'This is the Wild West': Inside Peapod's ambitious plans to defeat its online grocery rivals
The only online grocery player to survive the dotcom crash now faces a fresh wave of deep-pocketed challengers, including Instacart and AmazonFresh.
At Peapod, online grocery delivery has always been trendy — even if it took the market years to catch up.
Nearly two decades ago, Peapod emerged as the sole survivor of the online grocery collapse, narrowly escaping the financial carnage that befell other competitors. Now, the dotcom survivor is gearing up for another bruising battle with aggressive, deep-pocketed challengers, including AmazonFresh, Instacart and FreshDirect, who are fighting for online supremacy in a decidedly old-school business.
And of course there's Walmart: The nation's largest retailer also sells the most groceries, a category that's critical to market dominance for its ability to drive traffic and cement loyalty. Groceries account for more than half the company's sales. Walmart is testing several modes of grocery delivery including click-and-collect models that include a 24-hour automated kiosk, an Uber partnership in Arizona and most recently, a program where employees deliver grocery orders to customers on their way home from work.
Executives at Peapod come equipped with one thing lacking at many of their competitors: nearly 30 years of experience understanding the intricacies of delivering pasta, crackers, soups, cereals, juices and thousands of other food and beverage products. This invaluable insight is by no means a guarantee for success, but it could give Peapod an advantage over fast-growing rivals that the company claims are making many of the same mistakes it and other startups made before the dotcom implosion.
“We fail fast, and we learn, and we optimize — and that’s sort of the thing we’ve been doing for the last 29-plus years,” Carrie Bienkowski, Peapod’s chief marketing officer who joined the company in 2014 from eBay, told Food Dive in an interview at the company's headquarters 16 miles north of Chicago. “We’re really good at delivering groceries, and we know how to do that incredibly efficiently — and that’s why we’re going to be here 10 years from now.”
In an industry beset by slow growth and razor-thin margins, grocery companies are hungry to capture any new revenue they can, and the online business represents a potentially lucrative opportunity. An estimated 20% of all grocery spending — a total of around $100 billion — is expected to come from online shoppers by 2025, according to the Food Marketing Institute and Nielsen.
While a quarter of consumers today regularly do their shopping from their computers, that figure is expected to more than double during the next decade. With e-commerce comprising just 2% of grocery sales today, there’s plenty of room for Peapod and its competitors to grow their online businesses.
“Grocery and food are really the last — and the only — vertical that has not gone through that inflection point in terms of a digital transformation. This is the Wild West."
Peapod’s chief marketing officer
Capturing those consumers would create a financial windfall for the companies that emerge victorious, potentially bringing in billions of dollars in revenue while simultaneously siphoning business away from other players desperate to grab a stake in the fast-growing sector.
“Grocery and food are really the last — and the only — vertical that has not gone through that inflection point in terms of a digital transformation,” Bienkowski said. “This is the Wild West. If you want to be at the forefront of what is truly innovative, and what is truly new, and where consumer habits are changing — ironically, it’s in this very old school [business].”
But as the collapse of Webvan, HomeGrocer and other online operations from the dotcom era shows, expanding too fast without access to capital and lacking sufficient knowledge of the market and the changes that are taking place increases the odds that today’s hot and trendy upstarts become tomorrow’s multimillion-dollar busts.
'Growth over profitability'
Peapod was founded in 1989 by a pair of brothers, Thomas and Andrew Parkinson, but the innovative idea was still several years away from moving online. In the beginning, employees delivered the company’s product catalog to customers by hand on a floppy disk — at first targeting about 400 people in the Chicago area.
Customers would submit their orders and employees at Peapod — oftentimes the brothers themselves — would grab items from nearby store shelves before delivering. It wasn’t until 1996 that the company launched its website — making it one of the first internet startups.
“Many of the other players that are entering the space are falling into the trap of prioritizing growth over profitability,” said Bienkowski. “I think there is still this temptation to ignore the rules of physics and math, in terms of at some point an entity has to bring in more revenue than cost — and it sounds very, very simple… but at some point, all companies have to be self-sustaining.”
Peapod executives are tight-lipped about their finances, pegging annual growth in the double digits. Kantar Retail Americas Market Insights estimates Peapod, which posted sales of $758 million in 2016, could see revenue top $1.2 billion by 2022.
