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E-grocery Industry in the US

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1.1 Introduction and Background

An old Chinese saying goes like this: Food to the people is like people to a king. It means that just like a king has to rely on the support of his people to remain on the throne, ordinary people have to rely on food for survival. The importance of food is universal, and the retail food industry is a vital part of the economic activity of every country.

The food on America's table is mainly supplied by supermarkets, hypermarkets and discounters. Americans are used to going to these traditional stores in person to buy groceries. With an increasing number of grocers now offer online ordering and home delivery of groceries, Americans are gradually changing the way they shop for groceries. Online grocery retailing is becoming more and more common. New start-up online grocery retailers such as Peapod and FreshDirect are in the market to compete with traditional supermarkets. Some of these new online grocers have support from traditional supermarket chains. Some are “pure-play” or stand-alone grocers that operate their own supply chains and facilities. Traditional supermarkets are also offering online ordering and home delivery to customers as a new distribution channel in a struggle to keep the market shares from being taken away by the new ventures.

Online grocers utilize different operating strategies and business models. History has seen both successes and failures in this industry. Various aspects of online grocery shopping have been studied, but few studies have compared the successful and less successful companies in this industry to identify the characteristics that contribute to these outcomes. By identifying these key variables, this study intends to look for business models that have a better chance of success.

Once considered a symbol of the dot-com crash, the online grocery industry struggles to come back to life. Applying a sound business model and effective operational strategies is essential for the existing players in order to stay competitive and successful. New ventures that intend to join this business also need to come up with a promising plan. This study attempts to add to the body of knowledge and provide insights that might be helpful to these companies.

1.2 History of Home Grocery Delivery

Neighborhood grocery stores have, in fact, offered delivery services since the 19th century. At that time, urban citizens, who did not own horses like the residents of rural areas, had groceries delivered to their home free of charge. Most of them did not own a car until the beginning of mass production of automobiles in 1914. Fifty years ago, Americans were used to having milkmen deliver fresh milk to their doorstep each morning.

In more recent decades, grocers have allowed customers 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 usually short lived. Today's 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, touch, and possibly taste in person before they make the purchase (Underhill, 1999). The convenience of driving their own family cars and being able to really touch and feel the food in big supermarkets made many customers unwilling to take advantage of phone-in services. Lack of profitability has been the biggest problem for these grocery delivery services for vendors. By the mid-1980s, some local grocery delivery services allowed customers to browse product listings and place orders by computer. Marketing strategies used during this time, such as the focus on suburban families and the use of price promotions to attract new customers, would later surface again among the online companies of the late-1990s (“E-Commerce: Online,” 2004).

In 1989, Peapod, an online grocery business, emerged in suburban Chicago. In the days before the World Wide Web, Peapod's 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 history,” n.d.).

Afraid they were missing out on the market share occupied by Peapod, many grocery stores jumped on the bandwagon of home-based ordering and delivery in the 1990si. Safeway considered expanding their partnership with Peapod to cover a larger part of the Southwestern United States. Other chains linked their catalogues to online content services like 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 experienced growing demand. Sales doubled every year (Funding Universe, n.d.); however, costs also rose, causing Peapod to suffer continuing losses and growing debt.

Peapod saw the rise of new competitors like Streamline Inc. in suburban Boston in 1993. Unlike Peapod's 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 platform in which these companies could build 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 built highly automated warehouses to process its orders. Webvan allowed customers to schedule a 30-minute window for next-day grocery delivery (Feather, 2001). Webvan had attracted $1 billion of venture capital and had planned to aggressively expand into 26 cities. Founded in 1999, SimonDelivers was another online grocer. It serves the Minneapolis-St.Paul metropolitan area of Minnesota and Western Wisconsin (“SimonDelivers,” 2008).

Expansion did not go smoothly for these new grocers, however. Peapod was suffering cash-flow problems by 1999. It wasn't until Royal Ahold, a Dutch-based international supermarket operator, came to the rescue with $73 million in 2000 that Peapod was saved from collapse (Lerner, 2002). By 2002, nearly all the leading 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 through $1 billion of venture capital in just two years despite having what was once considered to be the model most likely to succeed (Porres, 2003). Webvan's subsequent failure caused many to lose faith in the idea of online grocery shopping 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 Research in 1998 toned down their forecasts, dropping their projections of 2004's expected online sales to less than five percent of US grocery retail sales (“E-Commerce: Online,” 2004).

