Internet Sales: Fact or Fiction?

Conventional wisdom says shoppers won't buy perishable products online, sight unseen.

Yet leave it to giant Walmart to sell apples, bananas and salad greens from its website, proving the naysayers wrong. Harris Teeter also is defying the pessimists, offering fresh sushi to online shoppers who can pick up their orders in express lanes after store clerks select and bag the items they've requested.

Consumer packaged goods are becoming hot buys online with brands like Pampers establishing designated websites that provide product information and allow consumers to order from retailers Walgreen, CVS, Target and Walmart directly from the site.

What's fueling the innovation?

Convenience increasingly is the name of the game in grocery retail, and merchants and CPG companies are taking a new look at the opportunities the Internet provides. Food and beverage purchases accounted for less than 2 percent of all e-commerce sales in 2010, but the segment saw sales increase 7 percent from the prior year, suggesting new interest. Total e-commerce and mail-order sales of food, beer and wine totaled $3.82 billion in 2010, up 3 percent from 2009, with e-commerce accounting for 62 percent of the segment's sales or $2.39 billion, the U.S. Census Bureau reported.

But will e-commerce ever dominate the grocery retail business? Most people doubt that day will come. Even at MyWebGrocer, a provider of e-commerce and other web-based programs for retailers, Chief Strategy Officer Alec Newcomb doesn't foresee e-commerce eradicating brick-and-mortar grocery sales.

Shopping for groceries is ingrained in American culture, and many consumers look forward to the task. "I honestly believe shoppers do not mind the grocery shopping experience if they have the time," says Carrie Colbert, director of shopper marketing at RGI Inc. in Cincinnati. For one thing, they like being in control of their purchases, Colbert says. "People are picking what they are going to make for dinner, feeling like, 'I have this choice. I feel that I have made the right decision on a jar of salsa.' It's that behavior that's going to be hard to change."

ONLINE PLANNING

But more shoppers are turning to the Internet before they head for the store, and this behavior is likely to continue, says Newcomb of MyWebGrocer in Winooski, Vt. When consumers arrive at retailers' websites, 4 percent actually order online, Newcomb says, and most of them choose to pick up their groceries at the store. The other 96 percent engage in some form of planning, from looking for coupons and recipes or preparing shopping lists.

Many retailers don't yet offer e-commerce on their websites, says Newcomb, who estimates online sales of grocery items will hit 10 percent in the United States over time. But obstacles remain, including establishing seamless fulfillment. "You've [already] got a whole bunch of people stocking the shelves. Now you have a whole bunch of people picking off them," Newcomb says. "Having 10 percent of their business that way is very doable. If you're planning for 50 percent of the business, then you have to go to a different model because it gets in the way of the customer shopping."

Some online companies opt to fulfill from a warehouse for delivery. Once the logistics are established, retailers stand to gain higher margins and incremental sales from Internet orders. Margins are higher because online sales require less overhead and fewer touches to convert sales.

But the logistics can be a stumbling block for highly perishable items that require refrigeration. Consumers don't want to be forced to stay home between 10 a.m. and noon for a delivery, Colbert says. Still, Boulder, Colo.-based Mile High Organics, which was founded in 2010, achieved 9 percent growth in 2011 by offering exclusively home delivery, including refrigerated items, says Michael Joseph, president and chief executive. "We've designed an unattended delivery model where no one needs to be home. We will deliver on the day you have chosen and by dinner time" using reusable rigid plastic containers cooled with ice packs, Joseph says.

The company, which specializes in organic foods, has 2,000 members in Colorado's Front Range area near Boulder and Denver, and Joseph is convinced more will convert due to the convenience. "Whenever I'm in a brick-and-mortar store, I feel like I am in the past," he says.

AT THE STATION

With convenience in mind, Royal Ahold's Peapod plans to expand its virtual supermarkets for commuters in Chicago and six East Coast markets. Commuters can use their smart phones to scan items displayed on interactive billboards in train stations for home delivery. Peapod's approach follows a similar effort by U.K.-based Tesco in Seoul, South Korea.

But at this point, most supermarket retailers have simply added online operations to their existing brick-and-mortar stores. The addition requires more labor to pick and pack the items requested, as well as expanded freezer cases to store orders waiting to be picked up. The model requires additional labor. "You're looking for a different skill level and customer service level than you might have in the store," says Lawrence Lerner, a Chicago management consultant. "You can route it centrally rather than have people call an individual store" to make fulfillment more efficient, he says.

