Peapod: It's the Delivery, Stupid

MICHAEL GARRY

If experience is the best teacher, then Thomas Parkinson must know a lot about online grocery sales.

For one thing, Parkinson, 43, and his brother Andrew have been in the business of selling groceries online as long as anyone, having introduced the concept in 1989 when they launched Peapod. His knowledge is starting to pay off.

Peapod, like many Internet ventures, has had plenty of highs and lows during its lifetime, but the service has been riding high since it was acquired by Ahold in 2000. Led by Parkinson, now chief technology officer, his brother Andrew, chief financial officer, and Marc van Gelder, president and chief executive officer, Peapod has been charting a course of both profitability and growth.

Parkinson, named one of SN's 50 industry visionaries in 2002, attributes the recent success to several factors. Ahold's acquisition gave Peapod the footing and stability to go forward at a perilous time in its history, but the innovations that Parkinson and his team introduced — especially in delivery and scheduling — coupled with its ability to manage two very different service models, have helped turn the tide.

For reviving its business and figuring out how to become profitable in an arena that has waylaid many other players in recent years, SN has selected Peapod as the winner of the 2004 Technology Excellence Award in the online sales category.

Peapod, based in Skokie, Ill., operates in several markets under two logistics models. In its home market of Chicago — the only non-Ahold market — it uses a warehouse as a base of operations, picking orders there for delivery. It employs that model also in the Washington, D.C., area, where it is affiliated with Ahold's Giant Foods division.

Yet in the New York area and in New England, where it is affiliated with Ahold's Stop & Shop division, Peapod employs a much different approach, picking products from "warerooms" — the second floor of select Stop & Shop stores — and from the perishables areas of those stores. Those markets include Boston; Long Island, N.Y.; Westchester County, N.Y.; and three markets in Connecticut (Norwalk, Hartford and New Haven). Hartford and New Haven were launched last year.

Asked which model was better, Parkinson said the economics of each are about the same. "When you look at the economics, transportation is less expensive for the warerooms because you don't have to drive as far, but picking costs are more expensive — you need more of them to cover an area," he explained. "In the warehouses, the picking is cheaper, but transportation is more expensive. The funny thing is, it all works out the same in the end. It's a beautiful thing, really."

Also beautiful is the profitability and growth picture. Parkinson said Peapod is now profitable in four of its five main markets (he doesn't say which is not profitable), serving 150,000 customers. Sales grew by 23% last year, and the service will open up in "several new markets" this year, including Providence, R.I., in April, he added. Average order size has grown from $120 to $145.

A key ingredient to the recent turnaround has been Peapod's focus on the less glamorous, but really essential, part of the online business: efficient delivery. Like any wholesaler, Peapod has worked on ways to make sure its trucks are as full as possible and that their routes are as compact as possible.

To achieve this, Peapod borrowed a page from airlines' book, developing a "yield management" model. Just as airlines provide monetary incentives for flying at certain times and in certain seats, Peapod gives its customers incentives for accepting delivery at less desirable times: the more flexible the customer, the less the delivery charge. Peapod's base delivery fees vary by order, ranging from $4.95 (more-than-$100 order) to $9.95 ($50 to $75 order), but those fees can be cut by a dollar or two. Parkinson called the incentive program "Smart Mile." Peapod has even created a department — the Logistics Group — that monitors the times selected by customers.

Smart Mile "gets demand to move and smoothes the routes out," he said. "Suddenly, we got more orders on a route and that changed the economics dramatically and we started to become profitable." Peapod uses routing software from Descartes.

Peapod also adjusts the service model based on population density and demographics. In low-density areas around Washington, deliveries may be made twice a week, while in densely populated Cambridge, Mass., Peapod delivers seven days a week. Density also affects whether Peapod will offer "unattended delivery," leaving orders in designated spots outside a shopper's home with perishables in coolers that are picked up on the next delivery. On the Web — at Peapod.com or the affiliated store sites — the appropriate service model is displayed.

Parkinson is now working on enhancing Smart Mile to make it even smarter. In this new version, routes will be created on the fly as orders are taken on the Web. "We will figure out what time we want to be at your house, and offer you that time with an incentive to take it," he said. Currently, the customer is given more choices of times.

Another innovation introduced in the last few years has been enabling loyalty card shoppers at Stop & Shop and Giant to call up the last 13 weeks of purchases online as they create an order for Peapod. "It's a fantastic quick-start for orders," enthused Parkinson. He is also excited about the temperature controls at the Skokie warehouse, which is divided into five temperature zones and automated with conveyor technology.

These days, Parkinson is proud that Peapod survived and proved the naysayers wrong. Also, he's finally able to relax a little. "It's good, solid 25% growth now," he said. "Nothing is crashing and burning. It's a real business."