GUELPH, Ont., -- For years, the vagaries of online grocery shopping have presented a complex code that many companies have longed to crack.
Several of the best-known attempts to do so took place during the historic dot-com bubble of the late 1990s and early 2000s, the best example being Webvan, which failed to tap into this burgeoning market at a price of over $1 billion; specifically, the cost of developing warehouse and delivery infrastructure proved too overwhelming for the fledgling franchise.
Purchased in 2009 by Amazon, Webvan is now considered the biggest loser of the dot-com bust. A similar fate met HomeGrocer.com (which was bought out by Webvan a year preceding its own demise).
More than a decade later, however, one company believes it has the proper infrastructure to support a modern distribution approach to food.
Amazon announced recently it is prepared to expand aggressively into the grocery business. Under the banner of AmazonFresh, the online mega-emporium already sells some non-perishable food items in the grocery and gourmet food section of its U.S. website. The proposed expansion would include Amazon's own trucks delivering fresh food and produce.
Considering the business's razor-thin profit margins, some may wonder why large corporations would bother offering consumers online grocery delivery. The answer is simple: customers need to eat every single day, and the advantage in being inside homes more frequently might well outweigh the risk. Amazon could compensate any potential loss by simultaneously delivering high-margin products like electronics. It can be argued this business model could work for a high-profile brand like Amazon; once consumer habits change due to enhanced convenience anything is possible, so long as the price is right. The question is: Will enough customers will feel comfortable ordering perishable items like produce and allow an outside source to pick their peppers or cucumbers?
In addition, in-store grocery shoppers are often astute, regularly trying to buy products with the furthest expiry date possible to better manage home food inventory, reduce waste and save money. At this point that particular skill set is not transferable online. Any potential virtual grocery shopping experience would need to address and attempt to equal or better these kinds of experiential details provided by the multi-sensory experience of roaming grocery store aisles.
What goes on in the U.S. and with Amazon may very well influence how the market will develop here. We could see Walmart, Target or even Loblaw's develop hybrid strategies over the next decade, offering grocery shopping both online and in bricks-and-mortar stores.
Given that Canada is, geographically, the second-largest country in the world, the logistical challenges posed by this industry are hardly trivial. Building economies of scale will not be easy; the virtual food retailing space could be occupied by a few regional-based players in a decade or so, or, we could see a larger player overpowering the market. A business case would need to be built. As consumers become older, less mobile, temporarily or permanently affected by injuries, chronic illnesses or, for some, trying to minimize their carbon footprint, the online option may become increasingly attractive moving forward.
As market segments become increasingly fragmented, the food industry is becoming equally complicated to analyze. Consumers are looking for different things, for different reasons, all of the time. As a result, grocery stores are beehives at night as they roll inventories hundreds of times a year. "Virtual" stores could reduce costs from such a perspective.
Finally, the Amazon announcement presents an interesting case study. The company has the infrastructure, but no physical presence to couple its online strategy. However, Amazon is significant enough to allow many to consider this move a tipping point for the grocery business. Essentially, because of its market power, Amazon could very well do what Apple did to the music industry: rewrite another industry's rule books from the outside.
Sylvain Charlebois is associate dean of the college of management and economics, University of Guelph, Ont.