provides home delivery services on behalf of several large retailers including Costco, Kroger, The Food Emporium, Super Fresh, and Whole Foods amongst others.  When customers place orders online they can receive home delivery within 2 hours for $4 or within 1 hour for $6 for a minimum $35 order size.  For orders below $35, the delivery fee increases to $8 for 2 hour service and $10 for 1 hour service. Instacart wants to eventually make its service available in every city in the United States and recently raised $44 Million in funding from the investment community.  Good Eggs is another startup firm that services Los Angeles, San Francisco Bay, Brooklyn, New Orleans.  Home delivery is $4.00 within 24 hours of order placement.

One company that I believe has the online home delivery challenge figured out is Winder Farms. The company is headquartered out of West Valley City, UT (near Salt Lake City) and was originally started in 1880 as Winder Dairy which was a dairy farm with a milk delivery service.  In 2004, investment firm Dolphin Capital took notice and invested an undisclosed amount into the firm.  Since 2005, Winder Farms has figured out how to profitably provide an online home delivery model for Fresh grocery merchandise to several markets including Salt Lake City, SW Utah, Las Vegas and Los Angeles (Orange County).

The concept is as follows:

  • Winder Farms produces its own milk and obtains other products from local growers and bakers.  They offer over 300 fresh chilled products that can be ordered online including: milk, eggs, cheese, butter, yogurt, juices, organic meats, deli meats, fresh bakery, produce, and prepared foods. 
  • Customers are required to set up a standing repeat order which can be customized as needed on a weekly basis. Winder Farms also provides suggested product bundles.
  • Orders are delivered weekly based on a preset schedule. Each customer is assigned a preset delivery day during the week to ensure an efficient outbound transportation delivery operation.  The minimum order size is $10 and the delivery charge is variable and is usually less than $5.
  • Orders are delivered in a returnable cooler/ice chest to the customer's doorstep before 8:00am.  The customer does not have to be home to receive the delivery.
  • The customer is responsible for the returnable cooler which costs $30 to replace if it goes missing.  Customers are also charged an early cancellation fee of $30 if they withdraw before 40 weeks of service.
  • Winder Farms operates a fleet of 80 delivery trucks and directly employs its drivers which is key as they represent the company when they interface with the customer.  Six warehouses are in operation to service Utah, Southern Nevada and Orange County California.

The key to success in this business model is the company's logistics efficiency which is a direct result of their transportation strategy.  Rather than offering expensive same day delivery service, Winder Farms limits its customers to a weekly delivery service.  This way their truck routes are optimized for efficiency since customer delivery locations are grouped together to minimize the outbound distance traveled.  The challenge with same day delivery service is that customer orders are shipped to all possible locations being serviced within a market region which drives up the total distance traveled and the driver hours required to make the deliveries.  Winder Farms understands this and has made the intelligent decision not to try to be all things to all people.  By dividing up the market region into smaller geographical areas, outbound delivery routes are established such that the distance between deliveries is minimized.  This ensures that the cost per delivery is kept to a reasonable amount of $5 or less.  This is of significant importance because surveys show that high cost delivery fees are cited as a primary reason to not shop online by 47% of consumers. 

Sometimes the best ideas come from the local milkman.

Marc Wulfraat is the President of MWPVL International Inc.  He can be reached by clicking hereMWPVL International provides supply chain / logistics network strategy consulting services. Our services include: supply chain network strategy; distribution center design; material handling and automation design;  supply chain technology consulting; product sourcing; 3PL Outsourcing; and purchasing; transportation consulting; and operational assessments.

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