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PMA FRESH SUMMIT '98

NEW ORLEANS -- Consumer-direct buying habits are so fragmented that they're currently difficult to measure. But make no mistake: the burgeoning market represents a wealth of opportunity for supermarket retailers.This conclusion was shared by panelists who discussed produce merchandising via home delivery, on-line shopping and Web sites during a seminar at the Produce Marketing Association's annual

NEW ORLEANS -- Consumer-direct buying habits are so fragmented that they're currently difficult to measure. But make no mistake: the burgeoning market represents a wealth of opportunity for supermarket retailers.

This conclusion was shared by panelists who discussed produce merchandising via home delivery, on-line shopping and Web sites during a seminar at the Produce Marketing Association's annual convention here.

A study by Andersen Consulting, Chicago, estimates that the current size of the consumer-direct channel is 1% of the food and consumer packaged-goods market, though it's expected to comprise 8% to 12% of that market within five to eight years, driven by the growing number of time-pressed consumers not satisfied with the store shopping experience.

The growth of the Internet is expected to play a key role. The panel referred to statistics suggesting that 11,000 new users sign on to the Internet each day; that more people use America Online than watch CNN during prime time; and that about 125 million people in the United States will use the Internet regularly by 2000. All this bodes well for any supermarket department that installs a remote-ordering program.

The concept is alive and well at Scotty's Home Market, a "virtual supermarket" that delivers perishable and nonperishable groceries from a single warehouse in Lake Zurich, Ill. The operation, which has been delivering groceries in the Chicago area for more than seven years, serves about 20% of metropolitan Chicago, counting more than 1% of the homes in its service area as customers, according to Bruce MacLeod, chief executive officer.

He added that, in certain communities, its market penetration is more than 3%. About a third of its customers use a dial-up software program to order, with the rest using phone or fax. Ordering directly from the Web site (www.scottysmkt.com) is on tap for first-quarter 1999.

"This is a channel that's going to be vitally important to the produce suppliers and, in turn, produce is absolutely vitally important to us in the [consumer-direct] channel," he said, adding that retailers can, and will, market produce directly to consumers on a larger scale.

Skepticism surrounding the market is understandable, MacLeod acknowledged, as many consumer-direct and e-commerce models touted in the past few years have failed to deliver on their promises. But he added that most of that skepticism is based on myths and misperceptions.

"You hear quotes in the trade press like, 'it's not easy to set up a call center to handle 25,000 stockkeeping units,' " he explained. "But we don't have to duplicate the [entire] grocery store in the channel."

Consumer direct can work with considerably fewer SKUs, offset with incredible convenience, he explained, just like warehouse clubs draw flocks of consumers with a fraction of the SKUs of the typical supermarket.

Kevin Coupe, editor of IdeaBeat.com, a Darien, Conn.-based Web site for the food industry, implored the audience to stand up and repeat the following phrase: "It can happen to me."

"It" is the increasing propensity of consumers to buy a growing number of products directly and accept delivery at home, whether those products are ordered via computer, fax or phone, Coupe said.

"People in the perishables business spend a lot of time saying Amazon.com works for books, but it will never work for produce, or chicken, or beef," Coupe told SN. "It's simply foolish when you look at a juggernaut like Internet commerce and say it can't happen to me. If the last decade has taught us anything, it's that anything can happen to anyone, and probably will."

But retailers shouldn't be misled to think that the consumer-direct channel is exclusively an Internet channel, panelists repeatedly emphasized.

Amazon.com has transformed book retailing, for example, not simply because it uses the Internet, but because it uses Internet to create an intensely individualized experience.

"It's not just cold boxes or wires," Coupe said. "You can use [technology] to develop a personal relationship that your part-time cashier is never going to be able to do."

To be successful direct marketers, retailers must raise quality standards to a new level simply to meet customer expectations, according to the panelists. For example, customers who shop in-store will pick through a so-so batch of tomatoes and be perfectly happy with the best of what they can find; but direct marketers who ship those same tomatoes to a customer's home will be admonished quickly with angry phone calls or e-mail.

The PMA attendees were advised to learn as much as they can about sourcing, picking, delivery and technology in the emerging consumer-direct market.

"There will be significant learning curves from a marketing perspective, like how can I help people navigate through 10,000 products on-line and make it as convenient as possible," said Fred Schneider, director of electronic commerce for Andersen Consulting, the firm that conducted the studies discussed in the seminar. "It's not too soon to begin learning these lessons."

Among the early lessons emerging from the consumer-direct channel is that store-based picking models have only limited applicability. "Retailers may think their stores represent a viable source of distribution," Schneider said. "But in the long term, it's not a viable way to do this. You need to [detach] the store out of the supply chain to make a consumer-direct model profitable."

In Boston, for example, ShopLink has built its neighborhood distribution capabilities based on multiple-temperature zone facilities that handle dry, frozen and refrigerated products, according to Schneider; meanwhile, consumer-direct marketer Peapod, Skokie, Ill., is moving away from store-based picking toward a model more like ShopLink's in at least two of its markets.

The biggest threat to existing retailers, according to Schneider, is that consumer-direct players will create the value proposition first, making it difficult -- if not impossible -- to win back existing customers. On the other hand, Andersen surveys suggest consumers are most likely to buy direct from their supermarket of choice.

"When somebody develops a relationship to deliver food into the home, that will represent an extremely high level of trust," Schneider said. "Consumers are not likely to have multiple relationships in that respect."

Customers most likely to be among the early adopters of consumer direct are in fact the customers most inconvenienced by shopping trips, panelists said: namely, the customers buying the most in land-based stores.

A walk through the PMA expo floor showed that industry suppliers and vendors are not as quick to adopt consumer direct as the panelists would argue is necessary.

"I visited many booths, and most of what they had had no relevance to me," MacLeod said. "Forward-looking suppliers and manufacturers will invest in this channel, much the same as they eventually invested in the warehouse channel."