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Commentary: Cost of delivering an apple can spoil it for Net grocers

The key for online grocers is to keep prices close to those of brick-based grocery stores while offering greater convenience and delivering efficiently.

By Geri Spieler and Kevin Murphy, Gartner Analysts

In the short term, Gartner believes that the prognosis for the combined company called Webvan Group would be good for a number of reasons.

First and most obviously, the companies would complement each other. Webvan would gain access to HomeGrocer.com's client base and its geographic reach, which would help Webvan with its expansion efforts. By merging with Webvan, HomeGrocer, which incurred a loss of $84 million for the fiscal year ended Jan. 1, could stay in the market and benefit from Webvan's more efficient fulfillment and distribution system.

To succeed in the online

See news story:
Webvan bags HomeGrocer for $1.2 billion
grocery game, a player's order-fulfillment process must be extremely efficient (that is, quick and inexpensive) and deliver quality perishable and nonperishable items to consumers quickly and at a cost that isn't outrageously higher than a trip to the local supermarket.

Webvan's $700 million war chest and its partnership with Bechtel Group have allowed the online grocer to build a fully automated fulfillment center that enables the company to employ one-half of the number of workers needed to handle a similar volume at grocery stores. This highly technical and efficient fulfillment and distribution system reduces the cost of fulfilling the order, which is one of the major challenges with the online grocer business model.

Webvan competitors will be hard-pressed to catch up on the automation front, because picking and packing fresh food items and brands is a process that is not easily automated. Webvan's business model gives it a big edge over online grocers attempting to fulfill orders manually, particularly when it comes to grocery items and other low-margin consumer goods.

Webvan Group also would likely thrive because of its penetration of other markets outside of groceries. What Webvan has done and what HomeGrocer was attempting to do is expand beyond the idea of an online grocery store. Webvan also competes against vendors specializing in quick and high-end delivery, such as Amazon.com, Kozmo.com and other online merchants that sell nonessential items, such as books, CDs and videos. Gartner views this "I-want-it-and-I-want-it-now" market as a small one, but one that is growing.

Dallas-based GroceryWorks, which just received a large investment from Safeway, poses an immediate competitive threat to California-based Webvan. Not only does the investment give GroceryWorks the infrastructure support of bricks in addition to its own clicks, but GroceryWorks plans to expand into Northern California and compete directly with Webvan.

U.K.-based Tesco represents the potential proverbial 800-pound gorilla if the supermarket chain should choose to bring its online model to the U.S. market. Tesco, an excellent example of the marriage of brick-and-click business models, has 821 stores in Great Britain and Ireland and plans to add 300 more stores in Ireland. Tesco's efficient business model uses its established network of grocery stores in strategic geographic locations throughout the United Kingdom to fulfill online orders.

In the longer term, the true competitors of online grocery stores will be the grocery market chains, such as Safeway and Stop & Shop. As traditional grocery stores go online in an attempt to dominate that channel as well, the plight of the purely Web-based grocery store becomes less certain.

The extremely labor-intensive business model is the problem. What will keep so-called online grocers alive is the ability to reduce delivery costs, which can significantly affect profitability.

In addition to keeping costs low, online grocers should target high-end and time-starved consumers who are willing and able to take advantage of fast and convenient services. The cost of fulfilling the order and delivering the last mile is the competitive formula for this market. Consumers are not going to pay a lot more to shop for groceries online, especially when they can't touch and examine the fruit first.

The overhead is what will and did eat some online grocers alive--Peapod, for example. Although Peapod received a reprieve in the form of a $73 million investment from Royal Ahold, the future for this Web-based grocer remains uncertain.

The key for online grocers is to keep prices close to those of brick-based grocery stores while offering greater convenience and delivering efficiently.

(For related commentary on how e-commerce tools may soon identify, direct and fulfill customer needs, see TechRepublic.com--free registration required.)

Entire contents, Copyright © 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.