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Commentary: Stand and deliver

The recent buyout of Net grocer PDQuick by WhyRunOut.com is another step toward the ultimate destination of the online home-delivery market--franchising.

By Kevin Murphy and Geri Spieler, Gartner Analysts

The recent buyout of Net grocer PDQuick by WhyRunOut.com is another step toward the ultimate destination of the online home-delivery market--franchising.

The industry has seen this market run the gamut, from Peapod's start-up that predated the Web to the $1 billion near-flameout of Webvan and the evolution of Kozmo.com from a successful Manhattan business to an overreaching failure doomed by its expansion into unsuitable markets.

See news story:
WhyRunOut acquires Net grocer PDQuick

As with Kozmo.com, PDQuick stumbled not because the business model was unworkable, but because it was not scalable. An online grocery service can be a nice little business in a few densely populated, upscale neighborhoods. However, try to make it into a business big enough to satisfy the ambitions of venture capitalists and greedy MBAs who are building to flip, and the model fails. But someone will make a few, profitable small businesses out of this opportunity.

Grocery and convenience store items are already priced very low, and the mindset of people shopping for those items online has never taken hold. People have become used to shopping for books, clothes and electronics online, but not toothpaste and tomatoes.

The nature of the buyout by WhyRunOut indicates again that Web-based businesses that carry inventory, like PDQuick, have a tough time competing with actual stores. WhyRunOut eliminates the inventory and offers a Web-based errand service. That is the next step toward franchising--the only business model that has not been tried that has a chance of working.

One reason why online home-delivery models are not working is that the average order comes in somewhere between $15 and $25, with either no or minimal delivery costs. The merchant can barely cover salary and overhead costs with those profit margins.

However, an errand service franchise, although still based on the interactive connection, would be centrally controlled, and franchisees would pay for the rights to deliver in a neighborhood. Local ownership of the heavy-lifting end of the business would reduce overhead and cut costs. It would also put the risk of opening in unsuitable neighborhoods on the franchisee, as it's unlikely, for example, that franchisees could be found for some of the locations tried by Kozmo.com and PDQuick.

Consumers who used those services might be the only people in the United States to get the better of venture capitalists over the last couple of years. Imagine, groceries delivered for free--with venture capitalists picking up the delivery tabs. That almost makes you feel sorry for them. Nah.

Entire contents, Copyright ? 2001 Gartner, 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.

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