LOGISTICS KEY TO E-GROCERY SUCCESS: ANALYST

DAN ALAIMO

SAN DIEGO -- Logistics represents a bigger challenge than technology to e-grocers right now, and that may give traditional supermarkets an advantage in launching on-line shopping services, said Matt Stamski, retail analyst, Gomez, Lincoln, Mass.

"In many ways, logistics is the end-all and be-all of this business, because if you can't get people the products they want with the best quality in the time desired, you are not going to have much of a service, if you are a van-based delivery service," Stamski said, speaking to SN during the iGrocer conference here last month.

In Gomez' recent ranking of Internet grocery merchants, No.s 1 and 2 were Webvan and Albertson's, both of which have invested heavily in the logistics of their home shopping operations, he said.

"If you talk to people in Silicon Valley, and those running dot-coms, while no one ever has enough programmers, it is a lot easier for someone to find someone who can code Java than it is for them to find somebody who knows how to run a warehouse," he said.

Many logistics questions are fundamentally technological and can be attacked from a technological angle, he noted. At Webvan, the company's competitive advantage is that everything is driven by its technology, he said.

"But the logistics of picking and packing accurate fresh orders every time is a significant challenge, because, while a grocery shopper in a store might pick a bad tomato, they will cut themselves some slack. But if somebody else is picking that tomato for them, they are not going to cut that third party as much slack. If they don't pick accurately and pick quality products, they are going to lose that customer.

"So for the Webvans of the world, the challenge really lies in delivering these products in a timely and fresh manner, and that definitely is still a challenge," Stamski said.

Meanwhile, he noted, the traditional grocers have the infrastructure, and the Internet merchants are starting from scratch, in some cases building multi-million dollar facilities, he said.

"It's a significant advantage and once they are able to figure out how to incorporate the Internet into their operations, it is going to revamp the entire Internet grocery industry and pose a formidable threat to the pure plays," he said.

One disadvantage for traditional supermarkets is altering how they now pick orders. "Most grocery stores or distribution centers are geared toward working with pallets rather than eaches or even crates, so it is going to be tough. One thing they are able to do is look to Tesco in the U.K., which is by far and away the world's largest Internet grocer, and its in-store picking model," Stamski said.

The ability to offer a store pick-up option is another logistical advantage. "Our consumer research is showing that people are drawn to an in-store pick-up model. We think it reinforces that click-and-mortar strategy, and it reinforces the existing trust and relationship that is there with the grocer. For all grocers, particularly the small- to mid-size chains and even the independents, the Internet is a way for them to fight back.

"The grocery industry is losing market share to the Wal-Mart Supercenters, they are losing market share to people eating out of the home. The challenge is, how do they take back some of that share of stomach?

"I think the Internet is going to be a way for them to combat these other sources while leveraging their existing foot traffic that they have. One solution might be home delivery. One answer might be in-store pick-up.

"And another answer might just be information that is going to help the shopper to make better decisions about what they eat.

So in essence, Internet grocery retailing depends as much on the order picking and trucks as on the computers. "For this industry to scale and appeal to the masses, it needs to offer some different solutions. A lot of these companies are going to have to figure out how to efficiently do the in-store pick-up model and how to leverage their bricks-and-mortar entities, because not everyone needs a full-on van-based delivery service. Those appeal to the very convenience-minded people.