SFGate042

Digital Food Online Groceries Set Stage for Long-Awaited Revolution in the Aisles

Hal Plotkin, Special to SF Gate
Friday, May 26, 2000

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/technology/archive/2000/05/26/grocers.dtl

Leading online grocers Webvan and Peapod are in some serious trouble on Wall Street.

A growing chorus of analysts claim it’s impossible for online grocers to generate decent profits by making small home deliveries of bulky, low-margin goods.

They say the costs involved are just too high; the expensive computerized warehouses, fleets of delivery trucks, and scores of well-paid drivers, not to mention having to pay for all the ice cream that melts before it reaches its final destination.

Sagging prices for the stocks of online grocers are doing more than just hurting investors who bought those stocks high. They’re also undermining the financial options of the firms themselves, making it harder for them to use their own assets as collateral to support additional growth.

With Wall Street souring on their prospects, the online grocers have only one option left: they’re going to need to prove themselves in their key initial test markets. That puts the San Francisco Bay Area in the online grocery jury box since our region is one of the most important early test beds for such services.

The next few months could be decisive.

The executives who run online groceries apparently think their best path out of the wilderness is to play up the futuristic angle of what they’re doing.

Ironically, though, their salvation may depend more on their getting a better handle on the past.

Revolutionizing the grocery business was one of the early goals of some of the idealists who helped kick off the Bay Area-based personal computer revolution, which, as some may recall, started out as a social movement and only later became an industry.

It was back in the late 1970s, for example, that Palo Alto political activist and early computer entrepreneur Josh Goldstein led an illustrious but ill-fated attempt to start a computerized grocery-buying collaborative.

It was a revolutionary stab aimed right at the establishment’s breadbasket. The idea was to use computers to take over the means of distribution.

Participating was, at its heart, a political statement. Those involved wanted to band together to use their grocery money to support wholesalers who respected human rights and the environment.

Unfortunately, this was back in the days of time-shared mainframe computers.

Participating took a huge, even laughable, amount of effort.

Each month every member of the co-op received an oversized bound mainframe computer printout that was, as I recall, about the size of a small Buick. We’d go over the pages one by one, indicating in pencil the amount of each item we wished to buy.

The printouts were collected and the orders laboriously combined. Members would then stop by the distribution center a few weeks later to locate, sort, and pick up whatever items had been ordered.

Like many counter-culture experiments, this one fell apart just a year or so after its inception.

It turned out shopping at Safeway, although less politically correct, was somewhat more practical.

Even so, I couldn’t help but think about my experience with the Palo Alto computer grocery-buying co-op when I placed my first two orders through Webvan last month.

On a technical level, the Webvan service was flawless.

The company has taken full advantage of a variety of recent high-tech advances to master the many practical details that proved elusive twenty-five years ago.

I was struck, for example, by how simple it was to locate items and place orders online, far easier than navigating the narrow aisles of my crowded local grocery store.

The site’s key navigational feature, a simple tree-like menu, is intuitive and fast.

Better yet, its design makes mistakes painless. Clicks on the wrong item or category can be easily reversed, quickly taking you back to wherever you got lost. Likewise, a simple search feature makes finding most items just one or two mouse clicks away.

If you haven’t yet tried shopping for groceries online out of fear it will be too complicated or cumbersome, such worries are misplaced. It’s hard to imagine how it could be made any simpler.

But the really big untapped marketing opportunity for online grocers, particularly here in the Bay Area where online grocers need to prove themselves, has more to do with understanding who we are than what we eat.

My own personal experiences tell me there are a lot of consumers, especially in the Bay Area, who are motivated by factors other than price, such as such as whether products are organically grown, are genetically modified, or were made under non-exploitative conditions.

Given the steady march of technology it’s likely we’ll soon see more social movements organized around grocery and other online purchases as more and more consumers seek to tap the power that comes from aggregating purchases.

All it will take is for online grocers and other merchants to start asking people what values inform their shopping decisions and then designing offerings that meet those needs.

Whether it’s vegetarianism, a desire to purchase American made or grown products, or an aversion to goods produced by non-union workers, there are significant numbers of local consumers who would probably enjoy a chance to use their purchasing power to advance the causes in which they believe.

Affinity buying programs or other specialized services aimed at online shoppers could even become a key battleground between online upstarts such as Peapod and Webvan and their more established brick and mortar competitors.

Stores such as Albertsons and Safeway, for example, are rumored to be thinking about offering Web-enabled grocery shopping sites that let consumers order online and then pick their stuff up on their way home, a service that may turn out to be more convenient for some than waiting for a delivery truck to show up.

In that case, using Internet technology to cater to individual tastes and buying preferences would turn out to be even more important than bringing the goods right to your doorstep.

There are also similar untapped Internet-based opportunities on the price side of the grocery business, as well.

Much like the original vision behind Palo Alto’s first computerized grocery-buying co-op, consumers could be invited to sign up in advance to purchase a minimum amount of whatever staples they normally use over a given time period.

Doing so would give the online merchants more predictable cash flows and the demand side information they need to negotiate more favorable deals with suppliers.

As more consumers turn to online grocers it should create economies of scale that help to keep a lid on prices, if not drive them down.

Other Web sites, such as Mercata.com, are already doing some of this by lowering prices on items as more consumers sign up to buy those products online.

A variation of the same strategy, coupled with attention to the values-based buying decisions many consumers now make, could lead the online grocers to the higher profits they seek.

To be sure, not everyone will be interested in becoming a “green” consumer or in participating in group-buying discount programs. But those who are would be more reliable long-term customers and, in the case of organic food fanciers, will be willing to pay somewhat higher prices, which is exactly what the online grocers need.

And if that happens, it would take the online grocery industry full cycle, back to a time when a handful of wild-eyed local visionaries first promised us that wise uses of these new machines would help us become more humane.

Wall Street is watching the Bay Area’s experiment with online groceries with avid interest. They’re wondering if the whole thing is just a fad, or if it will catch on like so many other innovations that started here and eventually moved east.

What may surprise them, though, is if online groceries become a setting for the economic expression of the Bay Area’s unique social and political values. Changing how we buy things shifts the balance of power from suppliers to consumers and gives consumers the opportunity to begin exerting more influence over the way products are produced.

It’s a chance we thought we had twenty-five years ago. But this time, it might actually work.

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