Staying Power

JON SPRINGER

An old video clip recently surfaced on YouTube showing Thomas Parkinson, a co-founder of Peapod.com, demonstrating the capabilities of the nascent Internet grocer.

Sources estimate the Web-based grocer tallied sales of about 3 million in 2008.

The clip came from an instructional videotape distributed to Peapod's new customers in 1993. At the time, Peapod was software installed onto a user's hard drive via diskette. In the video, a young Parkinson, seated before a chunky IBM desktop, reminds users that anyone can use the service, provided they have a 2,400-baud modem, a phone connection and the ability to find their A drive. He also mentions a commitment to quality: “We guarantee each and every order. If there's ever a problem, we'll make it right.”

Screenshots from the shopping demonstration reveal no graphics — only words on a blue screen. The crawling Internet hookup allowed for Peapod to set prices for items — which would be shopped for at a partnering store — and for the transmission of the order itself. In those days, it wasn't unusual for Parkinson himself, or maybe his brother Andrew, the other co-founder, to show up at the customer's door with shopping bags.

Sixteen years later — and 20 since it was founded — the technology looks positively ancient. But the Parkinson's belief that shoppers would embrace a store-free shopping experience if given good service has proven enduring. The business, now a subsidiary of Dutch retailer Ahold, still employs both Thomas (chief technology officer) and Andrew (chief executive officer), and their newest videos are television commercials in which they discuss the benefits of Peapod and reflect on their 20 years in business.

Headquartered in Lake Zurich, Ill., a Chicago suburb, Peapod offers Internet grocery ordering and delivery in metro Chicago and also in East Coast markets served by Ahold's Stop & Shop and Giant-Landover banners. In the Chicago and Washington, D.C., areas, the company picks orders from a central warehouse; at Stop & Shop, the service is run out of mezzanine storage space at selected stores. Peapod also operates with different strategic objectives by market. On the East Coast, it adds loyalty and incremental sales in markets where Ahold operates stores. In the Midwest, Peapod is the retailer. Its goal is measured geographic expansion behind a brand that's become known around Chicago for quality and service.

“We see Peapod as a laboratory,” Larry Benjamin, chief operating officer of Ahold, told SN. “It's been an innovation center where we've learned a lot of new things, and in the broadest sense, it's another format. It's been a source of learning, inspiration and innovation.”

Ahold classifies Peapod's sales as part of its Stop & Shop/Giant division, and declined to provide specific sales figures. According to the Internet Retailer Top 500 Guide, Peapod rang up Web sales of $373 million in 2008. The guide estimated Peapod attracts an average of 900,000 unique visitors monthly, and around 1.5 million visits per month. The average sales ticket was $158.

While still only a tiny chunk of Ahold's sales — an analyst estimated $373 million is roughly the annual equivalent of 15 high-volume Stop & Shop stores — the business continues to grow. Sales in 2008 were up 10% from 2007, according to Internet Retailer, and have increased 160.8% since 2003, according to sales figures published in SN five years ago.

The economic downturn has slowed Peapod's rate of growth over the last year, Scott DeGraeve, senior vice president and general manager of Peapod, told SN in a recent interview. But it hasn't stopped growth altogether, particularly while Peapod's own geographic expansion continues, and the drivers of Internet sales on a macro level — particularly broadband penetration and Generation Y growing into grocery shopping age — continue to advance.

“We're not growing at as quite a high rate as we were in the past, but we're still experiencing strong growth, even in the downturn,” DeGraeve said.

According to Pew Internet & American Life data, broadband Internet penetration has skyrocketed in the last decade but less than two-thirds of Americans have access still. In the meantime, Generation Y — the so-called “echo boom” whose oldest members are now age 32, according to Pew — are just now starting their own families.

The economic slowdown “is a short-term thing,” he added. “The economy has had some impact but it's going to go in the other direction — there are a lot of upside opportunities as Internet penetration continues to develop. More and more people are getting comfortable shopping that way.”

Peapod at the same time is making improvements to its technology geared toward making Internet shopping easier and more personalized, DeGraeve added. This combination portends further growth ahead.

“I think the technology allowing you to shop on the Internet has improved dramatically and helped people customize orders for the customer and be able to make the service work better,” he said.

In the East Coast markets where Ahold operates retail stores, Peapod — known as Peapod by Stop & Shop and Peapod by Giant — is leveraging the Internet to help Ahold gather in sales dollars even when local residents don't visit their stores. This combination of available formats means incremental sales and increased loyalty, DeGraeve explained.

“In Stop & Shop and Giant markets, our overriding objective is to optimize the total dollars customers are bringing to the banner. We're really focused on driving customer loyalty irrespective of the format. That means pleasing people no matter where they want to go or how they want to shop,” he said.

To accomplish this, Peapod is working to expand service to everywhere Stop & Shop and Giant operate stores. DeGraeve estimated the service today reaches 85% of Stop & Shop's stores and between 70% and 75% of Giant's locations.

