GroceryWorks.com was founded in 1999 by Kelby Hagar a then 29-year-old Harvard educated lawyer. The premise was to create an on-line home delivery grocery store that would be comparable with the brick-and-mortar grocery stores on price and offer higher quality products. During 1999, the infrastructure for GroceryWorks was established in a 90,000 square foot warehouse in the Dallas area and the company went live on the internet in January 2000 serving the Dallas area. The company offers its customers a full range of traditional grocery benefits plus home delivery. The on-line grocery items include perishables such as: meat, fish, produce, prepared meals, refrigerated, and frozen food. There are no service charges, monthly charges, or sign-up fees. The delivery service is direct to your kitchen counter and free for orders above $60.00. The pricing of the grocery items are comparable to other high quality supermarkets. In June 2000 GroceryWorks, in an effort to solidify ties to a brick-and-mortar establishment, signed an agreement with Safeway Inc to be the exclusive on-line grocery channel for Safeway stores. This allowed GroceryWorks to utilize the Tom Thumb brand name recognition on its products and services.

Kelby Hagar is the founding father of GroceryWorks.com. He originally conceived the idea for an on-line supermarket while attending Harvard Law School. He was considered a technology "geek" who felt that it was a pain to go to the grocery store each week and struggled to find an internet site that would serve his needs. After graduating from Harvard Law School, Kelby started practicing law at a law firm in Dallas, Texas where he continued to cultivate the idea for GroceryWorks. Kelby finally finished developing the business model for GroceryWorks and began to shop the idea to venture capitalists. One firm, Donaldson, Lufkin & Jenerette Securities recognized the potential and provided the initial round of venture funding to Kelby to start his business. In January 2000 Kelby hired Gary Fernandes from Convergent Partners, a venture capitalist firm that Kelby had proposed his idea to, as GroceryWorks Chairman and Chief Executive Officer. Gary had spent 30 years with Electronic Data Systems, most recently as its Vice Chairman, and had a broad range of upper management experience. Gary Fernandes was instrumental in securing additional venture capitalist funding for GroceryWorks including bringing Safeway in. Safeway Inc. is a Fortune 50 company and is one of the largest food and drug retailers in North America. Safeway provides grocery operations regionally through its affiliates, Vons, Dominicks, Randalls, and Tom Thumb stores. The Safeway deal is a joint venture that combines Safeway’s purchasing power, expertise in promotion and advertising, brand recognition and customer service with GroceryWorks on-line business model, web merchandising, home delivery and routing systems.

The grocery market is a $450 billion industry. The web grocers are fighting for a piece of the market share and how to position themselves in the market. The main players in the on-line grocery market were Webvan, HomeGrocer, Peapod, and GroceryWorks. However, with the environment of the internet market changing rapidly, the face of competition in this industry has changed dramatically over the last year. Webvan purchased HomeGrocer and re-badged the product under the Webvan brand. Peapod had financial difficulty and was purchased by Dutch grocery store operator Royal Ahold. The focus of competition for GroceryWorks was with Webvan and the brick-and-mortar grocery stores. Currently, GroceryWorks offers its services in the Dallas Metroplex, Austin, and Houston markets. As of late, all other on-line grocery stores have pulled out of these markets. The financial difficulties of GroceryWork’s competitors have caused them to rethink their growth strategy plan and focus on making a profitable operation in their home markets before they expand to new markets.

The positioning of the on-line grocery product in Dallas is no surprise to some people. The Dallas area is considered one of the top battlegrounds for the nations top on-line grocers. Dallas is considered a "wired" city. These neighborhoods include some of the most affluent, dual-income, internet-savvy surfers in the country. The target customers are households with children and annual incomes over $70,000, mothers with newborn children, the elderly, and stay-at-home mothers. The big advantage to mothers is the home delivery where they do not have to take the children to the store. Another market segment that has seemed to develop is with larger "heavy" bulk items. Customers are ordering the "heavy" items from the on-line stores where the delivery driver carries the product and places it in your kitchen. A market segment that they seemed to miss in the early stages of the launch was with the mothers of newborns where GroceryWorks did not stock "bulk" items of diapers and baby formula and were showered with requests to offer larger package sizes.

GroceryWorks advertising is focused on gaining brand recognition and awareness. They advertise heavily in their core markets using billboards, radio spots, and print ads. The single most successful advertising venture is with their "fun fruit". Their ads and delivery vehicles are decorated with fruits and vegetables that have "fun" faces. They purchased the rights to use the "fun fruit" from a well-known children’s author and it has proved to be a successful investment in gaining brand recognition.

