May, 1999

Fruits of Thought

High-Tech Deliveries

Today when anyone proposes an Internet opportunity, caution should be used. We can never be sure if that person has a valid business proposition or merely the makings of a hot stock in the age of Internet mania.

Still, when Louis Borders, former chairman and co-founder of Borders Books, manages to raise $120 million in start-up funding from marquee names such as CBS and Knight-Ridder, as well as big Silicon Valley capital companies, one owes it a serious look. The new company is named Webvan Group, Inc.

The plan is simple: First, build a large regional warehouse specially designed to consolidate consumer orders in a highly automated manner. Second, establish an unparalleled delivery service – the claim is that this service can schedule within a 30-minute delivery window of the customer’s choosing. Third, offer maximum selection at competitive prices – the service is going to deliver live lobsters, run its own butcher shop and offer 2,500 different vintages from its wine cellar.

Certainly the Webvan venture is an enviable undertaking and, indeed, it addresses many of the weaknesses of existing Internet services. The original Peapod model of having in-store shoppers gather each order has always been a prohibitively expensive one as it incurs all the costs of a conventional supermarket plus the in-store shopping cost and the delivery cost. Equally, nobody likes to be stuck at home waiting for their groceries, so an inability to schedule tight deliveries can doom a service.

Still, this effort is, to say the least, ambitious. Though the high tech warehouse is the way to go, many pitfalls remain. Remember all the problems at the new Denver Airport in getting the high-tech baggage system to work properly? Developing a high-tech grocery-packing warehouse is no lesser a challenge. Most fundamentally, it is not clear that the demand is there. Peapod, after all, has been losing loads of money.

Remember, to a consumer, it makes no difference how the groceries get put in a bag. So while a high-tech system may lower costs, unless those lower costs get passed on to consumers, the new system won’t increase demand. Peapod’s basic problem is that in 1998, its total revenue was only $69.3 million. If the revenue had been $693 million, Peapod would be the one raising $120 million and building high-tech warehouses.

Of course the delivery could make a big difference. If one can really schedule a delivery within a half-hour window of one’s own choosing, that would make Internet shopping much more appealing. I wish Webvan well, but I can’t think of anything I can have delivered to my home within a half-hour window – even Dominos dropped its delivery guarantee.

Perhaps the company won’t be able to make the delivery guarantee, and people really need a kind of 24-hour drive-through center. I’m thinking of a double drive-through model of Dairy Barn-type stores but, instead of ordering on-sight, you place your order via phone, fax or Internet and drive through these centers to pick up the goods. Delivery can still be available, as it often has been, but as a special service for the sick, elderly or shut-in or for dense urban areas where people don’t have cars to carry groceries.

Someday, delivery might make sense, but the key is a “no need to be present” system. Streamline, another Internet-type service, has the right idea. The company places a special receptacle in people’s homes in an accessible area, then puts everything from food to dry cleaning in the receptacle while one is away. It is complicated because we need a frozen area, a refrigerated area, a dry area etc., but it can be done.

The place where Streamline may be making a mistake is that it actually wants to sell all these products and services. One wonders if ultimately the model won’t be a kind of neutral drayage company that will deliver for the vendors that the consumer chooses, not the ones selected by the delivery service.

Perishables are supposed to be a big part of Webvan. Yet the role of perishables in Internet shopping is still unclear. There is a lot of anecdotal evidence that produce items are among the most frequently ordered on-line items. Some research shows that consumers like buying produce on-line because they feel so inept at picking it themselves. Intuitively, though, many hold that these services are likely to provide an unsatisfactory experience when it comes to perishables – particularly produce. Visual appearance and brands can all influence satisfaction and, so, a consistent experience is likely to be difficult to provide on line.

Of course, the big question is – and we may all get to learn the answer – is produce shopping fun or not? If consumers do actually enjoy squeezing the melons, smelling fresh-baked bread, seeing the bounty of freshly prepared foods, then it is easy to imagine delivery services confining their efforts to easy-to-handle dry groceries while new perishable stores handle produce, deli, meat, bakery, floral, and perhaps some high impulse specialty foods.

If not, then in the end, consumers won’t miss the shopping experience, and stores will die to be replaced by delivery services or pick-up services.

For now there is a new warehouse being built. That means another produce buyer, and for that we should be grateful. We also should be thinking hard about how in this most impulsive-driven of departments we can promote when nobody steps into a store.  pb