Because of its reach and low cost structure, the Internet is ideally suited for selling niche products that shoppers might not find at local brick-and-mortar merchants. MexGrocer.com has more than 2,000 customers in the United States and Canada for its hard-to-find Mexican food products.

"Most people that buy from us have a particular profile. They typically cannot find the ingredients they want for cooking in their local grocery store. Therefore it makes it very convenient to just order online and have it delivered to them," says Nacho Hernandez, co-founder and vice president of the San Diego-based company that stocks about 3,000 SKUs in the Mexican food category, including Pulparindo candies and Herdez salsa. It ships most orders with the U.S. Postal Service's Priority Mail for delivery in two or three days, he says.

Still, grocery isn't the easiest merchandise to sell profitably online. "They are very heavy items, and the average ticket is not that high. People just want to buy a few primary ingredients they want at home to make their...Mexican meals," Hernandez says.

With Amazon competing in the space now, there are "love and hate relationships between the merchants that sell on the Amazon platform as well as Amazon trying to sell items through their own purchasing and fulfillment," Hernandez says. While MexGrocer.com sells on Amazon in what Hernandez describes as a really good partnership today, some caution it could change as Amazon enters the space in a big way.

Shipping out orders adds to the total cost and precludes offering some perishable items. "The challenge you run into with fresh food... is a lack of efficiency in shipping and handling," says Bill Leber, director of business development, at Swisslog U.S. in Newport News, Va., a provider of automated warehousing and order fulfillment solutions. What's more, shipping heavy canned goods with more delicate items also creates inefficiencies.

Retailers that aren't ready to sell product online increasingly are encouraging shoppers to visit their websites to find specials or to create and print shopping lists. By asking shoppers to log in using their loyalty cards, Safeway is offering personalized promotions online through its Just For You program, which it launched this year.

FRIENDLY REMINDERS

Using loyalty card data on prior purchase activity, Safeway can remind online shoppers that it might be time to purchase paper towels again and offer a special. But currently, Safeway's website is designed to further brick-and-mortar sales. "We see a hybrid model for retailers that have the advantage of purchase information," says John Groene, senior manager at Kalypso in Cincinnati.

"From an investment standpoint, you're going to see people invest more in digital because it's more cost-effective and you can see the return," Groene says. "You can start to see the relationship between your investment in marketing and whether it's driving your business."

Regardless of whether they are selling merchandise online or offering product information and promotions, once retailers embrace the Internet, they should be prepared to handle more questions and comments communicated via social media.

"With discussion groups, forums and particularly social media, people can get answers really, really fast," Hernandez says. But they aren't always the answers the retailer or CPG company would offer.

"In less than a minute, you can get a response from a friend or someone you might not know who can tell you, 'I recommend it' or 'I don't recommend it' or 'this is how to use it.' That's really powerful in my opinion, because it breaks the traditional shopping behavior that we're used to," Hernandez says.

From the retailers' perspective, the public nature of the correspondence can pose new challenges in how to respond. "It's easier for the customer, but more difficult for the company to deal with because it's public and it can be shared and retweeted," says Joshua March, co-founder and CEO of London-based Conversocial, which offers software that helps companies track and respond to tweets and posts.

While the marketing team often sets a company's social media agenda, they often don't have time to manage the customer service aspect. "Companies are having to set up new teams in social media," March says. "If you've got customers asking you questions, you've got to answer them. In the same way that if people are trying to phone you, you can't just not pick up the phone."

But communicating with customers also becomes easier online because companies can send out blast emails, says Joseph of Mile High Organics, who previously launched DoortoDoorOrganics.com with a partner. The company has a program in place to alert shoppers to potential food safety problems via email.

Retailers entering the e-commerce space should expect to change the way they do business on both the front end and the back, Joseph says. Without visits to a brick-and-mortar store, online merchants must ensure their customer service surpasses expectations. "People ask us what the key is and there is not one key. It's a very difficult industry," he says. "The more we learn about it, the more we learn how different it is from traditional grocery."

Freelance journalist Ann Meyer serves as senior editor of Retail Leader magazine. She is also president and CEO of L3C Chicago, L3C , and editor of www.SmallBizChicago.com