GroceryWorks constantly runs "in-store" weekly specials on the web site. They also honor all manufacturers coupons, however, the coupon is given to the delivery driver and your next order is credited with the coupon amount. The delivery service is free when an order is $60.00 or more. To aid in the generation of repeat business GroceryWorks was supplying a free gift with a customers first 5 orders. GroceryWorks does track the spending habits of its customers and although they will not release customer "specific" information (i.e. name, address, phone) they will sell the demographic information to outside organizations. A longer-term promotional tactic is to charge product manufacturers for "placing" their products on the web site, similar to brick-and-mortar stores charging shelf space.

The pricing structure of GroceryWorks is to price the grocery items at the same price as the higher quality supermarket stores, such as Tom Thumb. In most instances the prices are higher than a Krogers or Albertsons, but they are not considered the high quality brick-and-mortar competitors. The Safeway alliance has provided GroceryWorks the ability to ensure price parity with the Tom Thumb stores in the Dallas, Austin, and Houston areas.

The business model for GroceryWorks is based on the development of a infrastructure to support a single warehouse that is centrally located within a market and the technology needed to interface between a web based system, a warehouse management system, and a delivery routing system. The model is based on servicing 5,000 customers/day at a cost of $9.5 million. A warehouse is purchased or leased and stores the non-perishable grocery items. The perishable items are outsourced to local suppliers who are connected to the warehouse management system and prepackage the products based on customer order input. The business model requires the web based system, the warehouse management system, and the routing system to be the state-of-the-art technology that can minimize the level of human contact and automate as much as possible to keep overhead costs to a minimum.

The internet site is now maintained by internal GroceryWorks personnel, however, the initial start-up site was developed for GroceryWorks by Advanced Visuals NYC, an ecommerce development company, as a joint alliance. The warehouse management system (WMS) is a cutting edge technology system that was adapted for GroceryWorks by EXE Technologies. The system is Exceed 4000 and has a cost of around $25 million. A partnership was formed with EXE where a portion of the $25 mil was paid and the remainder of the balance was an exchange of stock in GroceryWorks. The delivery routing system is handled by RoadNet and utilizes GPS to calculate the shortest path for delivery cycles to customers and for supplier pick-ups.

When GroceryWorks form the joint venture with Safeway Inc. they were able to utilize Safeway distribution channels and leverage resources to achieve a more efficient system. Safeway brought to the table the bargaining power of the Safeway brand; as a result, GroceryWorks was actually able to increase their margins by decreasing costs in the distribution channels.

GroceryWorks formed partnerships with existing brand name food providers to offer their products on the internet under exclusive agreements. Eatzi’s Pizza/Pasta/Italian and Colter’s BBQ were exclusive internet agreements with GroceryWorks and they advertised the products as differentiators to competitors. GroceryWorks also formed a partnership with Magazines.com where customers could order magazines from Magazines.com through the GroceryWorks web site and the order would be delivered with the grocery delivery service.

GroceryWorks business model is established on the development of alliances with local suppliers that are willing to interact with the warehouse management system and provide customer based prepackaging of products. The perishable items are completely outsourced and inventoried at the supplier’s warehouse. When a customer enters an order on the web site the information for the perishable item is sent directly to the supplier who packages the order for delivery to the customer. A GroceryWorks delivery van will pick up the item at the suppliers dock on a return run and deliver it to the GroceryWorks warehouse. GroceryWorks will then pass the products through to the correct delivery van and deliver the product with the rest of the order. The meat and deli products are handled through Freeman’s Meat Services, the produce through Standard Fruit and Vegetable, the poultry through Grubbs Chicken, and prepared food through Eatzi’s Italian.

The critical success factors for this industry are to provide quality grocery products while maintaining a minimum amount of overhead fixed cost, to increase margins and gain a large market share. This industry has high overhead fixed costs because of the development of a warehouse, the high technology infrastructure to process the information, and the delivery and routing systems. If the business model is developed with high fixed costs and prices have to be kept comparable to brick-and-mortar supermarkets then the only way to increase profit is through increased market share and retaining customers-for-life. GroceryWorks acknowledges this and has attempted to keep overhead to a minimum by partnering with suppliers to utilize their warehouse capacity and reduce waste. They also have increased grocery sales margins with the Safeway joint venture by leveraging Safeway’s purchasing power over suppliers. They are now in a better position to lower their breakeven point of customer per day.

GroceryWorks established a warehouse in the Dallas area at a cost of $9.5 million, this warehouse is built to support the processing of approximately 5,000 customers/day. As mentioned previously, supplier’s warehouses were used as extensions of the GroceryWorks warehouse to reduce waste, increase product quality, and lower overhead. Compared to a brick-and-mortar supermarket the warehouse and infrastructure was less expensive. However, it did require approximately the same number of employees to operate the warehouse as a brick-and-mortar store. The disadvantage was that with an on-line store there is still the cost of the distribution system, which had a high variable cost. GroceryWorks typically paid a higher wage for delivery drivers because they felt that this was an important junction in the business transaction. The delivery of the product was the only face-to-face interaction with the customer and if the customer did not have a pleasant experience then the customer would not provide repeat business. As a result the cost of the delivery system was approximately $60-$75/hour. With the infrastructure and distribution system in place, GroceryWorks had a breakeven point of 2,780 orders/day at an average cost of $72/order, which yields a daily cost of operations of $210,160. As of the end of 2000 GroceryWorks was only processing 1800 orders/day. GroceryWorks does realize that in order to gain market share they have to lose margin on grocery sales. The goal is to increase market share to cover the overhead fixed costs and once the market share is established they can begin to charge for delivery service and can generate additional revenue from delivery fees.

