E-Grocery Pioneer Grows, Learns Lessons from Past

The founders of Peapod Inc, the first online grocery delivery company, learned an important lesson in the early 1990s: Don't listen to mom when developing a business plan.

"The two Parkinson brothers told their mother they had an idea for a business, and were trying to decide whether to sell groceries or books," John Caltagirone, a food industry consultant, said at Food Logistics 2000, the 109th annual convention and trade show of the International Association of Refrigerated Warehouses in Phoenix, Arizona. "Their mother responded, "Go with groceries, books will never sell online.""

The amazing success of Amazon.com proved that books do sell on the Internet. Peapod, like other e-grocers in an industry with thin margins, has had a tougher time. One obvious reason: perishables require more careful handling than books and can spoil before reaching the consumer. Nevertheless, Peapod revenue in 1999 was $73 million, the most in the online grocery industry, Caltagirone said.

Caltagirone formerly was senior vice-president and chief logistics and operations officer for Peapod. He left at the end of March 2000 to join The Revere Group as vice-president for supply chain strategy. Peapod and The Revere Group both are headquartered in Chicago suburbs - Peapod in Skokie, and The Revere Group in Deerfield.

Peapod serves eight markets - Chicago; San Francisco; Austin, Dallas, and Houston, Texas; Cleveland; Boston; and New York. Operating distribution centers in Chicago and San Francisco and from supermarkets in other locations, Peapod recently entered a partnership with Royal Ahold, an international retail and foodservice company, to leverage and accelerate combined e-commerce initiatives. In May, Peapod announced that its new president and CEO is Marc van Gelder, from The Stop and Shop Supermarket Company, a Royal Ahold subsidiary in Boston.

Drayton McLane, owner of the Houston Astros, former vice-chairman of Wal-Mart, and architect of many of Wal-Mart's logistics systems, has joined the Peapod board. The McLane-Peapod alliance is expected to result in new industry standards for centralized distribution, warehouse, and logistics operations in the online grocery industry, said Fabio Fonseca, IARW chairman in 2000.

Industry in Pioneer Stage "The consumer-direct industry is in its pioneer stage, and the market is accelerating," Caltagirone said. "Studies have shown that many Internet users want to do grocery shopping on line. I think that's great news. Independent research indicates that in the next five to 10 years, this industry is going to be huge. In e-grocery alone, we're talking about $185 billion."

As the original pioneer in a pioneer industry, Peapod has grown through three growth stages, learning lessons at each step. The first phase in 1989 and 1990 was personal shopping with delivery by automobile. The second phase in 1995 and 1996 was growth of the young company. In the third phase, 1999 to 2000, Peapod laid the foundation for the future. Peapod has delivered more than two million orders to date.

In Phase 1, the Parkinson brothers conducted a customer study in Chicago. They found that more than 60% of consumers dislike shopping. Two-income families want to complete such chores more quickly for more free time. Most Americans make 90 trips a year to the supermarket. Some of those trips take two to three hours, including driving and shopping.

Peapod developed custom software for online orders. "Remember, this is around 1990," he said. "Peapod started out by building brand awareness with minimal investment. They worked from existing stores and delivered with employee automobiles. With no inventory, facilities, or fleet, they were able to conserve capital. Getting that first customer was tough, but the next several thousand was easier.

"Peapod worked with 20 food manufacturers and leveraged supermarkets" buying power with its delivery service. While the supermarkets provided inventory and real estate, Peapod provided incremental profitability. They took orders, did the shopping, and made the delivery."

In Phase 2 in the mid-90s, Peapod had about 40,000 customers, expanding from one to seven markets (all its current territory except New York). They refined and accelerated marketing services. "Peapod decided to centralize all information-related activities, such as customer service, data-base management, and marketing," Caltagirone said. "Physical activities, on the other hand, were decentralized.

"When you're in more than one facility, you have to get some key performance indicators. You have to standardize policies and procedures consistently in all markets and still provide for the distinct buying habits in each market. Peapod decided to distribute some products nationally, and to handle perishables and low-value products locally."

Infrastructure Investment In Phase 3, Peapod expanded to about 130,000 customers and opened distribution centers in San Francisco and Chicago. "In recent years, other e-commerce companies have joined the field and have large investment in infrastructure," Caltagirone said. "But I think investors are becoming less tolerant of dot-com companies not making a profit. They will not continue investing forever.

"For e-grocers, 1999 was the year for building stand-alone facilities. That's what we'll see in the future. This represents a huge opportunity for the refrigerated warehouse industry, because online grocers will need large facilities to handle the volume and throughput for a large product mix."

An important lesson e-grocers including Peapod have learned is that transportation is the highest cost in the business. "We've got to do pick-and-pack right and quality right," he said. "But transportation is a huge nut to crack. Ultimately, we have to offer a myriad of delivery options. Do customers want attended or unattended deliveries? Do they want to pick up orders while stopping at the drug store?"

Because e-grocers must offer more delivery options, logistics are more constrained than traditional distributors, he said. For instance, e-grocers deliver in quantities of one's and two's rather than in case or pallet lots. Customers demand shorter order-cycle times. Soon it will be standard for dot-com companies to pick, pack, and deliver all on the same day of order receipt.

"Flexibility in consumer choice is very different today than when we used to have milkmen," Caltagirone said. "On a milk route, customers had to take or leave the product offering and delivery day and time. On the other hand, e-grocers offer choices of products, type, size, quantity, time, and method of delivery. Of course, perishables must be delivered fresh and damage-free."

Caltagirone emphasized that demand for grocery home-delivery is increasing and will continue to grow. "E-grocers must manage and match assets to market growth," he said. "They must ensure that they are ready for an order onslaught once they advertise something. Logistics and marketing have to work hand in glove."

To respond to increasing demand, e-grocers need good people, vehicles, and systems in place, he added. Because they work with computers, online grocers tend to forget that they really are in the distribution business, and that choosing the right people for those distribution functions is the key to success.

"Peapod advertised for shoppers, but they really wanted order pickers," he said. "These pickers may not drive fork trucks, but the work is hard. They may work nights or weekends. Grocers don't get many days off. Pickers must be experts. If they deliver the wrong thing, customers won't order again. Order selectors are the eyes, ears, and nose of consumers."

E-grocers should consider outsourcing order selection, Caltagirone said. "The part I don't think should be outsourced is the final link to customers, and that is drivers," he said. "At Peapod, we call drivers ambassadors. They are the only physical link with customers. Drivers have to make sure that customers" needs are met. They represent us like no one else can."

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