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 / First Quarter 2000 / Issue 18(originally published by Booz & Company)


To Hal Varian, the Price Is Always Right

"This is a very good time," says Hal Varian, "to be an economist with lots of ideas."

From Homeruns to Webvan to Peapod

by Victoria Griffith

With the buzz about the Web at a fever pitch, it is hard to believe that bricks-and- mortar companies could find themselves caught in a replay of the scenario. Yet the David and Goliath story may be poised to repeat itself in online grocery delivery.

Web grocery delivery would seem to be a promising Internet business. After all, some 41 percent of Americans say they hate supermarket shopping, according to a 1996 AT&T Corporation e-commerce study. Moreover, it's something people do once or twice a week, on average. Hence the competition, with startups and existing grocers battling for online market share. The very different strategies of companies like Webvan, Peapod, and Homeruns show the sector has not yet converged on a single formula.

For the most part, large grocery chains remain outside the fray. Gary Rhodes, spokesman for Cincinnati, Ohio-based Kroger Company, has difficulty imagining how online grocery delivery might work. "What happens if you get a bad apple?" he asks. "What happens if you're not there for the delivery? Does the guy have to come back? And what if the food is spoiled by then?"

Delivery and service are indeed the key hurdles for Web grocers. Most have committed to building their own warehouses and distribution networks to insure customers get the quality goods they want. Inc. and the Hannaford Brothers Company's Homeruns service, both operating in the Boston area, are also looking to expand nationally using their own distribution warehouses. And Peapod Inc., an early entrant, has re-thought its original formula of partnering with local supermarkets. "We're operating warehouses in San Francisco, and plan to move the rest of our business to that model," says Dan Rabinowitz, chief financial officer of Peapod. The stunning stock- market debut of the Webvan Group - whose initial public offering in November 1999 yielded the company a market capitalization of about $8 billion - shows that investors like this model. Webvan plans to use most of the I.P.O. proceeds to create a vast network of automated warehouses to facilitate distribution of groceries and supermarket products.

Innovative solutions to the logistical challenges faced by Web grocers are illustrated by the Boston-area and Homeruns services. The two companies, taking a cue from courier companies like the Federal Express Corporation and the United Parcel Service of America Inc., have invested heavily in good service people to make sure the customer gets as few bad apples as possible. Homeruns, for example, pays its delivery folk starting wages of $13.50 per hour.

Yet the differences between the companies are immediately noticeable. Homeruns believes the highest profits lie in the city. Its average order size is over $100, and its sales are at high margins. At the same time, the group's warehouses are located in the suburbs, so it doesn't pay high rents. "We've been shocked at the demand in the city for items like free-range chicken, which is out of all proportion to the demand we've seen in our suburban (physical stores)," says Alison Berglund, vice president of marketing and sales. These urban customers select a two-hour window during which they'll be home to receive delivery.

By contrast, concentrates on suburban deliveries, which it says saves it money. The company stocks refrigerators that its clients have placed in their garages; personnel never enter the house, and their customers need not be in when the truck pulls up.

Both companies have achieved real success. Some 8,000 customers use Homeruns on a regular basis in the Boston area alone, while has a 10 percent market share of total grocery sales in many of the suburbs where it does business.

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