There are definitely scale economies involved with entering into this market. The substantial capitol investment required to establish a facility and the infrastructure to process the products through the system is a barrier to entry. With GroceryWorks now being the only player in their markets there will be product differentiation through brand identification and awareness. A new competitor will have to spend heavily to overcome the existing customer loyalties.

Since the pullout of Webvan from GroceryWorks markets there are no comparable on-line market competitors. However, GroceryWorks must still compete with the brick-and-mortar supermarkets for market share. GroceryWorks will need to focus on their differentiation from the brick-and-mortar stores, which is the delivery to the customer’s home.

Substitutes in a commodity market suck\h as grocery items are difficult to recognize but GroceryWorks must acknowledge that they are there. The brick-and-mortar stores could offer web based shopping where a customer can place an order and the groceries are picked and packaged and are ready for pick-up by the customer at a given time.

The bargaining power of buyers, with regard to price, is somewhat limited with a commodity such as grocery products. The price you are paying at GroceryWorks is not based on a low cost position but rather on the convenience of having the product delivered to the customers’ home and the cost of the customers’ time for not having to travel to the store. The bargaining power of the buyer in this case is probably in the low switching costs from on-line to a brick-and-mortar supermarket. There is no cost, other than the individuals’ opportunity cost, to switch to a different grocery store.

GroceryWorks’ suppliers in this case seem to have the bargaining power because the business model of GroceryWorks is based on a successful alliance with local suppliers who are willing to rapidly customize their product packaging based on customer input. With the outsourcing of the perishable items it would be difficult for GroceryWorks to adjust to integrating and stocking and handling of perishables if a supplier was to deliver poor quality or cease shipments. GroceryWorks success in the deliverables of perishable items is solely base don the suppliers ability to deliver a quality product on time and in correct packaging.

The online grocery space is shrinking rapidly. The online pioneers have not been able to capitalize on their first mover’s advantage and the brick and mortar/traditional grocery stores have caught up reasonably on the technology. From a financial perspective, the online model shows great weakness as all the players including GroceryWorks have failed to show operating profitability or even a realistic path to profitability. Furthermore, while there has been some enthusiastic response to the convenience factor offered by online grocers, the general public on a whole has been cool to the idea of shopping online for groceries.

While GroceryWorks has plans for expansions in its home state of Texas, the capital required for such expansions is drying up quickly. In the current recession-like economic environment, it is difficult to see GroceryWorks surviving as a viable entity and making it through the end of 2001. The company’s alliance with Safeway/Tom Thumb has provided GroceryWorks some degree of financial stability and name recognition but it appears to be a case of too little, too late. There is a high probability that GroceryWorks will simply become the online part of a conventional grocery chain in order to stay in business.

GroceryWorks’ problems are typical of the online grocery business model and the grocery industry in general. Webvan and Peapod, two of GroceryWorks’ competitors are also having huge operational losses and are starting to pull out of certain markets to try to stop the financial bleeding. Webvan has recently pulled out of the Dallas-Fort Worth market and Peapod is pulling out of the San Francisco market with the stated goal of focusing on a smaller number of markets to improve financial performance. Infact, in a desperate last ditch attempt to avoid bankruptcy, Webvan is launching a massive advertisement campaign to some how attract more customers. The company is expected to be delisted from NASDAQ and may run out of cash before the end of the year. Peapod has announced that its CEO and President is departing and letters of intent for $120 million in funding have been withdrawn.

In the current industry climate of contraction rather than expansion, growth prospects look quite bleak for a company like GroceryWorks. While the company’s growth plans include setting up of 21 fulfillment centers in 9 markets in the next two years, the projections seem extremely optimistic and unrealistic, considering the current investment and economic environment. GroceryWorks must demonstrate a sustainable competitive advantage (distribution channel, lower prices, and quality service) in order to survive in the online or even the brick and mortar world of the grocery industry.

www.GroceryWorks.com

Patrick McDuffee, Operations Manager, GroceryWorks.com, Nov 1999 - Nov 2000

A New Bag, Gary Robins, www.consumergoods.com/archive/may00/may00_11.shtml

GroceryWorks: Smaller, cheaper, faster?, Tom Steinert-Threlkeld, www.zdnet.com/filters/printerfriendly/0,6061,2431299-2,00.html