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DUVAL Washington State University (USA) and Asian Institute of Technology (Thailand) Email :

ABSTRACT E-grocers are making food grocery shopping more convenient and less time-consuming by offering online ordering, and home delivery services. Information has been gathered through company websites and informal phone calls to online grocery store employees and managers. Five different e-grocery business models have been identified: the integrated model, the thirdparty shipper model, the delivery-only model, the drop-shipping model, and the multi-channel model. The five models are compared and advantages and disadvantages of each model are presented. INTRODUCTION The online grocery industry in the U.S. accounts for about 0.55% of the $435 billion in total U.S. grocery sales, and has a following of about 3.4 million American consumers according to the American Institute of Food Distribution (, 2000). Five e-grocery business models have been identified during the course of this study: the integrated model, the third-party shipper model, the delivery-only model, the drop-shipping model, and the multichannel model. The five models are compared and advantages and disadvantages of each model are discussed. All online food retailers have one common goal: to provide customers with the ability to order food and other grocery products via the Internet for home delivery. Grocers recognize that the principal competitive factors that affect their business are product selection, product quality, customer service, price and convenience. For traditional grocers, customer convenience is largely a function of location and hours of operation. For online grocers, it is primarily determined by ease of use of the website and availability of delivery times. In addition, six specific risk factors can prevent widespread customer acceptance1: Prolonged delivery time compared to the immediate receipt of products at a traditional store. Perceptions that online delivery services are premium services and therefore may be more expensive than traditional grocery stores. Customers desire to see and touch products, particularly fresh produce, prior to purchase. Product selection that is less varied than customers desire. Perceived or actual lack of security or privacy of online transactions. Difficulties in making accurate and timely deliveries to customers.

These risk factors were included in prospectus for its March 15, 2000 initial public offerings. 427

These risk factors apply to all online retailers, but to differing degrees because the companies differ in the way they are implementing the idea of capturing the convenience market for online food and grocery products. This can be seen by examining Table 1, which shows that some e-grocers specialize in dry foods while some others offer dry foods and produce as well as fresh prepared meals; some accept coupons like traditional retail stores and have local service areas while others serve the national and international markets. The number of items offered online varies from 1,000 to over 20,000 depending on the e-grocers. Similarly, some e-grocers deliver online orders in less than one hour after the order has been placed while others take up to five days. These differences in product and service offerings are explained by e-grocers differences in their underlying organizational structures and business models, which we summarize below. THE INTEGRATED MODEL The integrated e-grocers business model involves the delivery of most everything your local supermarket offers (Peapod, 2000). Customers order and often pay for groceries online. The order is then typically processed and shipped from a highly-automated warehouse located near the densely populated urban area that the e-grocer serves. The order is delivered to the customers home by the e-grocers own fleet of refrigerated trucks. Online prices are competitive with traditional supermarket prices, and delivery charges are low. This business model requires strong financial support to build and stock the warehouses and purchase a fleet of delivery trucks. It has been implemented by leading U.S. e-grocers such as Peapod, Webvan and Homegrocer, who build 330,000 square-foot warehouses about 20 miles from downtown areas to service the same area as 18 supermarkets (Carlton, 2000). Terry Drayton, co-founder of, argues that the money saved by building and running distribution centers in low-cost real estate areas allows his company to develop a (long-term) cost advantage over the traditional food retailers. However, these companies generally cannot provide same-day delivery for orders placed after 11 a.m. This model is characterized by high fixed costs that require e-grocers to build quickly a large customer base through expensive promotion and advertising programs. Indeed, Webvan spends between $140 and $210 luring each customer. In addition, packaging and delivery can cost up to $40 an order, and customers ordering less than $100 worth of groceries at a time are not profitable. This may present a real challenge to online retailers, since the average purchase in a traditional grocery store is less than $30 (Vickers, 2000). THE THIRD-PARTY SHIPPER MODEL One of the most complicated and expensive tasks a grocer performs under the integrated model is that of shipping and delivering. Many e-grocers and e-commerce companies, such as, prefer to rely on the services of specialized shipping companies such as UPS and FedEx. A company adopting the third-party shipper model loses an opportunity to make person-to-person contact with the customer, which may ultimately affect loyalty. The companies also cannot replicate the fresh or frozen product offerings of a local supermarket. However, these companies can offer a larger variety of dry goods than typical supermarkets, a strategy successfully adopted by which stocks and ship 9,700 nonperishable items via FedEx. In addition, they can deliver products nationwide or even worldwide rather than being restricted to local customers as in the previous model.


