Is Online Grocery Ordering a Fresh Idea That Will Grow Profits?

Online grocery shopping began heating up like a pot of boiling soup in late 2016. With the recent acquisition of Whole Foods by Amazon.com, it seems everyone has an opinion on the long-term viability of digital groceries. Is it a new concept? No, but it certainly seems its time has finally come.

It’s hard to deny the consumer appeal of online grocery ordering, store pick up, and home or office delivery. Many customers view modern-day hunting and gathering of food and basic household supplies as a mundane, time-gobbling chore. It’s only logical that using technology to nearly eliminate grocery store frustrations and take back some of our precious finite time is appealing to many.

While countless recent articles would have you believe this is a new concept, a quick look back into recent history reveals that isn't true. Tesco, our friends across the pond, launched Tesco Direct in 1997 on a CDROM-based ordering service and launched tesco.com in 2000. Still fighting for its share of Britain’s $10 billion online food market, in early June Tesco launched a new service in central London available via its Tesco Now app which allows consumers to select from over 1,000 grocery products with a delivery promise by moped within 60 minutes.

As the executive in charge of the front-end website, online merchandising and digital marketing for the first-ever online grocery service company GroceryWorks.com in the Dallas-Fort Worth area from 1999 to 2001, I have a lot of familiarity with this business. Visionary founder Kelby Hagar gathered key food and retail industry leaders around him to develop and run the business. He even enlisted famous artist Joost Elffers to humanize the food in unique, memorable marketing that had everyone around the city buzzing. I can share that acceptance of the customer proposition was never in question — we had so many customers, we could never keep up.

Two other U.S. online pioneer companies in the grocery delivery space also date back to the late ’90s when e-commerce was just gaining a mass foothold. The three big grocery forces of the time were GroceryWorks.com, Webvan.com and Peapod.com. We duked it out in a consumer land grab in cities such as San Francisco, Dallas and Chicago. These entrepreneurial models were far ahead of the technology and availability of the consumer data of the time.

Both GroceryWorks and Webvan approached the model by building large, complicated, multitemperature warehouse operations that needed to be certified for food storage, pest free, and able to pick and pack orders within 24 hours. Then they coupled this with complex neighborhood delivery models using a fleet of climate-controlled trucks that attempted to deliver the full gamut of products ranging from fresh cold meat and dairy, fragile flowers, frozen ice cream, and 50 lb. bags of dog food. At GroceryWorks, we hired off-duty firemen to lug those heavy cases of soda and dog food right into your garage. Unfortunately, the real kink in the armor wasn't the website, the food or the service — it was the delivery logistics, or what’s known as the last mile. It only took a few missed delivery windows within a neighborhood and the whole delivery schedule was upended, bearing heavily on profits. One by one, these early models were mostly shelved, along with the big idea, until technology and data could evolve.

GroceryWorks was eventually acquired by the large grocery retailer Safeway and the online business became Safeway Direct, which is presently a pickup service. The consumer appetite for grocery delivery remains unsatiated due to the convenience and time-savings factors. The greatest challenges then and now for the retailer to make a profit will be based on the complex logistics of delivering on time to the customer, maximizing delivery neighborhoods for economies of scale, and the challenges of delivering all the various food types at one time, such as frozen ice cream bars; fresh, cold milk; temperature-sensitive produce; fragile eggs; heavy cases of soda; and bulky toilet paper.

Fast-forward more than 15 years and technology, data mining and logistics have caught up, and now make online grocery shopping a much more sustainable business model. The latest online grocery-ordering models are convenient, and some would even say fun. Initially with its Amazon Fresh, the company states an order placed in the morning can be delivered the same evening. For the busy working mom with kids in tow, who can’t bear to traverse the grocery aisles on the way home from work, this seems a stress-free, valuable alternative. Or for the weary business traveler returning from a week on the road, fresh groceries delivered the day of return would be a welcome sight.

Grocery retailers that have large, well-developed customer bases and loyalty programs would likely be best to develop their own programs, particularly because the profit margins in groceries are already traditionally slim. Since the grocers already have the products and understand the complexities, the cost to partner with Amazon would likely erode potential profit margins. Kroger has launched its own ClickList service in the Dallas-Fort Worth area, which is order online, pick up curbside. Kroger has just begun heavily marketing the service. It will likely use this period to test the order volume potential and desire in the Dallas-Fort Worth market. In the Dallas-Fort Worth market, Kroger has many stores, so it can use Uber or other networks similar to pizza delivery.

Amazon has a strong reputation for delivering fast and in the promised time frame. Paying attention to and managing the early customer reviews, successes and challenges provides continual learning. Amazon has been aggressively testing new business models to take advantage of the logistics and delivery networks it has been investing in. With local warehouses carrying more than 40,000 grocery items presently totaling about 3 million square feet that are strategically placed throughout major metropolitan areas, adding new categories of merchandise will be the logical next step for Amazon.

The recent acquisition of Whole Foods — and its physical stores — is smart for Amazon. The retailer essentially purchased 1 million square feet of food warehouse space along with 430 mini-warehouses masquerading as stores, which are completely set up for store pickup or, more likely, a multimile radius for neighborhood delivery, not unlike our GroceryWorks model. (Not to mention the deep employee operational knowledge within the grocery space.) In the event the attempted delivery fails, the risk factor is lowered, as product can simply be returned to the store and restocked immediately. It’s a perfect merging of online and physical environments. Back in the GroceryWorks model, we recognized the segment of consumers who wanted a human to hand-select their produce or meat, just as they would. To solve this, we enlisted the main restaurant suppliers in the city to provide only the best. Whole Foods, similarly, has already started down this same path, testing in their New York and Philadelphia stores a specialty produce touchscreen kiosk named Baldor Forager where specialty items only available to chefs and foodservice can be ordered.

Will this not-so-new idea finally make traditional grocers go away? Just like the early predictions that online shopping would kill brick-and-mortar retailers, the new digital grocer and online ordering models won't kill grocery stores; they will only serve to improve the customer experience and most likely drive customer loyalty.

Linda Mihalick is the senior director of the Global Digital Retailing Research Center at the University of North Texas.