Rising from the ashes of the online grocery failures were more cautious ventures in the online world. A scaled-down Peapod, with backing from Royal Ahold, was joined by brick-and-mortar grocers now testing the online waters. Although experiencing some financial difficulty, SimonDelivers weathered the dot-com boom and bust by securing $15 million in funding and focusing on its local market instead of expanding nationwide (Tellijohn, 2000).

1.3 Factors Driving the Popularity of Online Grocery Shopping

In today's busy world, the time available for grocery shopping is scarce. Americans now work more and thus have less free time. According to a 2008 ranking by the Organization for Economic Co-operation and Development (OECD), Americans are among the hardest working people in the world with 1,797 work hours on average each year (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 likely to shop for groceries online. Many disabled people rely on online grocery services to fill their refrigerators and because of the quickly aging US population, 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 Minnesota's Twin Cities area and Shnucks in St. Louis, Central 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 complete list of current US online grocers.)

Scott and Scott (2008) report the 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 research estimates that the percentage of US online grocery sales will rise to 1% by 2009. Manor (2006) stated that industry analysts estimated US online grocery sales would reach $4.2 billion in 2006, up 27 percent from 2005. Despite still 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 Statement

Many consumers welcome the option to shop for groceries online, but they are not yet ready to abandon the traditional in-store method of shopping. Many still consider online grocery shopping too expensive, mostly due to the high delivery charges. Since customers are not able to pick out produce themselves, grocers must be able to convince customers that they are choosing only items of the desired quality.

The logistics of going from the customer making an order to delivery at an agreed 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 litter the history of the industry. Grocers are desperately searching for the best formula for success.

1.5 Purpose of This Study

Although grocery delivery is not a new idea, the electronic grocery shopping business is underdeveloped and still in a nascent stage. This is a very challenging business, 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 been done in this area. The purpose of this study 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 Study

This study will attempt to understand the factors contributing to online grocery success by finding answers to the following research questions: • How should an online grocer's management function to ensure its success? • How should an e-grocer expand its business 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 grocer's website function, and how is customer relations management handled?

1.7 Significance and Limitations

The importance of the online segment in the overall retail food industry will be determined in the years to come. Although it presently only accounts for one to two percent of food sales in the US, market share of online grocery shopping may increase due to social and demographic drivers and technological and operational improvements. It has the potential to account for a major 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. Today's 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 study hopes to find answers to the major research questions stated above and put together a big picture view of the industry. Some of these companies are still operating, while others have failed. Various aspects of their business strategies will be compared, and an effort will be made to distill 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 dry food only) will not be examined.

1.8 Structure of the Thesis

This thesis is made up of five chapters. The first 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 review 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 typical 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 fourth chapter analyzes data. The fifth chapter confers research findings and draws conclusions. It also offers possible directions of future research. 19

Keywords: e-grocery, online grocery business, supermarket, business model, target market, store-pick, online order, warehouse-pick, delivery, customer demand, customer density, cost, investment, knowledge, experience, expansion, Peapod, Tesco, Safeway, FreshDirect, Webvan, Streamline

Chapter Two

The 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. Each 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 industry's 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 from previous studies regarding the factors contributing to the varied outcomes in the e-grocery industry.

2.1 Industry Overview

Americans 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. Milk delivery often 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, some people still prefer the old-fashioned way of getting their milk as they think milk tastes better in glass bottles. The milk delivery business is actually regaining some of its lost ground. The United States Department of Agriculture saw three-to-five percent of milk sold in the US delivered to homes in 1995, compared with only one percent in 1993 (Shih, 1995). In the 1950s, groceries could be ordered over the phone and delivered to a customer's kitchen within an hour or so, free of charge (Underhill, 1999).

American grocery stores used to carry only dry grocery items, such as flour, baking soda, dry beans and canned foods. People 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 neighborhood 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 after 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.

Even 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 Safeway's reentry into home-delivery, with experienced UK major e-grocer Tesco by its side. (In 1990, Safeway had started a delivery service, but discontinued it after just two 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 sector 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 beverage 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 the 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 Customer Base/Target Market

2.2.1 Demographic Characteristics

According to Buy4Now, an internet shopping service, 80% of online grocery shoppers were 29 to 50 years old in 2002. Seventy-four percent (74%) of the respondents were female shoppers (“Typical Customer Profile,” 2008). According to eGroceryUSA.com (“Typical Customer Profile,” 2008), three categories of people are the major users of online grocery services: affluent shoppers pressed for time, families with young children, and people who can't easily 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 two. They are older or disabled people and 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 increased 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 good 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 Characteristics

Sandoval (2002) quoted analyst Robert Rubin saying that average American cities are less densely populated compared to ones in the UK, which means high fuel costs will hurt even more when it comes to grocery delivery. 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 density 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 aim their target at large urban areas with higher population density for more potential customers.

