SimonDelivers More

Who Will Buy?

“I think the biggest challenge that online grocery has in general is still consumer habit,” Ojala says. “I can’t underestimate that.” Examining the meat and produce, comparing prices, seeing (and tasting) what’s new, buying specific quantities, and taking advantage of coupons and point-of-purchase deals are also conveniences of a sort, and not readily given up.

Simon Foster started SimonDelivers in 1999, at a time when many visionaries believed that nearly everyone would soon be buying everything on line—pet food, toys, cosmetics, on and on—from “pure plays” that were unencumbered by brick-and-mortar stores. The revolution didn’t quite occur, though online shopping has taken off in the U.S. According to U.S. Census Bureau estimates, overall online sales grew from $11.7 billion in 1999 to $108.7 billion in 2006. New York–based Jupiter Research expects online grocery sales this year to reach $7.5 billion, but that represents less than 1 percent of total U.S. grocery sales.

“It is actually one of the larger categories on line, but it has absolutely the lowest penetration overall,” says Patti Freeman Evans, a Jupiter Research senior analyst. “We’re expecting it to grow at a 17 percent compound annual growth rate through 2012, to reach $13.5 billion.” That’s still just shy of 2 percent of total grocery sales, she adds, but “it is the fifth-largest category on line.”

Despite growth, the online-retail trail is littered with the dead. In the grocery-delivery business, the biggest set of remains belongs to California-based Webvan.com, which collapsed in 2001 after trying to build a $1 billion nationwide warehouse system. SimonDelivers (where Foster remains as a board member) survived, as did Illinois-based Peapod, though it’s now owned by Dutch supermarket firm Royal Ahold. In metropolitan New York, FreshDirect has been delivering since 2002. That’s about it as far as primarily online grocers go.

Besides consumer habit, a big challenge for online grocers is maintaining produce quality. Evans says, “I’ve talked to the people with FreshDirect about this, and they say, ‘If an order comes in with five tomatoes and one of them isn’t perfect, we are likely to lose our customer for months.’” Online grocery buying is “a very high trust–, high service–oriented kind of experience that is a little precarious,” she adds.

Sucharita Mulpuru, principal retail analyst with Forrester Research, says “it’s difficult to make a case that [online grocery shopping] will ever be ‘mass.’” The online grocery business, Mulpuru notes, “is labor intensive, it’s capital intensive, it’s technology intensive. Grocery is such a low-margin business to begin with. You really need to make it up in volume, or in margins through things such as organic foods or prepared foods.” And online probably will never compete with bricks on the size of the receipt. “It takes a certain type of customer, one who values convenience over price,” she notes.

SimonDelivers’s analysis shows that its core group of customers is upper income. But Ojala says, “There are also a lot of people who fall into different categories—‘I have six kids, I don’t have time to go to the store.’ You’d be surprised, maybe, that they are definitely under $60,000 a year, but [they say] ‘I save money because I don’t have to drag my six kids to the store and show them the aisle of sugar.’”

Still, SimonDelivers may have to overcome a perception that it’s a spendy luxury, particularly if recession-spooked families enter belt-tightening mode. In January, WCCO-TV compared the prices of eight organic grocery items at six local online and bricks-and-mortar stores. SimonDelivers was the most expensive—$8 over Lunds and Byerly’s online operation, which was the second highest. The cheapest: Super Target, which beat SimonDelivers by $22.

Ojala acknowledges that her company’s prices were “not competitive” on three of the eight items: “The ground beef was more expensive because our organic product is also 100 percent grass fed, which is a very different product than normal organic hamburger.” As for the other two—apples and waffles—“on any given day, we are higher or lower than Lunds and Byerly’s, depending on the quality of the produce we get, where it comes from, our costs, et cetera.”

“Being price competitive is very important to SimonDelivers and our consumers,” Ojala says. But as she sees it, the refreshed SimonDelivers, with its enhanced site and health-conscious partnerships, is selling something more than price—and even more than convenience: “Now

it really is about how do we message to the consumer and have them understand how valuable the model is, and how it can enhance people’s lives.”