Are Online Grocers Nearing Their Expiration Date?

Bad news for agoraphobes and E-commerce addicts--you'd better get used to walking to the Piggly-Wiggly again. According to a new report by Jupiter Media Metrix, most online grocers will soon be forced out of business by economic factors, and growth in the sector is expected to stumble.

In the report, Jupiter says that low consumer demand and high delivery costs are "breaking the backs" of online-only grocers, who spend so much money on picking, packing, and delivering each order, that they often can't even make up their costs. As such, Jupiter has halved its 2001 revenue forecast, from $2 billion to $1 billion. Predictions for 2005 have been revised downward 61%, from $18 billion to $7 billion.

Online grocers were once among the dot-com darlings, but no longer. In the last year, industry leader Webvan lost its CEO, laid off 1,000 workers, and watched its stock price plummet from a 52-week high of $9.38 to about 14 cents. During the same period, competitor Peapod.com considered filing for bankruptcy before finding salvation in Royal Ahold. Royal, the world's largest food retailer, bought a controlling stake in the company and began retooling it to serve traditional chains like Giant Foods and Stop & Shop.

That sort of partnership may be the key to saving the sector, according to Jupiter. Despite the growth slump, the report predicts that online grocery sales will slowly increase to a 2% share of U.S. grocery sales by 2006, accounting for more than $11 billion in sales. Jupiter thinks that traditional grocers can exploit the market, augmenting their stores rather than replacing them. The report suggests that stores can sell some products online, which will then be bagged and ready to go when customers come to the store to complete their shopping.

Gartner analyst Rob Labatt agrees that regular grocers can make it online, but wonders why they would bother. He says there's no model for success, and that grocery execs have bigger issues to manage, such as developing private labels and regional expansion. "Why not stand back, continue to build the traditional business and watch, very closely, what's happening in the delivery world?"