In these urban centers, people reside closer 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 good deal of disposable income. He suggested that FreshDirect would not expand to the whole surrounding 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

Fox and Kempiak (2006) pointed out that out of MyWebGrocer's 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 changes, 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 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 buying 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 wasn't 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 ripe 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-grocer's 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 groceries 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 according 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 maximizing the wallet share a retailer could possibly get from each customer. Offering online grocery shopping to customers as a new distribution 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 Webvan's 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 included delivery time and methods, quality of produce, a limited variety of goods, and the security and privacy of online shopping. Anckar et al. (2002) considered the fear of receiving lowquality goods to be a potentially important obstacle 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 handpick 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 involved 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 Characteristics

The internet makes online grocery shopping viable. According to Fox and Kempiak (2006), the Food Marketing Institute (FMI) indicated that 86% of US consumers go online 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 boon 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 annual income over offline ones - at a little over $70,000 per year.

2.3 e-Grocery Shopping Process and Various Business Models

The 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 basic activities, e-grocers vary in how they carry them out.

2.3.1 Online Ordering

A consumer who intends to buy groceries on the web would first go to an egrocer's website to enter the zip code of the intended delivery address. The e-grocer's website would tell the consumer whether home delivery or in-store pick-up is available for the address or surrounding areas. If the service is available in the area, the customer is directed to the proper page where he/she can register with the e-grocer and create an account. Then he/she can start to browse product selections and choose delivery time slots.

E-grocers' websites often offer multiple ways of finding what a consumer wants. For example, a consumer can use the search button to search for a particular item. Alternatively, the e-grocer may offer an option to search for multiple items on a shopping list simultaneously. A page will appear that allows the customer to type in what he or she wants. The shopper can either search brand names or general item names. On the search results page, the customer can further browse all the items found and make a decision. The website may also allow browsing selections by aisle. All categories/aisles are displayed, each containing items of different brands. A consumer can also store shopping lists on the website and modify the lists anytime. Items on each list can be automatically added to the virtual shopping cart. Many e-grocer websites also offer recipes to allow customers to add all ingredients of a certain recipe to the shopping cart with a click of a button. Weekly specials are easy to find, often on the home page. E-grocery shoppers also need to decide whether they want the groceries to be delivered or picked up from a store/warehouse if this option is available. Customers pay for the entire order using their credit or debit cards.

2.3.2 Order Picking

Once an online order is received by an e-grocer, the items will typically be picked and put together before midnight the day before the scheduled delivery/pick-up date. Order picking methods are different. Some e-grocers have built their own automated, independent warehouses to store and pick orders. Each warehouse may cost millions of dollars to build and offers high picking-efficiency with miles of carrousels sending bins of products through different picking zones. For example, Webvan built highly automated central warehouses which cost $35 million each. These futuristic warehouses had motorized carrousels and robotic product-pulling machines to help increase picking efficiency and offset delivery costs (“Webvan finds that,” 2001). Others pick orders in traditional supermarkets. Some have supermarket employees use specially-designed carts to pick orders directly from the shelves of traditional grocery stores. Some pick orders from a backroom attached to a supermarket. This method is less efficient than warehouse picking, yet with less order volume, picking from stores often offers more flexibility and less upfront cost to an e-grocer. For example, Webvan's Oakland warehouse, which was capable of handling 8000 orders a day, would need at least 3000 orders to break even. Yet it only processed 2160 orders a day in 2001. Running far below its designed capacity meant that it was actually losing money every day (“Webvan finds that,” 2001). The items in each order are then separated according to their different temperature requirements and packed into different boxes or totes for delivery and pick up.