While an estimated 0.5% of U.S. shoppers have used Peapod, compared to 2% for AmazonFresh, its sales are significantly higher than the retail juggernaut, signifying that Peapod's core consumers are shopping more frequently and spending more when they do.
"[Peapod is] Ahold Delhaize’s most under-promoted asset and there are significant upside opportunities if the retailer is able to better promote it and drive increased shopper penetration," Elley Symmes, an analyst at Kantar Retail Americas Market Insights, told Food Dive.
Peapod learned early on that using the traditional grocery store to complete orders is good when you are just starting out, but it isn't scalable when the business really begins to grow. Bienkowski contends that grabbing items at supermarkets where aisles and displays are laid out to maximize high-margin purchases is not conducive to shopping for someone else’s groceries. Peapod is now dependent upon its network of 26 distribution centers to quickly and efficiently fulfill orders on the more than 12,000 products it carries.
The online grocer has carefully studied how to deliver those orders once they have been assembled. Peapod has detailed what it calls “last-mile metrics” — a complex set of algorithms that enable it to systematically pack multiple orders on the truck and understand what routes to take in order to maximize revenue and save time. The company is happy to concede the instant delivery game to smaller players, instead focusing its attention on larger, more profitable orders.
The last one standing... again?
Peapod first started out in Chicago, but has since branched out to 24 metropolitan area markets. The online grocer, which is only profitable in mature markets such as Boston, Chicago and Washington, D.C., has taken steps to increase its presence and meet demand in other places like New York City where it is building a 345,000-square foot distribution center designed to handle the city's dense population.
To be sure, Peapod has one advantage few of its competitors do, with the exception of Amazon and Walmart: a much larger parent company committed to boosting its online presence and a willingness to help fund growth in markets where there is significant potential.
“I do see them being one of the last ones standing,” Symmes said. ”Ahold Delhaize has made it very clear that e-commerce is one of their top priorities from an investment standpoint so they are going to have the corporate backing to be able to do the investments that they need.”
Ahold, the Netherlands-based food and grocery retail company, purchased a majority stake in Peapod in 2000 when the financially-strapped company was burning through cash and reeling from the resignation of its CEO — a sudden loss that prompted investors to pull a crucial $120 million investment.
A year later, Ahold, which operates stores under the Giant and Stop & Shop banners, bought the rest of Peapod— giving the struggling online grocer time to focus on improving operations rather than worrying about obtaining new sources of funding.
Ahold merged last year with Food Lion owner Delhaize to create a $40 billion retailer, effectively doubling the geographic locations Peapod could tap into for future growth. Today, Peapod continues to benefit from the company’s purchasing power, its extensive infrastructure network and other intangibles its rivals can’t access. Peapod, for example, can take unused storage space in a brick-and-mortar store and turn it into a mini-warehouse to complete orders for area customers.
“As we think about expansion into new cities, as we think about expanding to new channels like pickup, we have been able to piggyback on that existing infrastructure to expand relatively quickly and very, very efficiently without having to make large capital expenditures to enter a new geography,” Bienkowski said. “It’s a very high-class problem to have multiple growth opportunities to choose from, but we’re trying to be really smart about the ones we choose.”
Is a conservative approach the right one?
Analysts have expressed concern for years that Peapod was accustomed to being the only player in several markets where Ahold has stores — and for that reason, it had little incentive to promote itself beyond its recognizable green delivery trucks. The company could embrace a conservative approach and methodically enter new markets when the time was right.
As online rivals build out their own businesses today, Peapod has stepped up its effort to boost brand awareness, highlighted by a massive marketing campaign in the New York City region. Dubbed "The Grocery Store at Your Front Door," the campaign includes print and digital advertising as well as a contest for local artists to redesign the outside of a delivery truck. Peapod also is offering New York customers $25 off their first two orders and 60 days of free delivery. A larger nationwide campaign is expected later this year.
But with its competitors seemingly moving into new markets every few weeks, analysts say Peapod needs to decide how aggressively it wants to compete and challenge rivals that are establishing a fast and potentially insurmountable advantage in some areas.
"[Peapod has] had so much time to get to know the space, but they have historically been slow to innovate and you’re seeing that catch up with them now.”
