Are E-Grocers Serving the Right Markets?

Prior to 2003, the biggest news in the E-grocery sector had been the dramatic implosion of high-profile operators. Silicon Valley and Wall Street saw “dot.bombs” in many sectors during the 1990s, but failings in the grocery business seemed magnified due to unique supply chain relationships and, most importantly, strong consumer expectations about product and service quality that do not disappear when customers move online. Online grocers like Webvan were among the myriad of startups that failed to balance true market potential with their investment in technology and business strategy. Some firms simply subsidized online operations as long as they could as an “experiment” before giving up; reasons for these failures ranged from market selection problems to corporate culture and commitment. Others simply tried to run before they had crawled. Some thought that new technology offset the need for strategic ways of dealing with known consumer expectations and industry practices—and failed accordingly. The exit of Publix Supermarkets from the E-grocery arena illustrated risks from trying to build such an enterprise in areas with limited online subscribers or consumer suspicion of online purchasing. Despite these early stumbles, the E-grocery market rebounded and has grown dramatically since 2003. New entrants—many of them traditional grocery retailers venturing into E-commerce— are offering more products and services to broader geographic areas. The question we address here is whether surviving E-grocers are entering the right markets—ones containing enough of the kinds of customers inclined to use this service and generate profits—and what a right market looks like. Consistent estimates of current market size and projected growth in the E-grocery industry are elusive targets. In 2002, sales for online food, beverages, and groceries were estimated to range between $4.25 billion (Keenan Vision) to $6.4 billion (Yankee Group). Forrester Research called 2002 online grocery sales at $5 billion. A more recent estimate by Jupiter Research predicts that online grocery sales will hit $2.4 billion in 2004, or 0.4% of the total grocery market of $570 billion. By 2008, the estimate grows to $6.5 billion, just 1% of the total forecasted market of $641 billion, but showing an annual growth rate of 42%. Clearly this sector continues to grow: • Safeway.com doubled its business in two years (2001–2003) and expected it to double again in 2004. • Ahold-owned Peapod reports that it has 150,000 active customers in its system, which includes Chicago and parts of the East Coast. By 2006, Peapod expects to nearly double its reach to areas serving 14 million potential households. • In 2004, New York-based pure play Fresh Direct had 100,000 active customers—four times the number of just a year earlier.