2.3.3 Order Delivery/Pick Up

Orders that are packed will be transferred into delivery trucks or a room for pick up. Temperature-controlled delivery trucks are used for groceries delivered in ordinary boxes and bags. Some e-grocers use insulated bags/boxes with dry ice or ice packs to keep groceries at the right temperatures. Deliveries are made according to the methods chosen by customers while ordering. Some are unattended deliveries. The customer does not need to be home to receive groceries. The order can be left in a designated area outside of the residence in insulated containers. The area is often out of direct sight from the street to avoid theft. Some companies, such as Streamline, owned reception boxes and rented them to customers to use in households for unattended delivery. Shared reception boxes at a shared pick-up point near the consumer were also offered by some e-grocers (Kamarainen, n.d.). For attended deliveries, someone needs to be home during the chosen window of delivery to sign for the delivery. Delivery drivers can help bring items directly to the customers' kitchens. Pick-up services are available from some e-grocers in longer time frames. Customers would need to go to the e-grocer's facility, either a supermarket or a warehouse, to collect their orders. Research indicated that the way e-grocers get goods to customers has a great impact on the efficiency of the entire business model. Using reception boxes could mean a major cost advantage over attended delivery. The cost can be over 40 percent less when reception boxes are used, because of the wider delivery window made possible by the reception box. Delivery routes can be better planned and delivery workloads can be better distributed during the day to minimize costs due to the wider delivery window (Kamarainen, n.d.). Having a reception box involves some cost for an e-grocer and its customers. Using insulated containers or insulated bags is another way utilized by e-grocers to offer unattended delivery, but collecting delivery bins adds to the cost.

Time slots for attended delivery are pre-selected by customers at the time of ordering. Some time slots are shorter and more popular and thus are offered at a higher delivery fee to level out demand peaks, which are mostly during late afternoons and weekends.

2.3.4 Business Models

While there are strategic variations within each business model used by different e-grocery companies, there are two predominant models in the online grocery business. Pure-play model — Pure-play e-grocers are companies that do business only online, without any connections to brick-and-mortar retail outlets. They operate their individual websites. Automated warehouses are built for order picking. They order food items directly from farms, dairies and fisheries to get fresher goods at a lower price or order from middlemen. Goods are stored, picked and assembled in central warehouses which are designed for efficient order picking and packing. Some e-grocers using this model can even custom prepare food to order right on the premises (“Our promise: higher,” n.d.). Deliveries are made from the warehouses, or orders can be picked up from their central location. Some pure-play e-grocers offered reception boxes installed outside of customers' residences for order delivery. Companies using this model include Webvan, Streamline, and FreshDirect.

Brick-and-mortar (B&M) model — Online grocers that use this model are traditional “brick-and-mortar” supermarkets adding an online shopping service. They utilize the buying power and suppliers of the supermarkets. Goods would come from suppliers to the shelves or backrooms in a traditional supermarket. Then designated pickers who are employees of traditional grocery stores would assemble orders for online customers. E-grocers using this model often have several stores as designated order-fulfillment stores. Each region has such a store to take care of order picking. Deliveries are made from these stores to their customers in the surrounding area. Brickand- mortar e-grocers include Safeway, Albertson's, and Tesco in the UK. Some companies pursue a combination of both of these two business models. For example, Peapod uses the brick-and-mortar model in most markets by working with subsidiaries of Royal Ahold. However, in Chicago and Washington, D. C., Peapod operates two free-standing warehouses for order picking and deliveries (“PEAPOD LLC Corporate,” n.d.).

2.4 Opinions from Previous Studies

The success level of e-grocers varies. Some have disappeared completely. Some of them remain operating in limited regional markets. Some of them are already serving multiple markets nationwide. Some claim they have reached profitability. Some are just hanging on while continuing to lose money. There have been multiple explanations offered by analysts for the success or failure of e-grocers, but no consensus has been reached.

2.4.1 Factors for Success

Various researchers expressed their opinions on the factors that have a positive influence on the operation of e-grocery businesses.

One proposed success factor is experience in food retailing and possession of a strong brand name already familiar to shoppers. Traditional grocers already know the food retail business. They have established relations with suppliers and a large amount of buying power. Customers already shop in their physical stores. Mitchell Rhodes, president of GroceryWorks (the online division of Safeway), believed that the online division was valuable for promoting the grocer's brand (Guynn, 2003). Conversely, Fox and Kempiak (2006) and LeClaire (2002) believed that the brand helped promote the online division of the brick-and-mortar grocer. Fox and Kempiak also agreed with LeClaire that the past business experience and infrastructure of brick-and-mortar grocers were great advantages.

