Page 49 - Electronic Commerce

Chapter 1

customers became connected to the Internet and felt comfortable with purchasing online,
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the company was able to expand slowly and carefully into more geographic areas. After
more than 10 years of operation, Peapod operates in fewer than 20 U.S. metropolitan
areas. Most online grocers focus their sales efforts on packaged goods and branded items.
Perishable grocery products, such as fruit and vegetables, are much harder to sell online
because customers want to examine and select specific items for freshness and quality.
Peapod is a good example of how challenging it can be to build a business in an industry
that requires this kind of critical mass. Although it was one of the first online grocery
stores, Peapod has had a difficult time staying in business, and was even offline for a short
time in 2000. Peapod was subsequently acquired by Royal Ahold, a European firm that
was willing to invest additional cash to keep it in operation. Two of Peapod’s major
competitors, WebVan and HomeGrocer, were unable to stay in business long enough to
attract a sufficient customer base.
Established traditional grocery chains in the United States, such as Safeway, also offer
online ordering and delivery services in a second wave of using Internet technologies in
the grocery business. By using their existing infrastructure (including warehouses,
purchasing systems, and physical stores in multiple locations), they are able to avoid
having to make the large capital investment in facilities that led to the demise of first-
wave dot-com grocers such as WebVan and HomeGrocer.
One online grocer that has successfully implemented an updated version of the
WebVan and HomeGrocer operational approach is FreshDirect. By limiting its service area
to the densely populated region in and around New York City, FreshDirect has found the
right combination of operating scale and market. The company started in 2002 and
achieved profitability in 2004 with sales of $90 million. This is a much smaller sales
volume than either WebVan or HomeGrocer would have needed to be profitable.
Outside the United States, online grocers have done quite well. Three of the most
successful online grocery efforts in the world are Grocery Gateway in Toronto, Disco Virtual
in Buenos Aires, and Tesco in the United Kingdom. Grocery Gateway and Disco Virtual
operate in densely populated urban environments that offer sufficiently large numbers of
customers within relatively small geographic areas, which make their delivery routes
profitable. Tesco started its operations in London, which offers a similar densely
populated urban area. However, Tesco has also expanded its operations to selected rural
areas that are near a Tesco supermarket.

Predictability of Costs and Revenues
Businesses often calculate return-on-investment numbers before committing to any new
technology. This has been difficult to do for investments in electronic commerce
because the costs and benefits are often hard to quantify or predict with any degree of
accuracy. Costs that are a function of technology can change dramatically even during a
short-lived online business implementation project because the underlying technologies
are changing so rapidly. As companies move into the third wave and increasingly use big
data and related analytical tools, they are getting better at predicting some costs and
revenues. But the difficulty of cost and revenue prediction remains an issue for most
companies.

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