Internet Groceries 2.0

4 Dec 06

Remember Webvan?  This company promised to use the magic of the internet to transform the $500 billion supermarket industry.  It recruited George Shaheen, who left his job as chief executive of Andersen Consulting to run the internet food startup.

That was back in 1999.  During the next two years, Webvan burned through more than $1.2 billion in spectacular fashion before going bankrupt in July, 2001.  George Shaheen? He’s gone back towards businesses he knows a little better, and is now CEO of Siebel Systems.

While Webvan failed, a number of other companies that sell groceries over the internet are now starting to prosper.  Each of them focuses on a small region of the country – a city or two – and their services have changed with the change in the internet. We now have groceries 2.0 on the web.   

FreshDirect, which serves residents of New York City, seems ready to make the biggest splash.   This service is so popular that real estate agents list its availability in a neighborhood as a benefit for potential residents, like a river view or a building with a doorman.

FreshDirect -- Internet Groceries 2.0

FreshDirect is more than a grocery delivery service.   Because it buys direct from farms and manufacturers, it can beat conventional grocers by providing fresher food at lower prices.  Much of its food is prepared to order, rather than prepackaged.  During Thanksgiving week, for example, FreshDirect delivered more than 2000 fully cooked Thanksgiving dinners as well as 6000 uncooked turkeys, according to a recent story in The New York Times.

The company started in 2002, a year after Webvan crashed.  Its current revenues are around $240 million, and it operates out of a single warehouse in Queens.  It has not yet turned profitable, but expects to do so as its warehouse utilization increases. 

It’s easy to see the attractiveness of internet grocery shopping, but the approach also requires major changes in customer buying habits.  Using the four factor model of innovation success, we can compare groceries ordered at FreshDirect with in-store shopping at a supermarket like Safeway. 

FreshDirect vs Safeway – High Motivators, High Barriers

            Compared to a conventional supermarket, FreshDirect offers higher benefits and lower costs -- fresher foods, often at lower prices.  It can do this because it’s eliminated both the distributor and the retail store from its business. 

Distributors add both time and cost.   With conventional grocers, products must move from the farm or factory through several warehouses before reaching the store.  

The supermarket environment itself degrades the quality of the food being sold.  The most attractive presentation of food for purchase is not the best way to keep it fresh.  As FreshDirect notes:

“Since customers don't shop in our facility, we can maintain different environments for each type of food we sell. For example, we have seven different climates for handling produce, ensuring that the bananas are as happy as the potatoes.”

FreshDirect web site, November 06

            While the benefits may be compelling, FreshDirect and other online grocers require major changes in the habits and attitudes of grocery shoppers.  As a result, online grocers have not made major inroads into the grocery business.  According to The New York Times, online grocers currently represent about $2 billion of the $500 billion grocery business – less than half of a percent of sales.

            As the service becomes less novel, however, online grocers are growing quickly.   It turns out that the internet allows them to provide services that are very difficult for conventional supermarkets to match. For example, if you have a food allergy, websites like FreshDirect can screen out products that contain the offending ingredient.  If you want to make something from a recipe, FreshDirect’s website has a library of hundreds of recipes, and you can order all the recipe ingredients with one click of a mouse. 

            Perhaps the biggest difference between the current crop of online grocers and their predecessor, the now-extinct Webvan, relates to the timing of their ambitions. 

Webvan was conceived as a national business, and at its peak it offered service in nine US markets, from Chicago to Orange County.  While FreshDirect may someday expand, its focus is on making the business work in a limited part of New York City.

Instead of “get big fast,” the company’s motto is more like “get it right first.”  According to Jason Ackerman, one of the company’s founders:

“If we get to Chicago in 3 years or 10 years… we want to be the best when we get there.”

Jason Ackerman, FreshDirect co-founder, in The New York Times, 22 Nov 06

            As I noted in an ICE Update in September, stores like Safeway and Kroger’s are already being challenged by upscale retailers like Whole Foods and warehouse chains like Costco.  As companies like FreshDirect expand to more cities, they will provide one more alternative to conventional supermarkets.

More Information:

1. Here’s a link to the wikipedia entry on Webvan.
2. Here’s the FreshDirect Web Site.
3. New York Times article by David Leonhardt, 22 Nov 06, is here.
4. Previous updates on grocery innovation are here.
5. For more on the four factor model of innovation success, here’s a reprint from Harvard’s Working Knowledge newsletter.

Podcast:

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