DIRECTED VERDICT

DENISE ZIMMERMAN

Consumer-direct operators that provide groceries to consumers through low-overhead fulfillment centers, instead of retail stores, need not capture a big piece of the pie to shake up the industry.

The alternative channel is gaining steam and those involved today -- as well as those who experimented with the concept years ago -- believe projections that consumer direct will capture at least 5%, and perhaps 10%, of the market is attainable and will exert significant impact on the food industry before long.

"There is a niche that can be successful, but it is small. Somebody will make this thing work," said Charles Engh, retired vice president of retail operations for Nash Finch Co., Minneapolis.

In 1986, Engh spearheaded Nash Finch's "virtual store," which accepted orders through interactive-TV in Chicago, fulfilled them through a dedicated warehouse in Itasca, Ill., and contracted out for delivery. The project, part of an electronic mall launched by J.C. Penney, Chicago, failed after a year for a number of reasons, but consumer demand to buy groceries in this new way was not one of them.

"J.C. Penney got discouraged because even though there were 15 or 20 different stores in this electronic mall, over half the business was groceries, and food [orders alone] couldn't provide much revenue for the supplier of the service," Engh said.

The grocery order size and frequency of orders placed via interactive-TV turned out to be double what Nash Finch had projected, proving that the consumer-direct concept has appeal -- for some consumers in some markets.

Even if only a small portion of the population shifts their buying from conventional food stores to consumer-direct businesses, the supermarket industry stands to feel the ground move, industry observers told SN.

"The potential is there and the potential is huge. You don't have to have very big numbers to have a very sizable proposition here -- if a profitable business model can be established," said Fred Schneider, executive director, Smart Store, Andersen Consulting, Chicago.

He said his firm's research indicates that each percentage point of sales volume a company loses represents a 5-point loss in profits.

"So a 10% hit on volume would have a 50% hit on the bottom line," Schneider said. "And because of the economics of running a self-distributing chain, for instance, even 5% volume coming out of the existing infrastructure can have significant impact on bottom-line results."

Schneider is actively involved in the Consumer Direct Cooperative, a group of 17 retail and wholesale companies studying consumer behavior and exploring various business models for consumer-direct retailing.

"I think 1997 will be a very telling year for consumer-direct," he said. "The consumer demand aspect has been demonstrated. The telling thing for consumer-direct operators is to see if they can service that consumer demand in a profitable way.

"They are still struggling with the question: What does a profitable business model look like?" he added.

Hannaford Bros., Scarborough, Maine, is among those companies seeking the answer. The retailer's "Hannaford's Homeruns" program offers home-shopping and delivery service in Boston -- where the chain has no stores -- and fills those orders at a dedicated facility in Auburndale, Mass.

Tom Furber, general manager of Hannaford's Homeruns and vice president at Hannaford, declined to be interviewed, saying, "It's new and we're still learning."

A key piece of learning that Hannaford has embraced, observers said, is the value of a no-cost service to consumers. The Homeruns program offers product at prices competitive with local retailers and charges no delivery fee for orders exceeding $60.

"In my mind, the end game is delivery at no cost -- and it's doable. The 'how' is still not known and the people who figure that out are going to have a huge start," said an entrepreneur in New York state who is trying to break into the consumer-direct arena.

Andersen's Schneider agreed the "how" of providing no-cost home-shopping and delivery services -- while still turning a profit for a consumer-direct operator -- remains unclear at this point. High levels of efficiency at every stage of the process is critical.

Customer ordering, for example, cannot reach its maximum efficiency in its current, most common form: via telephone and fax. Orders placed by computer or interactive-TV are far more cost effective.

"The whole order-entry piece of the business model certainly is a major cost driver. The extent to which consumers can be migrated from that 'high touch' method to a more self-service order entry will be a major determinant for the potential growth of consumer-direct," Schneider said.

Customer-driven order entry is predicted to rise rapidly, according to Jupitor Communications, New York, which tracks trends in technology and Internet retailing. Interactive-TV sales in all classes of trade are projected at $793 million by the year 2000 and Internet sales are projected at $7.3 billion by the year 2000, according to the firm's most recent research.

Another major cost driver that will have to be overcome is logistics of delivery. The business model of consumer-direct operator Streamline, Westwood, Mass., has been hailed as a leader particularly because its delivery system is route-based for maximum efficiency, rather than demand-based, where consumers indicate a time window to receive delivery.

Nash Finch's Engh said delivery costs for the Chicago interactive-TV project were "extremely expensive" and the successful consumer-direct operator must find a way to reduce that cost.

"I had contracted a delivery service, and in addition to what I promised to pay them per delivery, I also had to subsidize them beyond that," he said. "It has to be done in a very concentrated area. If you have to go too far between deliveries, it's obviously too costly."

Finding the most cost-effective business model is nearly as important as selecting the right market, industry observers said. "One of the key challenges for retailers is to figure out how consumer-direct fits into their marketplace and different markets will emerge at different rates," Schneider said.