Lessons From Online Groceries

Recent research sheds light on some of the reasons behind the spectacular successes and failures in the online grocery industry. Initial findings of a three-year, ongoing study, “Internet Disintermediation of Food Delivery: Spanning the Last Mile,” funded by the National Science Foundation, conclude that some of the industry's early efforts (such as Webvan, Streamline and Home Grocer) failed as operating business models because they ignored key insights now being applied by today's successful online groceries.

The research is being conducted by Kenneth Boyer, associate professor of operations management, Tomas Hult, associate professor of marketing and supply chain management, both at Michigan State University's Eli Broad Graduate School of Management, and Mark Frohlich, assistant professor of operations and technology management at the London Business School. It includes interviews and survey data from most of the industry's major competitors, such as Sainsbury's and Ocado in Britain and Peapod, Lowes Foods To Go and Albertsons in the United States, and incorporates customer survey data from four online grocers, each of which employs a distinctly different marketing and supply-chain strategy.

The researchers suggest the study reveals broadly applicable principles for any company trying to market and sell through the Internet. For example, survey evidence clearly shows that successful online retailers strike a balance between their range of offerings and the ease of fulfillment and synchronize their marketing and supply-chain strategies. For instance, a root cause of Webvan's failure was its promise to deliver groceries at the same price as in-store service, which it was unable to do profitably. Today's successful online sellers now charge a delivery or pickup fee, designed not only to help offset the increased supply-chain costs, but also to identify and sift out target customers. Customers in the study uniformly rated the importance of convenience much higher than price, indicating they were aware of, and prepared to pay for, increased costs associated with convenient pickup and delivery. In general, online customers clearly appear to be conscious of the tradeoffs they make between product assortment, price and reliable delivery.

Another lesson from the study, say the authors, is that learning curves are critical for both the seller and the customer. The failure of Webvan and the success of Tesco, among other online grocers in Britain, illustrate the need for sellers to carefully educate customers about new services and coach them in how to get the most benefit from the service. For example, the study shows that customers ordering groceries online have substantially higher satisfaction levels after having completed four or more orders. Moreover, the time it takes to place an order quickly drops from 60 to 80 minutes for the first order to 25 to 35 minutes by the fifth. The data show the importance of working with online customers to develop their comfort with a new technology. In addition, many failed online retailers concentrated too much of their marketing efforts on attracting a broad range of customers and too little on retaining target customers.

The study also illustrates the importance of e-tailers paying attention to market segmentation and cultural differences. In Britain, where the grocery market is homogeneous, the stores make more efficient use of space than those in the United States, and denser populations make for easier delivery to local areas. Because of this, online grocery services carefully positioned themselves not as a revolutionary technology, but as an evolutionary channel that simplifies customers' lives. By contrast, many of the first wave of U.S. online grocers felt pressured to grow quickly and were not discriminating in the markets they served. The newer, more successful online groceries are better addressing their core target market: dense urban areas with a high concentration of families having two working spouses — busy people. As a surveyed customer who had placed more than 60 orders and spent more than $5,000 stated, “I think a $5 service fee is a bargain.”

The relatively greater success of online groceries in Britain (Tesco, for example, had sales of more than $550 million in the most recent fiscal year) underscores the study's fourth lesson for e-businesses. Unlike Webvan and other cautionary examples, British companies carefully thought through how to efficiently coordinate their IT processes, marketing approaches and supply-chain strategies. For example, most companies pick up customer orders from existing stores instead of building separate distribution centers, thereby assuring a lower fixed cost. (The major exception to that rule is Ocado, which uses a semi-automated warehouse to serve the exceptionally dense population in the greater London area.)

Such potentially beneficial strategies, the authors suggest, were not clearly understood in the early days of U.S. online retailing, but they indicate the kinds of approaches that today's online grocers, and e-tailers in general, should be employing.

More information on the study is available from Ken Boyer at Boyerk@msu.edu.