Another factor contributing to success in the e-grocery business is believed to be the ability to spend the most for the longest. Regan (2002a) believed that even with the new model of tying online ordering to brick-and-mortar stores, it will still be the company that can spend the most for the longest that will emerge the winner. While Tesco has succeeded in the UK, tailoring its system for the US will take time and money. Given enough time and money, even the failed pure-play groceries may have succeeded. According to Regan, the competitive landscape of today's online food retail market remains the same in that it will belong to the company that can stay in the game the longest. If the Internet division of an established grocer is dragging down profits, its parent company may not let it continue for very long, which means they are no safer just because they are tied to profitable businesses. Without demand for these services, this new wave of online grocers will follow the previous wave into failure. Good customer retention strategy is also important to an e-grocer's success. Consumers complete 60 percent of their shopping within a single grocery chain. To capture the loyalty of customers, e-grocers need to reward shoppers who stay with them. Vigoroso (2002a) reported that Safeway will give online customers access to their in-store purchases. Customers will also be able to earn savings awards and United Airlines miles.

Cautious investment strategy and growth plan are the key. Brick-and-mortar stores utilize their existing infrastructure to save on costs. Delaney-Klinger, Boyer, and Frohlich (2003) stated that Tesco succeeded where Webvan failed because it marketed its online division as a value-added service and charged extra for delivery, which served to make up for the part of the costs of getting the ordered goods to the customer (pricing strategy). Though Tesco's strategy of putting together orders at their stores meant a higher cost per order than Webvan because of the lower picking efficiency, it was more suited when sales volumes were lower. Mike Patton, president of the Northern California division of Albertsons, illustrated a cautious strategy when he stated that Albertsons was moving into areas with the greatest amount of Internet usage and with customers that have specifically asked for an online grocery service (Vigoroso, 2002b).

2.4.2 Factors for Failure

Some factors may have a negative influence on e-grocery businesses. Low level of customer demand for e-grocery was a problem found by many analysts. Sandoval (2002) mentioned that analyst Robert Rubin thought online-only businesses were doomed to failure because only a quarter of online grocery customers order more than once per month. There was simply not enough customer demand to sustain the size of the investments needed to start delivery businesses. Pure-play grocers spent huge amounts of money on building highly-automated warehouses only to find that these warehouses were operated at half of their capacity. Order volume was simply too low to make their businesses profitable. According to Anckar et al. (2002), Ring and Tigert believed that one of the reasons for the failure of pure-play online grocers was because pure-plays greatly overestimated the demand for Internet-based grocery retail. High start-up cost was blamed for many pure-play e-grocers' failure. According to Delaney-Klinger et al. (2003), although in theory warehouse-based grocers could cut costs related to providing a better shopping atmosphere for customers and design storage to maximize order-picking efficiency, the strategy required expensive expenditures of capital that in the short run increased the cost of business, whereas using existing stores to put together orders meant lower initial costs. High start-up cost resulted in being heavily leveraged and at a higher risk.

Another factor for failure suggested by analysts was that the management of some e-grocers did not have sufficient experience and knowledge in food retail business. Alsop (2001) believed the reason for Webvan's failure was less a problem with its concept and more a problem with its management. Management problems started at the top when Webvan hired a consultant (George Shaheen from Andersen Consulting) as CEO instead of someone with experience in food retail. Irrational spending was another factor contributed to failure. According to Alsop (2001), Webvan's spending patterns were more in line with that of the dot com mania of the time rather than the disciplined frugality of real groceries. For example, it embarked on a rebranding campaign after just two years and repainted its delivery vans, spending money that was not directly related to making the business work. Webvan was building too many facilities before it had figured out all the problems with their design and, therefore, was forced to reconfigure every warehouse instead of first fixing the problems in one warehouse before building any others and then applying the experience afterwards to build in efficiency from the start. Webvan's ambitious plan of expanding to 26 markets in a short period of time also sped up its failure. Fox and Kempiak (2006) expressed their concerns with the pure-play online grocery business model. They pointed out that today's lack of capital investors for these dot com ventures make it very difficult for these independent pure-play e-grocers to survive. Research also indicated that some pure-play companies relied too much on technology. They did not concentrate on building a relationship with customers or establishing a consistent company image. Traditional supermarkets have advantages in this area (Lunce, Lunce, Kawai and Maniam, 2006). Lunce et al. (2006) also pointed out that Webvan shouldn't have re-branded (by switching from a grocery service to a general delivery service) two years into its existence and wasted previous marketing campaigns. Webvan did not attempt to offer any incentives to encourage the usage of unpopular delivery time slots until very late in its business downfall. Webvan's later decision to sacrifice product quality to cut costs also further weakened its bond with its main customer population.

