Trend Watch: Online grocers in trouble

Maybe it is those earnest delivery vans, painted with peaches, or peas in a pod. Maybe it is the nostalgia for a milkman you never knew. Whatever it is, deep down many of us would like to see them succeed. But ... apparently not enough to use their services on a regular basis.

This paradox -- or some version thereof -- has plagued online grocery startups such as HomeGrocer, Webvan and GroceryWorks for months. Stocks in the sector have plunged. And recently Skokie, Ill.-based online grocery pioneer Peapod became the first to admit defeat. Click for more. Just a few years ago, enthusiastic online grocery store founders envisioned changing the way people shop. They imagined making food shopping easier, faster and more convenient. They gathered large venture-capital investments. They built great warehouses. They expanded into cities across the nation. They advertised. They gave away free groceries.

Then they waited ... for customers who never arrived. Click for more. What happened? Is online grocery shopping a solution in search of a problem? Recent research suggests that's part of it. Consider that:

By 2004 only 4 percent of the $900 billion market for so-called replenishables (nonperishable groceries and other packaged goods that consumers buy on a regular basis) will be sold online according to Forrester Research.

Many regions may not have enough customers to sustain an online grocer that serves customers with its own fleet of vans. A December survey conducted by Greenfield Online concluded that just 3.7 percent of Internet users had shopped online for groceries within the past month.

Less than $1 billion was spent on groceries online in 1999, according to Activemedia.

But our ambivalence goes deeper. As much as people complain about going to the grocery store, we are loathe to interrupt our habits. At least we know what to expect from the market up the road. As a result, the real winners in the online grocery space are likely to be familiar stores that also let you shop online.

Take Albertsons.com, for instance. One of the first traditional grocery chains to offer online grocery shopping and delivery, Albertsons.com caters to habit. Online shoppers get the same "Best Buy" specials offered in the brick-and-mortar stores. They get the same wide variety of brands. They get the same old look and feel. But the online store also haul your groceries to your door -- for free if your order exceeds a set amount.

How can a low-margin grocery store throw in so much labor for "free?" Easy. They save stocking costs (they can load your order from the warehouse). They save checkout expenses. And, most importantly, they glean valuable marketing data about your shopping habits.

Albertsons.com is hardly perfect. Many features are clunky, unreliable and counterintuitive (my opinion). Still, it is on the right track. Expect to see many of your local grocery stores to follow suit once they take advantage of the underlying benefits -- and more online stores to bite the dust as a result.

Ironically, when it started back in 1990, Peapod was on a path that could have proven very successful. It initially dispatched delivery people to shop local stores for customers. Had it deepened partnerships with real-world grocery chains and handled the online storefront setup and back-end delivery, it might have succeeded beyond its wildest dreams. Instead, it and many other online grocery startups opted to completely reinvent a very expensive wheel that wasn't exactly broken.

In the end, they may have just paved the online way for the very industry they hoped to revolutionize.