Peapod who? Online grocer shows Amazon, Walmart how it's done

Amazon and Walmart may be staring each other down as they enter the grocery delivery business, but they should really be keeping an eye on a little-known company named Peapod.

The Illinois-based online grocer, which has been around for more than 20 years, is growing steadily and now serves residents in pockets of the Midwest and East Coast. It's now considered the top provider of online grocery deliveries, fighting off competitors as they emerge, according to Harry Balzer, chief food industry analyst for The NPD Group.

"They certainly have fended off a number of competitors in this space, and they have been the survivor," he said.

Looking at Peapod's challenges and successes could be a window into how Amazon and Walmart, companies with massive resources, could evolve their services.

Both retail giants are testing services in select cities -- Walmart with Walmart-To-Go in the San Francisco Bay Area and Denver, and AmazonFresh in Seattle and Los Angeles.

If they succeed, they could change the way we shop for food. Groceries in general is not an easy business. The margins are low, the products are perishable, and the storing and transportation details can be complex. But the potential rewards are worth reaping.

There are more than 115 million households in the US, according to Balzer, and everybody needs to eat. Even a small piece of the grocery business means billions of dollars for companies, he said.

The market is heating up. Peapod ranks No. 55 in the top 500 Internet retail properties for 2013. But the company faces big competition. Amazon is the Internet's No. 1 retailer, and Walmart isn't far behind at No. 4. Both have enormous resources to tackle the challenges of storing produce and delivering them in a timely manner. In fact, Walmart is already the top provider of food -- it just hasn't cracked the online sales nut yet.

"Lots of people are looking at this business," said Peapod Chief Operating Officer Mike Brennan. "We're the biggest, but that hasn't gone unnoticed. There are more companies looking into this space. We have a persistent paranoia. We have to make sure we're innovating and developing new ideas and try to push forward."

The food industry has had this type of competition before. Dot-com startup Webvan, which was founded after Peapod, flamed out after several years because it grew too fast and customers found the ordering experience too slow during the days of AOL dial-up. But the initial threat was enough to spark panic in the 1990s among traditional grocers like Krogers and Safeway.

"It was a very hot button in the mid to late '90s...I don't think you had a food manufacturer who didn't have a group that was looking into this, to understand this and what kind of impact it would have on them," Balzer said.

There are a lot of challenges associated with online grocery delivery, like the cost of building warehouses and the rising price of gas and transportation. Companies will have to figure out how to make deliveries affordable if they want consumers to bite.

Brennan said Peapod, which was founded in 1989, has the benefit of being the oldest online grocer, so the company has had more time to understand the ups and downs of the business.

This includes the obstacles around the delivery, particularly during the winter when weather is harsh, and the storage of food before it goes out.

"It's not like what you think of when you think of a grocery store. There, there's a lot of product at room temperature," he said. "Our products are kept at a chilled room at a chilled temperature, so it can last longer. It's not touched by five shoppers and three stock people before you buy it."

Peapod has found success on mobile by letting customers create shopping lists from their smartphones and order groceries with a tap of a button. Walmart has yet to deliver a standalone Walmart-To-Go app, but AmazonFresh, like Peapod, is available through both iOS and Android.

It seems mobile will continue to play a big role in grocery shopping. Brennan said 30 percent of Peapod's orders come from mobile. The service's main selling point is that it's a huge time saver for busy parents and households. Consumers can add to their lists during the week before making a big purchase, and with a smartphone, it's convenient to add to the list once you've run low on something, like milk.

The company's next focus will be on adding nutritional filters to its process so consumers can more easily find gluten-free or peanut-free products.

Balzer said online grocery deliveries could change grocery stores dramatically, but he doesn't think they will ever eliminate the need for a store.

Consumers will always want to "squeeze the melons, so to speak," and not leave the decisions on quality to a stranger, Balzer said.

That sounds like a challenge to the likes of Amazon and Walmart, which are more invested than ever in having Americans buy everything, including their food, from them.