2.5 Summary

So much has been said about various business models and companies. Researchers have looked into many specific aspects of e-grocery business operation, but to date, no one has systematically compared these organizations to identify characteristics and strategies that contributed to these outcomes. The online grocers provide a service that many consumers welcome. The potential of this industry is still yet to be reached. JupiterResearch, a market research firm, predicted online grocery sales will grow by 17 percent in the next five years and reach $7.5 billion by 2012 (“Online Grocery Sales,” 2008).This study is intended to be useful to food retailers in the e-grocery industry, as well as to those contemplating entry into the industry, in choosing successful business models and strategies.

Chapter Three

In the previous chapter, various operational aspects of e-grocers were identified. This chapter covers the methodology and data analysis. 3.1 Research Approach and Method The research design of this study took a qualitative, inductive approach to data collection and analysis. Case studies from secondary source material were analyzed to detect patterns of e-grocers' business models and strategies, which will be used to develop a grounded theory of success factors in the e-grocery business. A metaanalysis of selected e-grocers/cases was performed to reach this goal.

3.1.1 Case Study Method

Experiments, surveys, archival analysis, historical analysis, and case studies are the five major investigative strategies used in social science research. According to Yin (2003), there are three conditions that distinguish the five research strategies: the kind of research question asked, the degree of control the researcher has over actual behavioral events, and the amount of emphasis on current, as opposed to past, events. Case study is a qualitative approach to carry out scholarly research. In general, it is desirable to use case studies as the strategy when “how” or “why” questions need to be answered, when the researcher doesn't have much control over the events, and when studying a current phenomenon within a real-life scenario (Yin, 2003). Also, it's used when conducting exploratory research, which lacks the benefit of conceptual/theoretical frameworks.

This study intends to investigate how the e-grocery businesses survive in difficult market conditions. It also wants to understand why the major current players in the e40 grocer business have managed to continue operation, while many others have failed. In addition, during the process of conducting this study, although the cases can be chosen, the actions of the companies or the strategies they are utilizing are not directly controlled by the researcher. Furthermore, this research studies the e-grocers' strategies under the current conditions of the market. For these reasons, the case study method is the best fit for this research.

3.1.2 Meta-Analysis

This study is a qualitative meta-analysis of case studies of selected e-grocery companies. Answers to the set of major research questions described in section 1.6 provided the qualitative data from each individual case (Lyons, 2003). The data accumulated across the cases/e-grocers were then analyzed to find possible relationships between the strategies/business models and the different outcomes of these e-grocers.

No single case can be considered a definitive example of the success or failure of e-grocers. Because there are a variety of business models featuring many different strategies, this study drew data from a wide range of cases. The meta-analysis method utilized the qualitative data gathered from multiple e-grocers to look for patterns of common operational characteristics and strategies among successful and unsuccessful e-grocery businesses. This systematic approach of making cross-case comparisons of the various business practices that led to varied results is appropriate for this study. There are some drawbacks to the meta-analysis method. For example, since the meta-analysis relies on the data from multiple cases, the quality of the analysis depends on the quality of data from each source, something which cannot be controlled by the researcher. While some companies may have been using similar strategies, they are rarely identical. The details within each aspect being examined might vary. There is no common agreement on the approach to analyzing data for a meta-analysis (Graney and Engle, 1990). This study relies on a good deal of historical data from various resources. Efforts were made to use information corroborated by multiple sources. Each major research question deals with one specific operational aspect of an e-grocer. These research questions define the criteria of interest in the case studies.

3.2 Cases/e-Grocers Examined

As Huberman and Miles (2002) noted, selection of a proper population helps the control of extraneous variation and sets the limits for the generalization of the findings. The case selection should not be random, as this is neither necessary nor preferable. Each case has been chosen to carefully provide a replication of other cases, to expand growing theory or to present examples of theoretical categories and polar types. Such a theoretical sampling, instead of statistical sampling, offers a foundation for the analytic generalization of theories in a case study. Each research question deals with a set of characteristics of an e-grocer. Because each case examines a single company according to the characteristics indicated by the research questions, these characteristics become units of analysis embedded in the case study. This is illustrated in Appendix D (Yin, 2003).

