Online grocery companies have made great progress in creating a new distribution channel. The potential market is huge; after all, everyone eats! Shopping online for groceries is easy. But does it beat shopping at the local supermarket?
Online grocery stores have been around for several years, but they're just now gaining enough customers for us to get an idea of how well they will compete against traditional grocers.
Webvan reported an $87.4 million revenue in the recent quarter, a 47 percent increase, and Peapod reported $22.7 million, which shows that consumers are interested in buying groceries online. Even with losses greater than revenue, the high growth of companies in this market gives hope that these can be sustainable and profitable businesses.
As is true in most markets, there are several consumer motivations that influence which type of store consumers will choose. When neighborhood grocery stores grew into supermarkets, consumers became frustrated that it took so long to find what they wanted. Then small neighborhood convenience stores sprang up to meet the consumer need for a quicker and easier way to buy groceries.
Online grocery stores are trying to provide a new solution to the same challenge: delivering greater convenience to consumers.
The direct mail and radio advertising being used by several online grocery stores shows that the grocers are interested in reaching beyond online shopping enthusiasts to attract traditional grocery shoppers.
In practically every industry, there are different market segments, each with particular consumer motivations, and the grocery market is just the same. This means that online grocers now need to start paying attention to traditional market segments to attract those traditional grocery shoppers.
One of the most important segments of the grocery market is the group of consumers who are heavy buyers of fresh foods, such as produce, meat, deli items, and bakery goods. ACNielsen reported that fresh-food shoppers make more trips to the store and spend significantly more per trip than other segments of the market. This makes fresh-food shoppers an important segment for the online grocers.
Just watching shoppers in the produce section of a grocery store will tell you how careful shoppers can be in selecting fruits and vegetables. Online shopping presents fewer choices in fresh foods. For example, when buying bananas online, shoppers can choose either "ripe" or "green," which just isn't the same as being able to choose exactly the right bananas in the store. This puts an extra challenge on the online grocers to ensure that their customers do not have a bad experience buying these items.
One way to reduce online frustration is to simplify something people already know how to do. If you've bought computer products or books from an online merchant, then it's relatively easy to navigate an online grocery store. But we don't buy groceries the same way we research and select computers and books.
Many of the purchases consumers make at grocery stores are triggered by seeing the products as they walk the aisles. In fact, selecting practically anything on the web is more frustrating than flipping through the pages of a catalog or walking through a store.
At least one online grocer is taking advantage of traditional direct marketing techniques to solve this problem. PDQuick mails a colorful catalog of its grocery items to consumers near its distribution points. Although it's not the same as browsing through the aisles at the grocery store, the company's printed catalog does make it easier to see everything that's available.
Pushing a cart through a store may be easier than learning how to navigate a store's web site, but the online grocery stores have several advantages over their brick-and-mortar competition. For example, HomeGrocer.com (now part of Webvan) has full product labeling, including nutrition data, unit pricing for easy comparisons, and excellent tools for managing shopping lists.
From our experience with HomeGrocer.com, buying groceries online is clearly faster than going to the local store, but only after spending a little time learning how to use the web site.
However, convenience isn't just about saving time. It's also about making it easy, which means reducing the anxiety and frustration of learning how to save time.
As online grocers try different marketing and distribution techniques, other online marketers will have an opportunity to see which techniques lead to success. Grocery shopping is an activity that is done frequently by nearly every household, which gives us an opportunity to track consumer adoption of online shopping at an accelerated pace. Although the next few years will be a challenge for online grocers, the rest of the online world will have an opportunity to watch and learn how to serve online consumers.
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Cliff Allen is President of Coravue, a company that provides content management software and application service provider (ASP) hosting for Web and email. Allen is coauthor of three books about Internet marketing, including the "One-to-One Web Marketing, Second Edition" (John Wiley & Sons, 2001).