Peapod provides online grocery shopping in eight metro areas in US. Its online shopping website is backed by a powerful distributor network consisting of tie-ups with local retail outlets and recently its own distribution warehouses. Members pay order and delivery fees for home delivery. The company faces a financial crunch and is mounting huge losses despite its growth due to very high order fulfillment costs. Its chief competitors are local grocers who sell at a lower rate than Peapod, and other upcoming online grocers like netgrocer.com, homegrocer, webvan, etc.
Retail Grocery Industry Analysis
The US retail grocery industry is $700bil. including groceries, health and beauty items and beverages. Intense price competition has lead to market consolidation. No single player holds more than 10% market share. Supermarkets average 15 to 20% ROI by low cost direct purchases and sophisticated cost-effective supply chains and are an established brand. Entry to online grocery retailing by existing players was viewed as either:
a) Cannibalizing its own local brick-and-mortar stores OR
b) Additional sales channel
The industry is highly price sensitive.
Presently the industry growth has slowed down to 3.4% due to business moving to wholesale clubs and drug stores.
The Online Grocery Segment
Essentially its not a new emerging industry but an emerging sales channel for the grocery industry. The online grocery segment seeks to sell groceries to the Internet savvy consumer online. It's a highly competitive industry in its infancy. Market research predicts a very high growth rate for this industry. This disintermediation and self service model decreases the costs of setting up large retail outlets at various locations.
The software and equipment costs in '99 by Peapod are 3,500 out of the total operating costs of 102,000 indicating only approx. 3.5% of the operating costs went in maintaining the website. Thus the...