This study examined several e-grocers, which included both relatively successful and unsuccessful companies. Since most of the e-grocery companies are private companies that do not publicly disclose their financial data, and the public listed brickand- mortar grocers do not separately disclose the financial data of their main operations and online divisions, the relative levels of success were judged based on each company's years in business, whether it has reported profitability, whether it is currently expanding or its percentage of market share.

Online grocery retailing is now offered in many parts of the US (“Who Is Offering,” n.d.). Currently, most online grocers are still operating with a limited geographic scope. Only a few names stand out when we count e-grocers that are apparently healthy and expanding. Among them, Peapod has been in e-grocery business for 19 years. It survived the dot com crash and is going strong with an annual growth rate of over 25 percent. Peapod currently delivers to 1,500 zip codes and over 12,700,000 households in metro areas in the Midwest and along the East Coast (“PEAPOD LLC Corporate,” n.d.). According to Safeway's 2007 Annual Report, Safeway Inc. is one of the largest food and drug retailers in North America, with 1743 stores in the Western, Southwestern, Rocky Mountain, Midwestern and Mid-Atlantic regions of the United States and in Western Canada, as of December 29, 2007 (Safeway, Inc., n.d.). Safeway now delivers e-groceries in 9 states in the US It offers a wide variety of both perishable and nonperishable items. Pure-play e-grocer FreshDirect first introduced its service in New York City in 2002 and gained popularity quickly. Now it has become a major player in the New York and New Jersey online grocery business and has achieved profitability (Schoenberger, 2006). In the UK, Tesco, PLC operates the world's largest online grocery service. It has over 30% of the UK grocery market, approximately equal to the total share of the next two largest chains (Asda and Sainsbury's) combined (“Tesco,” 2008). In 2002, Tesco was the first grocer to make online operations profitable (Cheyfitz, 2003). Peapod, Safeway, FreshDirect and Tesco are relatively successful in today's e-grocery retailing industry.

Webvan was the most spectacular failure of US online grocery business. It burned through $1.2 billion in its short life span of 2 years and filed for bankruptcy in 2001. It offers many lessons to be learned by researchers and the businesses still operating today. Streamline.com Inc. was the second to enter the US e-grocery retail business (the first was Peapod). Its operation lasted for 7 years until it closed its business in 2000. Despite of being one of the pioneers of US online grocers, Streamline was a pure-play e-grocer that was never able to break even, making the company unable to secure the capital needed to remain in business (McCormick, 2000). Webvan and Streamline are two examples of e-grocery failures.

Peapod, Safeway, FreshDirect, Tesco, Webvan and Streamline are the firms examined in this study. The combination of successful and not-so-successful e-grocers was chosen to help this study find a winning combination in today's online grocery retailing industry. Sources of data include annual reports and other data made public by the companies involved, news and trade articles, published studies, and industry research.

3.3 Data Analysis

According to Booth (2001), a qualitative meta-analysis is very different from a quantitative meta-analysis. Commonly used analysis techniques of quantitative metaanalysis (such as the use of software like Meta-stat) are not suitable for qualitative meta-analysis, because qualitative analysis is not primarily concerned with statistical exactness or representativeness. No attempt was made to sample or represent all views on the topic, but rather specific cases were found that possess characteristics relevant to the issue being studied in order to identify patterns and any possible “noise” which may lead to competing theories.

Previous sections of this study discussed operational aspects of the e-grocers. A set of research questions was used to identify the relevant operational aspects. These characteristics are the information that was extracted from each case examined. The data were then put into a matrix for comparative purposes; patterns of common criteria and strategies among successful and unsuccessful businesses were subsequently identified. Particular attention was paid to any sign of disconfirming evidence that may lead to different explanations.

3.4 Validity and Reliability

The type of validity that is relevant to qualitative, inductive research is face validity. It involves showing the research to people who are very familiar with the research topic and ask whether the findings/grounded theory are accurate. If they agree that the research looks sound, researchers can be reasonably certain that the study has achieved an acceptable level of face validity. If possible, the researcher would share the findings with professionals or experts in the e-grocery business and get their reactions to test the validity of this research.

Reliability refers to the consistency of the study's results. Another researcher following the same procedures and looking at the same e-grocers should be able to reach the same conclusions. This study will make efforts to document and present its data in a way that allows reviewers to follow the inductive approach of this investigation. However, in case studies of e-grocers' operating behavior and performance, many factors will be constantly changing. For example, business models and competitive strategies may change when the market conditions change or when major technological advancement occurs. This research was performed within the contemporary time frameand the context of present online grocery market conditions. This may limit the ability to generalize findings of the study.

