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 / Summer 2011 / Issue 63(originally published by Booz & Company)


Focus and Scale on the Internet

The clearest example of turning the old model on its head can be found in the grocery industry and the infamous “last mile” terrain that Webvan sought to tackle with the “get big fast” model of scalability and a mass-market focus. (See “The Last Mile to Nowhere: Flaws & Fallacies in Internet Home-Delivery Schemes,” by Tim Laseter, Pat Houston, Anne Chung, Silas Byrne, Martha Turner, and Anand Devendran, s+b, Third Quarter 2000.) Unlike Webvan — or even the largely successful FreshDirect — Retail Relay Inc. seeks to minimize capital investment and avoid the pursuit of scale economies and mass-market consumers by building uniquely local capabilities. Founded in 2007, the company offers online grocery shopping in Charlottesville and Richmond, Va., in partnership with local retailers, farmers, and employers through its website, (Disclosure: I have served as an advisor to Relay since its founding.) The site offers more than 15,000 items in each city from a combined network of roughly 90 local farms and stores, and taps into the food movement popularized by Michael Pollan in the New York Times bestseller The Omnivore’s Dilemma: A Natural History of Four Meals (Penguin Press, 2006). Instead of targeting major metropolitan markets, Relay scales its operations to smaller cities and towns. It can afford to serve these less-dense populations by offering a mix of pickup locations throughout the area rather than seeking to serve all customers through a home delivery model.

Like Zappos and Quidsi, the company does not seek the generic mass-market customer but instead focuses on a particular demographic — in this case, time-strapped “locavores” — that it can serve with a superior business model and turn into loyal customers. Relay views its ties to the local community as its competitive barrier to entry.

The Relay model stands in stark contrast to the failed models of the past as well as the current competition. Amazon also launched an experiment in online grocery, Amazon Fresh, in 2007. Although it is well aware of the challenges faced by Webvan and other online grocers, Amazon cannot ignore groceries, which represent a huge portion of total retail sales, if it expects to be Earth’s biggest store. Doug Herrington, the company’s VP of consumables, told Bloomberg magazine in September 2009, “We have a lot of confidence in the long-term economics. For a significant portion of the population, they’re going to find that the convenience, selection and pricing of online grocery shopping is going to be really compelling.”

Although the thin margins and operational complexity in grocery have constrained Amazon from extending its pilot efforts beyond Seattle and London, no pure-play Internet retailer is better positioned for the challenge of precise, cost-effective delivery. Amazon can leverage its technological and operational expertise in a scale-based model once the market reaches the necessary size. Similarly, online grocer Peapod, founded in 1989, can leverage the existing footprint and scale of its parent, the $39 billion, Netherlands-based global grocer Royal Ahold NV, which operates hundreds of supermarkets in the U.S., including the Stop & Shop and Giant chains.

Execution Matters

Focusing on developing loyal customers and unique, local capabilities does not guarantee success on the Internet. Companies must inevitably fend off the competition by executing their strategies well. In September 2010 — about halfway between its first and second funding rounds in Groupon — Battery Ventures founder Rick Frisbie told the Wall Street Journal, “I’m still not absolutely convinced that Groupon will be the kind of success we hope it will be.” He went on to explain that the company faces immense competition and a potentially indefensible position despite its current dominant market leadership.

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