It looks like the business model of selling groceries over the Internet and delivering them to your door is a loser. Peapod’s (PPOD) high profile stock is plummeting. Streamline (SLNE), Webvan (WBVN) and the newest kid on the block, Homegrocer.com (HOMG), have prices hovering around their IPO debut price.
Some analysts are saying the online grocers are having problems because brick and mortar groceries satisfy most consumers' needs. But others, for example senior market analyst Jeff Hirschkorn of IPO.com (as reported by E-Commerce Times) believe the need is there, but the business model should look more like that of priceline.com (PLCN).
What? People are going to bid on groceries and then pick them up at a local market? All right, I wasn’t originally a big believer in the Priceline model and I’ve been proven wrong. But will this model really work with groceries? I don’t think so. It just seems this is stretching the Priceline model way too far.
Here’s my argument.
We know the market for groceries tends to break out into different segments. For example, there are people who want a broad selection of products, convenience and service, and are willing to pay a higher price to get these benefits. In the offline world, these people tend to go to high-end grocers and specialty shops.
Statistics show this group tends to have relatively high incomes and Internet connections. It appears that Peapod and the other net grocers who deliver to your door are trying to appeal to this segment.
They may be unsuccessful now, but if Faith Popcorn (of "Clicking" fame) is right, people will cocoon more in the future and this group will continue to grow in size. Unfortunately it may not grow fast enough for these online grocers to survive. In any event, this segment doesn’t care that much about low price, and Priceline has no chance here.
In the offline world you have another major segment of grocery buyers. These people trade-off convenience, selection, and service for every day low prices (EDLP). They go to Wal-Mart (WMT) superstores, Price Club and the other deep discounters.
If Priceline is targeting this segment I think they’re nuts. Assuming current demographic and computer usage data is correct, these shoppers tend to have lower incomes and are least likely to have Internet connections (let alone, a computer). In any case, the history of Wal-Mart is about crushing competitors with their lowest prices (Wal-Mart invented EDLP).
And then you have the middle ground…the segment that wants a balance of convenience and low prices, and whose Internet connections are growing. Notice I didn’t say they cared about the lowest price, but rather a price that justifies the inconvenience of shopping.
And shopping can be inconvenient. You might have to gather the kids, find parking, hassle finding the products you’re looking for, stand in checkout lines (always the one that moves the slowest) and after driving home you carry the bags inside.
So if you’re in this segment, here’s Priceline’s value proposition. First, do some advance work. Hook up to the Internet, bid on every product on your shopping list (and you can’t be too brand loyal because you must be willing to switch to other brands), possibly re-bid on every product if your first bid isn’t accepted, and then check out. Then, go to the store with a computer printout and deal with all the inconveniences I mentioned above.
The key question is whether enough consumers in this segment will be willing to tradeoff this additional lack of convenience for a low price.
Before thinking this is an easy proposition, remember that consumers can already get a low price if they’re willing to inconvenience themselves with some advance work by collecting and using the ubiquitous coupons. But if they are that willing, why is the coupon redemption rate so pitifully low? In fact, academic research indicates consumers just don’t want to spend that much time shopping for groceries. This suggests they really don’t want more inconvenience than they already get at the grocery store.
Frankly, I wonder why manufacturers like Kellogg (K) and Proctor and Gamble (PG) want to play this game. A Priceline type business model tends to put their products heavily in a price focus, encourages brand switching, and reduces brand loyalty.
These are real risks and these manufacturers have been here before – during the eighties. Then, consistent deep discounting lowered their values as branded products (remember - these companies were the poster children for the loss of brand equity in America).
Contrast these risks with the large benefits the Airlines and Hotels derive from the same business model. These companies sell time perishable services - an empty seat on American Airlines (AA) flying to Dallas is empty revenue. So selling unused capacity cheap via Priceline is profitable (and doesn’t hurt their brand equity). But grocery products are far less time perishable (preservatives have seen to that).
Of course, I may be wrong again with Priceline. Maybe their model works well with people who get a thrill out of bidding on stuff. It’s kind of like gambling. Surely this drives a lot of buying on eBay (EBAY) and the other auction sites and probably drives a lot of behavior on Priceline. Who knows, maybe in the future we’ll all be gambling for groceries.
