Deja vu, All Over Again

I’m convinced that Internet executives have mastered the art of revisionist history. Leaders in this industry often attempt to rewrite, or simply ignore, a 20-plus-year history of interactive business models, both those that have succeeded and those that have failed. And guess what happens when we ignore history?

In 1988 I joined Prodigy Services Company, working in the online grocery division. Yes, before Peapod, NetGrocer.com, Webvan, and others, this division launched stores in New York (D’Agostino), Chicago (Dominick’s), Denver (King Soopers), St. Louis (Schnucks), Detroit (Great Scott), Atlanta (Kroger), Minneapolis (SUPERVALU), and Washington, DC (Telegrocer). In some regions you could order for delivery or pickup from any one of 50 separate stores.

Along the way there were plenty of adventures, many a product of the times.

We often had to have modems and PCs installed in each store location. Sometimes in the manager’s office. Or the warehouse. Or a broom closet. If we were lucky, the manager at store No. 12 could be trained to download orders. But if he went fishing, we would invariably get a call from store No. 12’s assistant manager, Mary Jo, asking, “Why are there five people here asking for Prodigy grocery orders? Why didn’t you send them to us?!” Thus beginning the adventure of telling her about modems and the need to download the orders — that is, if she knew where to find the Prodigy PC.

Imagine trying to order 50 items over a modem whose speed is 1,200 baud. Now imagine that after an hour of online shopping, just when you’re ready to order the 49th item, your connection is lost. Along with the rest of your order. The save-and-restore feature had yet to be developed.

Databases? We received tapes (yes, the reel-to-reel kind) twice a week with the products and pricing for each grocer. With descriptions such as “1lb w chx brst.” So believe it or not, each tape needed to be edited prior to display so online shoppers could actually understand it. Why these primitive methods? Hey, no commercial Internet. You would have to build a proprietary gateway, which was cost prohibitive for a client that wanted to test the waters.

Along the way we learned some things that are still true today. Here’s where our history lesson applies:

• Grocery typically is a low-margin business — 1.5 to 2 percent. And guess what. It’s not easy to make that business model succeed even when you’ve been doing it for 50 years!
• It takes time to pick and pack a $100 online grocery order for delivery. Even if you skip in-store labor at union wages and do it at your own warehouse, it’s still a cost on top of a low-margin business.
• If you deliver, you have the costs of delivery personnel and transportation. So either the charge gets passed on to the consumer or somehow, someway, you need to make it up elsewhere.
• Will most consumers pay higher prices just for the convenience? No! They want convenience and value. So increasing the prices for online goods in an effort to improve the profit margins will not work.
• Are consumers less discriminating and more forgiving because they can buy online? No! If the fruit is bruised, the broccoli wilted, or the steak too fatty, back it goes. Returned and replaced by someone in a truck who has to make another trip.
• Online grocery shopping in 1988 did not generate the volume of orders needed to overcome the low margins of the business. And it was not for lack of promotion, either. Yes, small groups of loyal shoppers in each region swore allegiance to picking produce online. But en masse, consumers were not ready to take the plunge.

Now, I’m not suggesting that just because a business model hasn’t worked before, it can’t be improved and made successful in the future. We can argue about the merits of Prodigy and the drawbacks of being in a market too early. And yes, some brick-and-mortar operations still dabble in online delivery to augment their core businesses. But take a look at Webvan’s stock price, which is now under $1. It’s suffering the same fate as the other players in the Internet space that are attempting to make online grocery a standalone business.

So exactly what has changed over the last 12 years? Not much as far as online grocery and its business model are concerned.

I can’t tell you how many times I’ve seen business plans that ignore past lessons. (Probably about as many times as I’ve heard new companies say, “Oh, we don’t have any competition!” when asked to compare their products to others’.)

My advice for new ventures is to combine the great enthusiasm that is the hallmark of our business with some of the learning of the past two decades. Then, when history repeats itself, it will mean only good news.