“If people aren't going into our stores, then we want them to go to Peapod, rather than another store or another format,” DeGraeve said. “I think we're having success in doing that. For customers who shop both online and in-store, we have more dollars coming into the banner than when they were just shopping the store. That's very exciting from a customer loyalty standpoint.”

Expanding constantly but deliberately has been a hallmark of Peapod under Ahold. At Stop & Shop, where store “warerooms” supply Internet orders, new territories are conquered in small batches of ZIP codes whose orders move from one wareroom in order to “seed” the next. This, officials said, assures efficient deliveries and relieves the potential strain of overburdened centers.

“Peapod has shown that if you go slow and be careful, you can win the game,” said John Rand, director of retail insight-grocery at Cambridge, Mass.-based Management Ventures Inc. “When you think of it on the scale of a company the size of Ahold, it's small potatoes. But it's a nice business.”

Peapod engineers efficient delivery — a traditional money-loser for e-commerce businesses — by incentivizing shoppers to choose delivery routes that are convenient for Peapod based on existing demand. The proprietary system is known as SmartMile technology and is just one component in a sophisticated combination of proprietary and commercial applications.

Peapod picks from warehouses in the Chicago and Washington, D.C., markets.

“We have to bring a lot of technologies together, that's one of the complexities of our business,” DeGraeve said. “We have to bring together the website with its transactional bandwidth and its online merchandising, and we need to have technology for doing the routing systems for deliveries, along with the back-end systems we use for fulfilling offers and doing the warehouse operations. We do a lot of technologies together and we've made significant improvements in each of these areas.”

In Chicago, Peapod has no retail store partner, but strong brand equity among a desirable shopper demographic and, increasingly, proprietary offerings that can't be found in stores are keeping that business rolling. The company now delivers within a 75-mile radius of the city, recently reaching parts of Indiana and Wisconsin for the first time.

Rand of MVI said the fact that Ahold continues to hold onto and grow its Chicago operation leads him to believe the business is making money.

“In Chicago, we work really hard to create a Peapod brand through a unique product offering, excellent perishables and a lot of flexibility to make the service really convenient for shoppers,” DeGraeve said.

Nash Finch is Peapod's primary grocery supplier in Chicago. Peapod is making a name for offering specialty goods and private brands including Chef Express, a ready-to-eat line. This year, the company added a line of six prepared meals from well-known Chicago chef Michael Foley under the Chef Express Smart Selections brand. Peapod's Chicago's Best offerings provide a selection of hometown foods, from Portillo's roast beef and gravy to Charlie Trotter's citrus smoked salmon.

“We've partnered with some of the biggest restaurant brands in Chicago. And people understand that if they want it delivered, they can't go to the store — they have to come to our site,” DeGraeve said. “These are places with real recognition in Chicago. We're a consolidator of great brands you can't buy in a grocery store.”

Recent Peapod commercials in the Chicago market play up the brand's local roots and products. According to DeGraeve, infusing that brand with good service — and providing it — has made the difference there.

“Having been in the [Chicago] market for 20 years, our brand awareness is very good,” DeGraeve said. “People understand if you're on the Internet and not providing good value and don't have excellent service, you're not going to survive.”

Benjamin noted that Ahold has drawn specific insights from Peapod customers about how they view product availability, bulk items and nonfoods, among other things. The service has also resonated with shoppers exhibiting strong loyalty and attractive demographics, he said.

Like any retailer, Peapod for the last year or so has been fighting the headwinds of a bad economy. Growth is slower than it was a year ago, DeGraeve acknowledged, and some areas have seen smaller average basket sizes. Peapod's business-to-business division has also seen a slowdown, he said.

As a result, Peapod is offering hotter deals, including discounts on delivery.

“People are certainly becoming more value conscious and we're attacking that head-on like most retailers are,” DeGraeve said. “If you look at the website, you definitely see value messaging and hot buys; we need promotions just like a store does. People are coming to us for convenience, but they need the dollars they spend to be smart dollars. So we have to give them promotions just like stores do.”

In the Stop & Shop and Giant markets, Peapod has followed pricing trends at the stores, and as a result of the Value Improvement Program undertaken at those banners, entered the recession in a better position than it might otherwise have been. However, the service is also offering rewards for frequent shoppers and delivery incentives for new customers. A recent promotion for new members offers $20 off their first offer, and free delivery for 60 days.

“We have rewarded customers with free delivery based on frequency of their purchases, and we also pulled back on delivery charges on the first few orders to take that [trial] barrier away,” DeGraeve said. “Our goal is to get into their home three times, and we're confident enough in our service to know that if we do it a few times that the convenience and the quality of the products is going to be a value that they're going to want to continue to use.”

The Peapod website in the meantime is loaded with features designed to facilitate shopping. Users can sort by price, unit price or brand, and a proprietary NutriFilter allows shoppers to sort selections by dietary restrictions. The site does not currently allow for product reviews, but “we're heading in that direction,” DeGraeve said.

“We've found social network recommendations can be critical and they can be even more sensitive in our business,” he said. “We also expect that applications on the phone will continue to emerge — helping customers make a shopping list or getting promotions and news to people. That will be important in-store and online.”