A strange thing happened to Internet-based food shopping on its way to profitability, or at least to survival. The long-touted strategy of using dedicated distribution centers for order fulfillment seems to be fading in favor of using active retail stores for fulfillment.
The change in sourcing strategy reverses fulfillment back to where it started. First-mover Peapod started down its long road by sourcing product from stores in Chicago, but as time went on the wisdom grew that to pick from a shopper-cluttered store wasn't the way to go. Practice followed that wisdom.
The decision to move to dedicated fulfillment centers for Internet-based shopping -- in the mode of Webvan and others -- grew for a couple of reasons. The chief one was the gush of capital produced by investors that had to be sopped up in some way. Secondly, the presumption was that the business model would become prodigiously successful, rendering it impossible to pick product in an active store with shoppers underfoot.
Both of those assumptions are now proven wrong, so the reversion to the inexpensive method of picking in stores looks better and better.
A news article on Page 23 of this week's SN notes that GroceryWorks.com plans to discontinue use of its two distribution centers in Texas markets in favor of picking from Safeway-owned stores in the area. Safeway is a major investor in GroceryWorks.
This is a strategy that makes a lot of sense at the current time, and not just because Internet-based food shopping isn't destined to produce such sales volume that it will become impossible to pick from stores. Better yet, the method allows fulfillment to be accomplished from multiple locations, moving the logistical side closer to consumers. It also allows every stockkeeping unit offered in a supermarket to be available to Internet shoppers, a situation difficult to achieve in a dedicated fulfillment center when the cost of slotting slow movers is considered.
And, of course, the in-store model is in far better balance with the amount of capital available from the equity markets, specifically little or none.
As is noted in this week's news article, and in earlier ones, Albertson's also is moving toward the in-store logistical model. Meanwhile, the mature Peapod operation has a hybrid model of dedicated centers coupled with dedicated space in the back of active supermarkets, depending on the market. It's likely that Peapod, too, will move to in-store picking since it has set the goal of achieving profitability in the next two years or so.
And, not incidentally, Tesco of the United Kingdom has long used the in-store method and is said to be in the unique position of profitability -- and has been busy describing the method, such as at SN's E-commerce Summit in March.
Finally, the in-store model plays well to the new outlook of using the power of an established brand to drive on-line commerce. It's probably the case that the failed or hobbled models, such as Streamline and Webvan, dissipated so much capital and energy on establishing an identity that they put profitability beyond reach.
Now, on-line propositions are increasingly branded or co-branded with names such as Safeway, Albertson's or one of the Ahold banners (in the case of Ahold-controlled Peapod) so as to obviate the need to build brand identity.