Chapter Four

In this chapter, each case (individual online grocer) is examined for factors implicated in business model success or failure. The data are analyzed to find any patterns that appear.

A summary of the data collected is presented first. Section 4.1 investigates the online grocery companies' management competencies; Section 4.2 examines the major strategic expansion and market selection decisions they made; Section 4.3 focuses on logistics and examines how the companies handle inventory control and order fulfillment; Section 4.4 examines delivery strategy; Section 4.5 evaluates web design and customer relations management; and Section 4.6 compares strategies across the cases. The findings of this research will be presented after conducting a cross-case analysis of data.

4.1 Management Core Competencies

This section looks into the experiences and knowledge in e-grocery business or in general traditional grocery industry each e-grocer's management team possesses and how this affects managerial decision making.

4.1.1 Peapod

Peapod was founded in 1989 by brothers Andrew Parkinson and Thomas Parkinson in Evanston, IL. The Parkinson brothers combined their backgrounds in consumer product marketing and technology and started Peapod to serve busy families. At first, customers had to use Peapod-provided software and modems to dial into its shopping system. From 1990 to 1996, Peapod operated its business by fulfilling orders through partnerships with local grocery stores. It has worked with Jewel Food Stores in the Chicago area, Safeway in San Francisco, the Kroger Company in Columbus, Ohio and Stop & Shop in the Boston metro area. In 1997, Peapod launched its own website www.peapod.com on the internet. Peapod listed its shares on NASDAQ through a successful initial public offering. Years 2000 and 2001 were crucial for Peapod's growth. In June 2000 Netherlands-based international grocer Royal Ahold took 51% ownership of Peapod. Marc Van Gelder joined Peapod from Stop & Shop, a subsidiary of Royal Ahold, to be the president and CEO. In August 2001 Peapod became a wholly-owned subsidiary of Ahold and started a long-term exclusive partnership with Royal Ahold-owned grocery stores in the US. In 2003 Peapod achieved profitability in four out of five markets. Later, Andrew and Thomas Parkinson were re-appointed as Peapod's President and CFO. Today's Peapod, having the grocery industry know-how from Royal Ahold combined with infrastructure support through Royal Ahold's physical stores, has achieved an annual sales growth rate of over 25 percent and has become one of the most prosperous online grocers in the United States (“PEAPOD LLC Corporate,” n.d.).

4.1.2 Tesco

Tesco is a UK-based international grocer and general merchandising retail chain. It was founded in 1919 by Jack Cohen. Tesco now has turned from the simple stall in the East End of London into the largest British retailer with profits exceeding £2 billion worldwide. As of March 2008, Tesco has a store in every postcode district of the United Kingdom with the exception of Harrogate.

Tesco.com was officially launched in 2000 to offer groceries online. Tesco.com now completes over 250,000 online orders each week (Tesco, 2008). Its service has been popular and profitable. It is the largest online grocery service in the world. The strength of Tesco.com lies with its well-established supplier and distributor network. Its tremendous buying power as the biggest player in the UK grocery industry, mature infrastructure consisting of near 2000 stores and an unbeatably wide range of products have helped it become a successful online grocery pioneer.

4.1.3 Safeway

Safeway has been in the grocery business for nearly a century. M.B. Skaggs bought a single tiny grocery store from his father and expanded his business to 428 Skaggs stores in 10 states. He later merged his company with 322 Safeway stores and listed Safeway on the New York Stock Exchange in 1928. According to Safeway's 2007 Annual Report, as of December 29, 2007, with 1743 stores in the Western, Southwestern, Rocky Mountain, Midwestern and Mid-Atlantic regions of the United States and in Western Canada, Safeway Inc. is one of the largest food and drug retailers in North America.

When it comes to offering online grocery shopping, Safeway utilizes its extensive network of distribution, manufacturing and food processing facilities and stores to provide infrastructure support. It also learned from the most successful UK online grocer Tesco through a prior alliance venture together. In summer 2001, Safeway made a deal with Tesco, Britain's biggest grocer, to start its online grocery shopping service in the United States. Tesco brought its technology and proven online know-how into an online grocer named GroceryWorks, which was majority-owned by Safeway. GroceryWorks became the exclusive channel of Safeway's online grocery service under the names Safeway.com, Vons.com and Genuardis.com. It became Safeway's wholly-owned subsidiary in 2006.

4.1.4 FreshDirect

FreshDirect was f

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