Analyst at Kantar Retail Americas Market Insights
Instacart, which has expanded to Detroit and Las Vegas this year as part of its goal of reaching 80% of U.S. households by 2018, recently announced it was offering new customers in Texas and the Midwest free delivery for a year on orders of $35 and up. Instacart owns 50% market share in the third-party online grocery space and has deals in place with retailers including Costco, Publix, H-E-B and BJ's Wholesale Club.
Shipt, which started in Birmingham, Alabama just three years ago, has leveraged its subscription model to quickly expand to 47 metropolitan markets with plans to double its reach during the next year. And AmazonFresh is now available in 16 cities after launching its service during the last year in Dallas, Chicago, Denver and Boston. Amazon also has easy access to millions of built-in Prime members it can leverage, not to mention the capital needed to move upmarket very quickly.
Even in cities where Peapod has long been a major player, its list of competitors continues to grow. FreshDirect announced in March it is planning to enter the D.C. market sometime in the near future, placing it in direct competition with other grocery delivery services such as AmazonFresh, Google Express, Instacart, Safeway and, of course, Peapod.
“Everyone is trying to have this service offered to shoppers,” said Symmes. Peapod is now finding it needs “to start to stand out against these trendier competitors. They are recognizing that it’s no longer enough to just be the oldest guy in the group. They have had so much time to get to know the space, but they have historically been slow to innovate and you’re seeing that catch up with them now.”
Still, the company has what amounts to a favorable head start as well as plenty of avenues for future growth. Peapod has yet to tap into the new markets Ahold entered through its merger with Delhaize.
Phil Lempert, a grocery industry expert who oversees Supermarketguru.com, said Peapod has done a good job training its employees to understand food and how best to select, package, load and deliver it — something he calls the company’s “secret weapon.” Peapod also has benefited from new executive hires with online experience including Bienkowski at eBay and Jennifer Carr-Smith, now the company's president, who was previously chief operating officer of apparel retailer J. Crew.
The company is not immune to challenges from other upstart grocery delivery companies or the rapid growth of click-and-collect services being offered at many supermarkets, he said. But Lempert predicts Peapod will inevitably emerge again as one of the few companies to survive in the battle for online grocery supremacy.
"Peapod wants to be in business," Lempert told Food Dive. "When I look at all these Silicon Valley companies [like Instacart], that's what they want to do — raise money, get rich and sell out — unlike Peapod, where they are in it for the long haul."
Knowing what you don't know
Executives at Peapod are confident in the company's ability to deliver groceries quickly and efficiently, but they are forthcoming about areas where they may lack expertise.
Peapod continues to benefit from the experience amassed during nearly 30 years of being in business and the close relationships it has with major food manufacturers, who are familiar with how the company works and its deep knowledge of the grocery delivery industry.
Barilla, for example, approached Peapod in 2014 about working on a meal kit — a partnership that enabled Peapod to take advantage of the pasta maker’s corporate kitchen, innovation and testing. ConAgra later witnessed what was happening with Barilla and approached Peapod a year later to work on their own together — bringing with it valuable food trends and demographic research unavailable to the online grocer. Peapod has since struck other meal-kit deals with General Mills, Campbell Soup, PepsiCo and spirit maker Jim Beam.
Peapod has worked with outside partners to make the process of meal planning, ordering groceries and preparing food easier — a factor further complicated by the fact that millennials, many of whom grew up without culinary skills, are going to Pinterest, Instagram or blogs for inspiration and need a little guidance to make what they find.
A recent partnership with a California startup led to the development of an Alexa-like device where shoppers can add an item to their cart by scanning it or using their voice. In addition, Peapod has developed a recipe site, FromthePod.com, with more than 400 shoppable recipes that allow customers to automatically fill their cart with all of the ingredients needed for home delivery.
Peapod also struck a deal in April with DinnerTime.com to make planning and shopping for meals more convenient. DinnerTime takes into account product promotions at Peapod, as well as a shopper's personal tastes, time constraints, tastes, budget and dietary restrictions, to create a parallel shopping list, which is then either programmed for home delivery or pick-up.
“You do not survive in this industry without being a little paranoid and looking over your shoulder," Bienkowski said. "Ten years ago, just getting your groceries delivered — that was convenient. But one of the things we're really internalizing is the fact that we've got to continue to evolve beyond just the delivery of groceries."
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