Online Grocery Biz Still a War of Attrition

Isn’t it great to see a new round of online grocery battles breaking out? No one is more hopeful than I that the outcome will be different this time. But is that just wishful thinking?

The key idea is supposed to be that this time it’s different. The brick-and-mortar grocery chains expanding up and down the West Coast have a new model — one that relies on existing stores rather than on expensive distribution networks built from scratch.

Sounds good. But fast-forward a bit, and it still appears that this war will end like a late-night poker game. No one has a winning hand, so whoever is most willing to keep upping the ante by putting more money on the table will walk away victorious.

Proof Pudding

The new online grocery services operated by Safeway and Albertson’s, among others, are still fairly new and therefore difficult to judge in terms of profitability. But Royal Ahold and its Peapod subsidiary provide a foundation on which to build an argument.

Ahold’s recent earnings announcement was all good news, except for the Peapod part of the picture. It seems that Peapod lost US$32.2 million in 2001, leading Ahold to make statements like “excluding Peapod’s loss” to show that its core business is doing fine.

In fact, the company’s CEO gave a speech in which he noted that “outside of Peapod, we have been able to achieve increasing operating margins.”

In other words: Thanks a lot, Peapod.

Now, Ahold may need more time to integrate Peapod. It is promoting the service heavily in some areas, and no doubt 2002 will be a better year on that front. But can Ahold push Peapod all the way to profitability?

Canned Response

Tesco, the British company working with Safeway on its online service, has turned a profit in Great Britain, so a precedent exists. But the United States isn’t England, and it’s going to take some tweaking to get the system right.

How much time will it take to perfect the tweaks? No one is willing to make that kind of prediction anymore. After all, the way forecasters saw it a few years ago, we were all supposed to have everything we needed delivered to our doors by now.

But time is the important ingredient. I’m sure the Webvans of the world still believe that if they could have bought themselves another two or three years, things would have been different.

Now, it’s happening all over again: The company that can hang on and weather initial losses, spend money on promotion and remain confident about the long term will win.

Fresh Produce

And the amount of hanging on that will be required is directly tied to whether the new breed of online grocers moved too quickly. They no doubt sensed a vacuum created by the Webvan flameout and wanted to chase Webvan’s wired customers. But is it possible that they miscalculated as well?

Ahold’s terse Peapod statements seem to indicate that grocery giants aren’t used to having Internet divisions dragging down their margins. Like Ahold, Safeway and Albertson’s are not likely to put up with that for long.

Ringing It Up

The prevailing wisdom is that Internet grocers are safe when under the wings of brick-and-mortar grocery stores. I say they’re in danger of being pushed out of the nest and told to learn to fly before they crash.

The chicken of online grocery service came before the egg of consumer demand once before. Let’s hope it’s not happening all over again.

What do you think? Let’s talk about it.