Online grocery shopping largely failing to deliver

It is vast, with more than 16 kilometres of conveyor belts and a futuristic control centre. It is also eerily sentient, in the way that highly automated plants tend to be, with thousands of little baskets zooming about.

At this distribution centre, the largest of its sort in the world, Ocado fills baskets with about a million items of food and other perishable goods each day, loads them onto vans and sends them to homes across England.

Overshadowing the enormous warehouse, which sells about as much as 25 supermarkets would, are questions over the future of Internet grocery shopping. The issue has been brought to the fore by Ocado's plans to list its shares at a price that would putatively value the firm at about US$1.52 billion.

It is almost a decade since the collapse of Webvan, an American Internet grocer that was a darling of the dotcom boom. Its short life seemed to sum up all that was wrong with the idea of bypassing shops and selling food directly to consumers.

Its warehouses were enormously expensive and never fully utilized. Its delivery vans, which were rarely full, drove huge distances. And its customers balked at paying for being spared the torment of supermarket shopping.

Internet grocers are more popular in Britain, largely because many city dwellers lack cars. Verdict, a research firm, reckons Internet orders will account for almost five per cent of the British grocery market this year and perhaps double that by 2014.

Ocado's sales have increased by 21 per cent a year since 2007. Ocado nonetheless has yet to make a profit and seems unlikely to do so soon. In this it has plenty of company. Most of its main British rivals are also thought to be unprofitable, though hard data are scarce.

A company selling music online needs only to add a few servers to increase capacity if sales double. Amazon, the world's biggest online retailer, which relies on the postal service for many of its deliveries, can simply ship items a day or two later if it is overwhelmed.

Grocers, on the other hand, sell perishable products that have to be kept frozen or cool and that must also be delivered at specific times. To make matters worse, online grocery shoppers tend to want their food delivered at the beginning or end of the week, leading to a crush of orders.

All this is expensive. Some analysts reckon it costs $40 to $50 to deliver groceries to a British house. In large parts of North America, where population densities are lower, it would be much costlier.

And although customers currently bear the expense of going to stores themselves, they are reluctant to pay for their shopping to be brought to them instead. Nielsen, a research firm, found that the two most common reasons Americans gave for not buying groceries online were delivery costs and the desire not to have to wait for a delivery.

One way of cutting costs is to pack bags at existing stores. Tesco, which has about half of Britain's online-grocery market, does this. But the approach has limits: Tesco's shoppers have taken to complaining if stores are crowded by busy Internet packers.

In response the firm is building "ghost" stores that are shopped only by staff packing bags for delivery. It may be a short leap from that to start delivering directly from warehouses, as Ocado does.

There is another drawback to online grocery shopping. A Harvard Business School study found that people ordering goods for delivery in a few days' time were less likely to succumb to temptations such as ice cream. On the Internet there is no sweet-filled alley leading to the checkout.

In time, Ocado may decide to open some real-world stores to capture such impulse spending, build its brand and keep its warehouses busy throughout the week. If that happens, supermarket chains and online outfits will gradually come to resemble each other.

Republished from the Winnipeg Free Press print edition July 22, 2010 A13