Peapod Inc., the only online grocer that has survived in theWashington market, announced yesterday that it will expand deliveryservice to more areas of the District and to a portion of PrinceGeorge's County in an attempt to capture the customers of formerrival HomeRuns.com, which folded abruptly less than a month ago afterrunning out of venture capital.
A 30 percent increase in Peapod's orders since HomeRuns.com wentout of business on July 12 convinced the company that this was thetime to court former HomeRuns.com customers desperate for someone topick out their produce and lug in their dog food, said Mike Brennan,Peapod's senior vice president for product management and marketing.
The company has hired close to 50 stockers and drivers in the pasttwo weeks to handle the surge in demand, bringing its total number ofemployees in the D.C. area to about 200, he said.
Before HomeRuns.com went out of business, a Peapod expansion intothe eastern part of the District and Prince George's County "wasmoving into a competitive area," said Brennan. "Now, without acompetitor there, it may be cost-effective to expand." HomeRuns.comclaimed 90,000 customers in Boston and Washington, but the companydeclined to say how many of those were in Washington.
HomeRuns.com's delivery areas fanned out from the Boston-basedgrocer's Landover warehouse across parts of Prince George's Countyand into the District. Peapod, which fills orders from a Gaithersburgfacility, served a more northwesterly area.
This the second widening of Peapod's service area since thecompany opened in Washington last November. The firm, which initiallyconcentrated on the Northern Virginia and Montgomery County suburbs,began checking off the virtual shopping lists of Howard Countyresidents in April.
The company can now reach 1.3 million customers, an increase ofalmost 40 percent.
It's not the first time Peapod has waited for a rival's supply ofventure capital to dry up, then swooped in on customers alreadyaccustomed to ordering groceries over the Internet.
A cautious player before caution was in style among dot-coms,Peapod entered the D.C. market by purchasing a distribution centerfrom Streamline.com, an online grocer that went out of business afterless than a year in the D.C. market. Peapod then began servingStreamline's former customers.
Unlike Webvan Group Inc., another online grocer whose expensiveand vast distribution network many analysts blamed for its demise,Peapod has avoided large upfront investments in warehouses. Instead,the company teams with local supermarkets and often fills orders outof the converted stockrooms of its partners to keep initial costslow.
In Washington, Peapod mainly relies on partner Giant Food Inc. forin-store advertising and fills all of its orders out of the 93,500-square-foot Gaithersburg warehouse.
Peapod has experienced financial problems, but Royal Ahold NV, theNetherlands-based global food company that owns Giant, bought acontrolling stake in it in April 2000 and provided funds that havehelped it stay in business.
Ahold announced in July that it would acquire the remaining sharesof Peapod for about $35 million.
Still, the 11-year-old Peapod, which racked up $93 million insales last year, is not profitable, although it says its operationsin Chicago, Long Island and Connecticut are no longer losing money.Peapod officials said the company has 120,000 customers in its fivemarkets.
"The Washington area is one of our fastest growth areas," Brennansaid. "It's really a wired market with high Internet penetration."Company officials declined to give the number of customers in theD.C. area.
The economics of grocery retailing, with its razor-thin profitmargins, in dicey enough. Adding online selling and home deliverymultiplies the pressure.
Expansion drives up costs in the near-term, Brennan said, becausetrucks heading to neighborhoods that aren't familiar with the firmare rarely full.
Some losses can be prevented by carefully selecting new serviceareas, he said.
Ken Cassar, an e-commerce analyst for Jupiter Media Metrix Inc.,said service areas should be selected "based on the density ofpotential customers." Other online retailers, such as Amazon.comInc., can use third-party companies such as United Parcel ServiceInc. and FedEx Corp., he said.
"In the grocery business, where inventory has to be stored locallybecause it rots and melts, distribution has to happen locally,"Cassar said. That means online grocers must invest in their owndistribution facilities and trucks and drivers.
"At low levels of scale, it's difficult to get substantialleverage" from an in-house delivery structure, Cassar said. Onlinegrocers incur costs of about $30 per order to get products fromwarehouse shelves to the customer's door, he said, and about $20 ofthat is for delivery.
"When a Peapod deliverer is busy enough to be doing four or fivedeliveries an hour instead of two or three, the cost per order dropssubstantially," he said.
As a result, he said, firms look for the "sweet spot,"neighborhoods close to the company's distribution center where housesare close together and busy families have Internet access.
Focusing on families rather than singles helps grocers save moneyby spreading fixed costs over bigger orders, according to e-retailing experts. A typical Peapod order totals $125 to $130,Brennan said.
"The challenge is to fill up the truck," he said.
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