An extension of the third-party shipper model is the third-party logistic (3PL) model, where a company relies on a 3PL provider for warehousing, shipping and delivering. Contracting with a 3PL provider can be a very effective solution for fast growing online companies that lack the expertise or the capital necessary to own and manage an efficient warehousing operation (Maloney, 2000). THE DROP-SHIPPING MODEL An online food retailer adopting a drop-shipping model is little more than a broker maintaining a website. Customers order through the e-grocer website, but the e-grocer does not generally own or store the products that he/she sells. All orders are automatically forwarded to manufacturer and wholesaler (partners) who take care of shipping the requested product to the customer. The drop-shipping model is a popular e-tailing business model because of its small start-up capital and human resources requirements. Many specialty food e-tailers, in particular, have adopted this model to offer high-margin specialty and premium food products that are hard to find in the typical food and grocery retail stores and to develop virtual niche markets. For example, has implemented this model and is only responsible for managing the website and forwarding email and other electronic orders to manufacturers. Because its customers are more concerned with product availability and quality than with price, has remained profitable regardless of the hefty fees charged by wholesalers and manufacturers to handle small size orders. In addition, its drop-shipping model allows it flexibility in terms of selecting and changing products to be sold on the site. However, the image of the company is ultimately in the hands of the supplier-shipper who may or may not be consistent in delivering products and services ordered through the website. Because success ultimately depends on consumer satisfaction and loyalty, the drop-shipping model requires that the online grocer adequately monitor the performance of its drop-shipper and develop contingency plans for replacement of under-performing partners. THE DELIVERY-ONLY MODEL Some e-grocers have adopted a delivery-only online model, where the company owns or manages only the website and the delivery system, and where the food and other products are collected from existing supermarket stores. For example, buys the groceries ordered by its online customers in existing Rosauers supermarkets and delivers them in exchange for a $6 to $10 delivery fee and a percentage of the total cost of the groceries (3%). They accept coupons like any local supermarkets and customers know what to expect since the company gets the products at the place they usually shop off-line. The model offers at least the same level of convenience to customers as the integrated model. However, the model simply adds online shopping, handling and delivery costs to the customers grocery bill. Hence, Delivery-only e-grocers are not able to compete on price. Also, they are not able to differentiate their product offering from local supermarkets as opposed to integrated egrocers who can offer different products from their proprietary warehouses. They may be able to compete on convenience, by offering additional delivery services such as delivery from local restaurants, and by delivering faster than the integrated e-grocers who often offer only next-day delivery.


Because of the decreasing importance of prices relative to quality and convenience for the U.S. consumers (Jones, 2000), this model may be an affordable way to build an online brand name, secure loyal customers and rapidly expand nationwide. Also, this model seems very appropriate in rural areas and small and medium size metropolitan areas where the construction of new warehouse facilities cannot be justified. THE MULTI-CHANNEL MODEL The multi-channel model is characterized by the sale of groceries both online and offline, which is typical of brick-and-mortar retailers who want to secure a share of the online retail market and increase offline customers satisfaction by offering them a choice of online ordering and home delivery services. As of now, few traditional U.S. grocery retailers have yet developed a full-scale online distribution channel. Indeed, some managers are afraid that the success of the new online channel may significantly reduce sales in their brick-and-mortar stores channel conflicts problem. The most successful multi-channel grocery company is Tesco PLC, a British supermarket chain with $30 billion in sales (Beck, 2000). Tesco assembles online orders placed on from its existing stores, cutting delivery times and delaying investments in huge Webvan-like warehouses until a stable online customer-base has been secured. already covers 90% of the British territory and holds 80% of the e-grocery market with 500,000 registered customers. The company will not build specialized distribution facilities until online sales reach $2.2 billion. Online sales for the year 2000 are forecast at $300 millions (Dawley and Ferguson, 2000). Note that the multiple-channel approach is also appealing for smaller food retail chains that can develop consortiums and cooperatives to develop and manage a joint e-commerce infrastructure allowing customers throughout a city or throughout the United States to order via a unique website. In fact, the Internet may be a key ingredient in the survival of small food retail and independent grocery stores, providing these companies are willing to cooperate with each other. CONCLUSION This paper described and discussed five broad business models applicable to e-grocery and etailing. These business models are not exclusive of each other and can be implemented jointly or over time. Success or failure of each company will likely depend on the details of implementation of each model. For example, broadly fits in the integrated business model category. However, as opposed to Webvan, with its giant automated distribution centers, Pinkdot stores goods in small warehouses located very close to its customers, allowing it to promise delivery only 30 minutes after the order has been placed while Webvan can only offer next morning in most cases. Louise Curcio, Pinkdot Vice-president, thinks brick-and-mortar grocery companies have an advantage. Their success will depend on managements commitment to change and thier ability to scale activities based on demand for product and services. Internet grocery industry winners will differentiate themselves by developing unique selling propositions and focusing on customer satisfaction, technology, and profitability.


Table 1 - Product and Services of Selected Online Food Retailers and Grocers Albertson' Thedeliveryb TheFoodStor m * Dry/Fresh 13,000 Web/Phone/Fax Yes Dry/Fresh 10,000 20,000 Web Yes Web/Phone/Fax Yes (sandwiches and salads) Yes No Yes Los-Angeles & Orange county No Self-managed Self-managed Yes No / on Spokane Area (WA) Worldwide Yes No Yes National of UK) No Self-managed (90% Web/Phone/Fax Dry/Fresh Dry/Fresh Dry/Fresh Mostly Dry, Fine foods less than 1,000


Dry only

Food Products Offered Number of Items offered 7,000 to 20,000 depending on location Web Same as in Rosauers Supermarkets* Web/Phone na

Adjusted on weekly basis*




Yes if it is in Seattle Area na





Order Methods Available Fresh Prepared Meals Availability Liquor/Tobacc o Availability Service Area San Francisco and 7 US urban areas Yes Self Contracted Standard bags and boxes Within minutes Waived if the value of amount ordered is more than $25 2.99$ per order $50 No 30 Insulated container with ice Within 2 hours /

State of Texas & Seattle area


Coupons Accepted



San Francisco, Seattle and 10 other US urban No Self-managed

Delivery Operation



Orders delivered in Time delivery Variable


Insulated container ice Next day


Standard bags and boxes

Contracted Merchant managed Depending Merchant

Standard bags and boxes

Within 4 business days

Insulated container with ice Within 4 business days

4 days
5 pounds for all order sizes

Insulated container ice Next day Depending on merchants, 4-5 days Variable


Delivery Fee

$5.95 for orders less than $60 and nothing for larger orders


$9.95 for orders under $75

Phone/Fax Fee


$5.95 for orders below $60 and up to $120 for orders above $1200 No No

No No No

No No

No Minimum order size *Up to 25,000 items



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