Grocery Gateway/Longo's: Online Turnaround

MICHAEL GARRY

In 2004, Toronto-based Grocery Gateway looked for all the world as if it were going to replicate the short, unhappy life of Webvan, the Silicon Valley online grocery operation that became an archetype of ecommerce failure when it went bankrupt in 2001.

There were some key similarities. Like Webvan, Grocery Gateway, which went online in 1998, was funded by venture capitalists whose patience for a money-losing enterprise was not unlimited. And while not remotely approaching the scale of Webvan, Grocery Gateway also chose to make a sizable investment in an automated warehouse custom-built to pick and deliver groceries to online customers — a model that was not supported by the customer base.

But the story changed in August 2004. After filing for receivership, Grocery Gateway was acquired by Longo Brothers Fruit Markets, Mississauga, Ontario, for a reported $6.96 million Canadian (about $5.3 million U.S.).

Longo's was a likely candidate to acquire Grocery Gateway, because in its first year of operation Grocery Gateway was allowed to use a Longo's store as a staging site where it could pick its orders. By 2004, Longo's had developed an interest in the online grocery business. “They decided ecommerce should be part of their strategy,” said Stephen Tallevi, general manager of Grocery Gateway and the only one of five co-founders still with the business.

Longo's gave Grocery Gateway a second chance, and the online retailer was determined to succeed. But to do that, it had to make a number of changes to its business model. Most notably, it sold its distribution center and returned to picking from Longo's, eventually using five of the 17 Toronto-area stores.

In addition, rather than overreaching, as it had been doing, Grocery Gateway initially scaled back, cutting the number of customers it served by 50% and the number of items offered by two-thirds. It posted an apology on its website and asked shoppers for patience.

“By not serving as many customers, we could figure out the operations correctly and keep costs to a minimum,” said Tallevi. “We wanted to rethink the business and ramp it up logically, with profitability as the benchmark.”

The new approach worked. The new Grocery Gateway was “positioned for profitability” within 12 weeks of its sale, according to Deloitte Canada, which worked with Longo's and Grocery Gateway during the transition. Within eight months of the sale, the online operation became a “break-even proposition” and went on to achieve profitability, with double-digit sales growth, said Tallevi.

Today Grocery Gateway, available at GroceryGateway.com and Longos.com, serves 15,000 customers in the Toronto area, making an average of 500 deliveries per day. It offers 8,000 stockkeeping units and plans to eventually offer 12,000. Grocery Gateway was able to keep many of its key logistics, technology and customer service people after being acquired by Longo's, but the website is overseen by Longo's IT department.

For its success in changing tactics and turning around its business, Grocery Gateway/Longo's was chosen to receive SN's 2007 Technology Excellence Award in the Online Retailer category.

90-Minute Window

Under its store-pick model, Grocery Gateway waits until a store's regular operations are winding down, and then, around 9 p.m., its staff begins to fill orders. By 5 a.m., the first truck is ready to deliver. Ninety percent of orders are delivered the day after they are submitted, within a designated 90-minute window. Regardless of the size of the order, deliveries cost $9.95 for consumers, $14.95 for businesses.

“The store model works very well for a number of reasons,” said Tallevi. “If you already own the stores, you don't have to invest in infrastructure. If you have multiple locations, you can be closer to your customer base. And since stores have preselected their produce, we are picking from the best.”

On the other hand, he noted, a store, unlike a warehouse, is not designed for order picking, and is a much more variable environment, with unpredictable levels of inventory. “It became a bigger challenge for us to get customers what they want, when they want it and with the right quality,” said Tallevi. Since the changeover, Grocery Gateway has asked customers if they will accept substitute items.

Stores also need to be able to absorb the online operation, such as withstanding a disruption every night and storing hundreds of delivery totes. “You need a strong store manager who can ensure that the product is coming in,” said Tallevi. Managers are supplied with movement reports to stay on top of demand trends.

Last year, Grocery Gateway began using a GPS-enhanced route-planning system, from Cube Route, Chicago, which helps the online service to meet its 90-minute delivery window. Since installing the system, it has improved its on-time delivery performance by 14% while increasing its yearly stops per paid hour number by 12.4%.

The GPS capability “lets us know what's happening on the road, so we can give a customer an accurate assessment of when a delivery will arrive,” said Tallevi.

Grocery Gateway also employs customer relationship marketing (CRM) software to target online shoppers with offers tailored to their shopping characteristics. The online service is especially keen on targeting first-time shoppers with a generous offer — $15 off their next order — to make sure they come back. “Those who take the offer become [regular] shoppers,” Tallevi said.