Management Information Systems, 13TH ED.
MANAGING THE DIGITAL FIRM
Kenneth C. Laudon ● Jane P. Laudon
Learning Track 1: E-commerce Challenges: The Story of Online
Groceries
What could be easier than ordering all your groceries online and having them delivered to your
doorstep at a time you choose? No more driving to the store, wasting gas and time, pushing carts
mated 12.5 million online shoppers will generate $5.9 billion in online grocery sales in the United
States at over 1200 online grocers.
Online grocery sales have grown 75% since 2006, and are expected to growata around 9% annual
through 2016 to an estimated $9 billion. e United Kingdom has the largest online grocery
market at around $10 billion in sales. In fact, online grocery sales are growing at nearly three
Webvan amed out in July 2001 after having spent almost $1 billion trying to build the Web’s
largest online grocery store based on huge distribution warehouses in seven U.S. cities, most
pundits and investors thought the entire online grocery business model was either a failure or a
fraud. Facing the costs of building an entirely new distribution system of warehouses and truck
eets to compete with existing grocery businesses, not to mention the expense of marketing,
Chapter 10: E-Commerce: Digital Markets, Digital Goods
Chapter 10 Learning Track 1 2
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comfortable ordering “high-touch” goods online in 2001. Today, the culture of online purchasing
has changed.
Despite Webvan’s failure, the pundits have proven to be wrong again. Online grocery is alive, well,
growing rapidly, but with different aspirations and business models. Pundits did not count on
Manhattan’s FreshDirect (and hundreds of other local niche online grocers) or the ability of tradi-
tional grocery chains to move into the ashes of the online grocery business to create solid, profit–
able businesses. ese firms are learning how to exploit this potential market with profitable busi-
ness models.
e largest online players today are traditional firms such as California’s huge Safeway Stores,
2016. While Peapod is traditionally known for operating a ‘best–in-class’ home delivery service,
the retailer has evolved its model to include QR-Code driven mobile shopping walls, and grocery
pick-up – using Chicagoland as its testing ground. Something must be working. Peapod announced
that it would launch more than 100 virtual grocery stores at commuter rail stations in Boston,
Connecticut, New York, New Jersey, Philadelphia, Washington, D.C. and Chicago. In a virtual
grocery store, pictures of products are posted on a large public LCD display with QR codes under–
neath. Shoppers use their smartphones to scan the QR codes of the items they want. e products
in their virtual shopping carts are delivered right to the customers’ homes at their selected delivery
time. No need to waste time on the Internet or, worst case, actually go to a physical store.
In the United States, Safeway’s wholly owned subsidiary GroceryWorks.com provides online
shopping and delivery services for Safeway stores in California, Oregon, Washington, Arizona,
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At Royal Ahold’s Peapod.com, which serves its Stop & Shop and Giant Food store customers in 24
regional markets, shoppers can view both their online ordering history and their oine purchas–
es at nearby stores during the previous four months. Peapod is the largest online grocery in the
United States. Its Web site also features a shopping list that displays items in the order they can
be found at the customer’s local store. Customers have the option of ordering online and picking
it up at the store, or printing the shopping list and taking it to the store. e average online order
is about $168, much larger than in traditional grocery stores. For these traditional supermarket
chains, the value being offered to customers is convenience and time savings at prices only margin-
ally higher than self-shopping.
How can FreshDirect succeed at these prices? One answer is that FreshDirect concentrates on very
fresh perishable foods and stays away from low–margin dry goods. For instance, the FreshDirect
Web site features around 3,000 perishables and 3,000 packaged goods compared to the typical
25,000 packaged goods and 2,200 perishable items that a typical grocery store offers. To do so,
FreshDirect created the most modern automated perishable food processing plant in the United
States. While most of the factory is kept at 36 degrees to ensure freshness and quality control,
dedicated areas vary from a low of minus 25 degrees for frozen foods to a high of 62 degrees in
one of its specially designed fruit and vegetable rooms. At the factory, FreshDirect butchers meat
from whole carcasses, makes its own sausage, cuts up its own fish, grinds coffee, bakes bread and
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FreshDirect was profitable for the first time in 2008. e key to profitability has been improving
its execution of the initial concept, and a rededication to customer service, just plain listening to
customers. In recent years, FreshDirect has introduced the following “customer centric” ideas:
◆ Produce: Employed experts to rate the freshness of all produce and set prices accordingly.
is reduces customer concerns about not being able to feel the product.
◆ Packaging: Eliminated the use of foam, and reduced the number of cardboard boxes by 1.5
million in response to customer complaints.
◆ Order pattern analysis: Instituted a system to reminds customers of their favorite products
and e-mails them when the system thinks they might be running out.
With these features and direct mail campaigns, FreshDirect has increased customer loyalty and
reduced its churn rate (the number of customers who leave the service). Currently, 65% of its total
customer base of around 600,000 active customers are repeat, loyal customers, whose average
order size is over $120, and who contribute 80% of FreshDirect revenues. Word among investors
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is that FreshDirect is planning an IPO in the near future, causing many to roll their eyes as they
remember the history of Webvan in early part of the decade. Is this time different? e technology