Organics Online

CHRISTINE BLANK

In the food retailing business, the well-known online shopping entities include such companies as Peapod, a division of Ahold, as well as Safeway.com, MyWebGrocer and some local players like FreshDirect and SimonDelivers.

But another significant segment, operating somewhat under the radar, is one encompassing a surprisingly large number of online shopping sites catering to organic and natural consumers.

In some ways these sites hark back to the early days of the whole health phenomenon when natural food shoppers had to rely on mail-order catalogs to supply them with products. Since then, the whole health market has gone mainstream, and it has left a legacy of shoppers who can leverage the Internet to meet their shopping needs.

Often more tech-savvy than the average grocery shopper, these consumers are now supporting a cottage industry of natural food sites. Many major metropolitan areas now have at least one online organic/natural food shopping site operating solely as an Internet outlet without a brick-and-mortar store. And most of the online companies have expanded their offerings to become full-service grocery providers, rather than just providing organic items.

It all adds up to a phenomenon that has lessons for any food retailer interested in tapping into online sales — and protecting its market share.

Like conventional online services, natural/organic sites seek to make the shopping experience more convenient for shoppers. “A lot of people don't want to go to the grocery store,” said Mason Arnold, president of startup organic delivery service Greenling Organics in Austin, Texas. Arnold also believes his perishable items are fresher than what is sold in grocery stores.

Major grocery shopping trips are on the decline because many time-starved consumers do not want to spend time in the grocery store, said Eric Satz, president of organic and natural delivery service Plumgood Foods, Nashville, Tenn. “This [ordering online] only takes 10 to 15 minutes,” he said.

Nearly 40% of Web shoppers say they are pressed for time and more than 70% find shopping online easier than through other channels, according to “U.S. eCommerce: Five-Year Forecast and Data Overview,” from Forrester Research, Cambridge, Mass.

For online shoppers, convenience is becoming more important than saving money, according to the study.

Online natural food executives are seeing the same trend. “Our shoppers are folks that have very little time and want to keep their families healthy,” said Larry Bearg, chief executive officer of 10-year-old organic grocery delivery service Planet Organics, San Francisco. “A lot of folks are elderly and it is difficult to get out of the house.”

The primary users of Planet Organics' service — a subscription-based system of weekly deliveries of meat, produce, dairy and grocery items, as well as nonfood products such as pet supplies and natural household cleaners — are families with children. “Fifty percent of our customers are moms at home with their kids or working out of their homes,” Bearg said.

One factor that makes shopping at Planet Organics more convenient is the “pretty bad traffic and bad parking” in the San Francisco Bay area, he added.

Some online delivery services are a good option for organic and natural shoppers who do not live near a Whole Foods or Wild Oats store, according to Laura Ruby, customer outreach coordinator for Door to Door Organics, Denver.

Even conventional online grocers are getting into the act. Last fall, Peapod added 120 Wild Oats-branded products to its website for customers in the Washington metro area. This allows shoppers in the D.C. market to get Wild Oats products, even though there are no Wild Oats stores in the region. Peapod was already carrying Wild Oats' products for its customers in Chicago.

And Amazon added a Natural & Organic specialty store to its Amazon Grocery site last summer, starting with about 5,000 natural and organic dry grocery items. At the time, Amazon said it would consistently add organic and natural items to its grocery selection.

GROWING SALES

While selling food online can be a hazardous enterprise that claimed the likes of Webvan, Streamline and others, the online grocery market has stabilized. In 2006, Americans spent $6.2 billion on food, beverages and groceries on the Internet, and that figure will more than double to $12.7 billion by 2011, according to Forrester's eCommerce report.

Online sales data for organic and natural groceries is not available, but some executives told SN their sales were growing between 15% and 50% a year.

Planet Organics is one of the best examples of sales success in the marketplace, boasting a projected $5 million in sales in 2006 and 4,500 active customers. Its average basket order is about $50, and the order size continues to grow as the site adds more items.

Planet Organics started by offering a selection of organic produce items, but now carries more than 100 grocery products, from prepared foods to toilet paper. “We are working our way up to a complete organic grocery store on wheels,” Bearg said.

Plumgood Foods has also expanded from fresh organic and natural items to toilet paper, household items and other nonfood (and sometimes non-organic) products via a partnership with Costco. It sells Costco's Kirkland-brand paper towels and other items. “It helped us round out our personal care and household business,” Satz said.

Expanding selection — including more prepared meals — has helped Plumgood double sales in 2006. Early next year, it will move from a 10,000-square-foot warehouse to a 30,000-square-foot building.

Greenling Organic, which started 1½ years ago, is still struggling to become profitable, but has derived extra sales from a would-be competitor: grocery stores.

Since it buys produce from local organic farmers, Greenling delivers wholesale organic goods to small grocery stores in the area.

“Our trucks are already out there, and sometimes we have a better timeframe for delivery [than conventional distributors],” Arnold said. In addition, farmers who would not typically be able to sell their produce to grocery stores can get into that market through Greenling, according to Arnold.

Greenling expects to do between $750,000 and $1 million in sales in 2006 and Arnold predicts nothing but continued growth in the Austin area. “I feel like we have barely tapped the market,” he said.

Operating on tight marketing budgets, natural online operators rely on word of mouth as their best method of garnering new customers. Most deliver to offices, where shoppers tell their co-workers, while friends and families tell each other about the natural and organic delivery services.

“Our biggest source of new customers is current customers telling others,” Bearg said. Planet Organics also receives many referrals from health care programs, Lamaze classes, and cancer support groups.

“Word of mouth has been our best ally,” agreed Ruby of Door to Door Organics. The company, which started with a small crew in a garage, now has 13 employees and delivers to the entire state of Colorado.

Many new Door to Door customers hear about the service at work, since about half of Door to Door's deliveries go to offices. Because the company is set up like a cooperative, office workers can join with four co-workers to obtain co-op pricing.

PROFITABILITY QUESTIONS

While the online organic-focused grocery services report fast growth — in some cases, sales in the millions of dollars a year — their profitability is still unclear.

Many are small, private companies that do not report their operating and profit margins. Some are funded by venture capital, along with the owners' savings and a shoestring budget.

But they all incur the significant expense of storing and distributing food.

“With the high fixed costs of distribution and warehousing, you either have to have critical mass pretty quickly or it is not possible,” said Jay Jacobowitz, president of consulting firm Retail Insights, Brattleboro, Vt. The model works better if an online grocer uses a third party shipper and passes shopping costs on to customers, he added.

But, most organic and natural services are not making up for delivery costs by jacking up prices on their products or charging for delivery.

And selling perishables sight-unseen to consumers remains a tricky business, Jacobowitz pointed out. If the online service does not consistently deliver the quality of produce shoppers expect, shoppers will not use the service.

Arnold of Greenling Organics acknowledged that the online grocery delivery business is very capital intensive. “It is definitely not lucrative like software; it is perishable food, and is very difficult to work with,” he said.

Greenling Organic was formed with a “variety of funding measures,” Arnold said, and runs a lean operation to provide organic food at affordable prices. “We're trying to create wealth in a way that is socially responsible and environmentally friendly.”