giant in the technology industry had a bold idea:
reinvent the way people shop, rendering grocery stores a
quaint reminder of the past.
company was Webvan, and it attracted $800 million in
funding before filing for bankruptcy at the peak of the
dot-com bust nearly two decades ago. The lesson in all
this? Building a grocery business on wheels is
terrifyingly expensive and inherently difficult because
many shoppers simply arenít ready to outsource their
people want to touch and feel their groceries,"
said Peter Relan, the former head of technology at
Webvan. "In focus groups, we found there was some
deep evolutionary biology there. People said, ĎYouíre
not going to do what Iím going to do for my family.í"
a challenge that continues to ring true today, even as
interest in grocery delivery services has risen ó
culminating in news this month that the biggest of all
e-commerce platforms, Amazon.com Inc., had bid $13.7
billion for one of the biggest names in the grocery
industry, Whole Foods Market Inc.
question now is whether the partnership between the two
established firms will finally blow grocery delivery
past its niche interest into the mainstream. Consumers
ultimately got used to browsing for books online rather
than on bookstore shelves; and they got over the fact
they couldnít try on clothes before shelling out cash
online. E-commerce sales now total 8.5 percent of all
retail sales in the U.S., according to the Commerce
Department, doubling its share since 2010.
shoppers begin to embrace grocery delivery on a wider
scale, that share will increase significantly given the
size of the $800 billion grocery industry.
despite a host of services, including AmazonFresh,
Instacart and Peapod as well as many supermarkets
themselves, interest has been far from explosive. Having
a stranger pick out and delivery your ribeye steak, it
turns out, is not the same as having someone deliver
your Christmas presents.
grocery industry is a completely different game when
compared to items like books, media and
electronics," said Natan Reddy, a tech industry
analyst at CB Insights. "Food delivery services on
the whole are considerably more logistically complex.
also no simple way to gain a competitive advantage
through variety, since a few specialty items aside,
grocery is not a category where thereís too much
variety in what consumers are looking for," Reddy
continued. "Since variety is out, it has to be
price or convenience."
the difficulty, the business holds breathtaking
potential. Unlike purchasing other consumer goods,
shopping for groceries is a weekly endeavor for most
households. Disrupting that task holds so much promise
that money has been pouring into the sector the last
five years ó just as it did during the dot-com boom.
delivery companies have raised $713 million in funding
globally through May, according to CB Insights, which
puts it on pace to exceed last yearís record funding
of $1.4 billion. In 2013, grocery delivery funding
amounted to a paltry $83 million.
the chief barriers to success is warehousing and
distribution. Perishable goods like fruit, dairy and
meat need to be replenished regularly and delivered
quickly. That requires intensive capital investment in
cold storage, software, vehicles and labor. These costs,
coupled with rapid expansion, is what ultimately doomed
hopes to solve this problem with its acquisition of
Whole Foods, which augments the Seattle companyís vast
network of fulfillment centers with the grocersí
warehouses and 460 stores worldwide. That reduces the
time that shoppers have to wait for food to appear on
their doorsteps, and the distance that Amazon must
travel to transport each order.
that convenience comes at a price. Consider Amazonís
existing grocery delivery platform, AmazonFresh. First,
subscribers need to sign up for Amazon Prime, the
premium subscription service that gives consumers free
shipping and access to Amazonís streaming
entertainment for a fee of $99 a year or $10.99 a month.
AmazonFresh costs an additional $14.99 on top of Prime.
players in the space such as Instacart and Shipt donít
have to shoulder the infrastructure costs a more
vertically integrated company like Amazon does. Instead,
they act as a third-party delivery service selecting
food from chains such as Publix and Costco. Subscribers
to Birmingham, Ala.-based Shipt can choose between a $99
annual fee or a $14 monthly fee. Instacart,
headquartered in San Francisco, charges $3.99 for
two-hour deliveries and $5.99 for one-hour deliveries on
orders of $35 or more.
fees run counter to what many consumers want: a
at HSBC studying the British market last year found that
no-frills grocers Aldi and Lidl were growing faster than
the top online supermarket brand Ocado. They concluded
that a discount was more important than convenience.
retailing may be glamorous and exciting for those
involved in developing it but the fact that the online
grocery market continues to grow at only half the rate
of discounters (and a quarter of the rate in cash terms)
suggests consumers value lower prices over home
delivery," the bank said.
therein lies the problem, said Relan, who now runs a
Silicon Valley incubator. Webvan tried to be everything
to everyone, rather than accepting that it was a premium
service for those who could afford it. Mainstream
interest in the service may be subdued until it can
prove itís a better deal.
hope among delivery service founders and investors is
that norms have changed. So much commerce is conducted
online ó thanks in large part to smartphones and apps
ó that getting milk delivered may soon become second
nature, especially among young people.
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are becoming accustomed to getting pretty much anything
they want delivered right to their door today, just by
clicking ĎConfirm and Pay,í" said Roger Beahm,
the WestRock executive director of the Wake Forest
School of Business Center for Retail Innovation.
"Having perfected this buying behavior in
categories such as books and apparel, itís not hard to
visualize consumers getting to a similar tipping point
in retail grocery once the logistics are there."
top of that, the way people value time as changed since
Webvan crashed and burned in the Y2K era, said Ian
Sigalow, co-founder of venture capital firm Greycroft
Partners, which helped Shipt raise $60 million in two
rounds of funding.
are saying the less time they spend in the grocery
store, the more time they can give to their
children," Sigalow said. "Itís not just
millennials. Shipt customers are also suburban moms who
donít have time and value convenience. Thereís been
a change in society the last 20 years."
remains skeptical of the mass-market home delivery model
(save for the arrival of self-driving delivery cars). Heís
far more bullish on a service that meets consumers in
the middle like a drive-through where you can pick up
your pre-ordered bag of groceries. That way shoppers can
inspect their orders and sellers can save the enormous
cost and complication of doorstep deliveries. Until a
sustainable model is discovered, he said, e-commerce
will continue to exhibit a gaping hole.
really are the final frontier," Relan said.