The short-term outlook for online grocers has dimmed considerably, but the long-range outlook remains promising, according to a study released Monday by Jupiter Media Metrix (Nasdaq: JMXI).
Jupiter said it has cut its forecast for online grocery sales for 2001 in half, from US$2 billion to $1 billion, largely due to economic factors and the impaired ability of grocers to expand amid a funding crunch.
Jupiter has also lowered its long-range forecasts for Web grocer sales.
Those reduced predictions show how quickly the online grocery sector has cooled after recording 200 percent growth from 1999 to 2000.
On a Diet
Once marked by rapid expansion, the online grocery industry has become the focus of extensive consolidation.
Even category leaders such as Webvan (Nasdaq: WBVN) and Peapod (Nasdaq: PPOD) have cut workers and departed markets as they strive for profitability in certain geographic areas.
The latest example of contraction occurred last week, when brick-and-click grocer PDQuick.com was acquired by WhyRunOut.com.
The Long Run
Still, Jupiter believes that online grocery sales will rise to $11.3 billion by 2006. The key, Jupiter said, is for grocers to convince producers of consumer packaged goods that the Internet is a viable long-term channel for selling their products.
Those producers “must not forget that [the online grocery channel] still represents a five-year combined annual growth rate in the double digits,” Jupiter senior analyst Ken Cassar said.
“Average growth rate of 64 percent that Jupiter has forecast for the (online) market over the next five years is substantially higher than the growth that the brick-and-mortar grocery industry will see over the same period,” Cassar added.
Jupiter said that grocers which are able to offer themselves as marketing channels to packaged goods makers will have the best shot at thriving over the long term.
Internet Advantages
Jupiter said that consumer goods firms should embrace the Internet as a way to test new products, improvement on existing products and other innovations, such as packing changes.
Web grocers, by using ZIP codes to target customers, can more selectively target desired audiences.
Other improvements needed to help grocers survive include better data exchange between retailers and manufacturers.
Some analysts have questioned the overall future of the online grocery industry, but most agree that those, such as Peapod, who find partners among brick-and-mortar grocers will be the most likely to survive. 
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Since low-margin/rapidly-turned-over groceries are profitably sold in traditional brick-and-mortar stores, and since revenue in the consumer-direct world is driven by the formula *delivery rate x average order size* — please imagine that there’s a contest between the following three scenarios:
A: people shop in stores
B: people shop online and get delivery by appointment — like how Webvan currently delivers
C: people shop online and get sequential delivery to a device like the one at http://www.ideo.com/studies/brivo.htm — which basically is a bigger/more functional mailbox that all delivery agents can use
The first contest is between B and C; but since C makes more deliveries with fewer trucks, it easily wins. And might C even beat A? Well, if A’s stores cost $x and yield revenue of $y; and C’s boxes cost $x+1 yet yield revenue of $y+2, then “yes”. Furthermore, since the cost of C’s boxes is likely to be shared by all delivering merchants, and since the historically low percentage of mail-order vs. traditional retail sales supports the theory that most consumers won’t order in the first place if they can’t be home when their goods are delivered, then C might actually be the undisputed champ. …And by the way, since bigger/more functional mailboxes are essentially outside storage devices, it’s really kind of revealing to consider that the primary function of traditional brick-and-mortar stores is “storage”, anyway.
Sincerely,
David Porter