Will the latest grocery delivery models disrupt your health food store?Will the latest grocery delivery models disrupt your health food store?

Arnie Katz

Think Whole Foods Market and Natural Grocers by Vitamin Cottage are the greatest threat to independent natural food retailers? You haven’t met Arnie Katz.

The co-founder and president of Charlottesville, Virginia-based Relay Foods predicts that within 10 to 15 years, 70 percent of all natural food purchases will take place via the Internet, with online grocery delivery services like his—which move fresh produce and packaged goods straight from farmer or manufacturer to consumer—squeezing out everyone from mom-and-pop grocers to major retail chains.

“Traditional retailers are operating under an outdated and inferior business model,” says Katz, noting that brick-and-mortar stores must pony up big dollars to rent space and pay large staffs, carrying far more overhead than his lean company requires. Right now, because of Relay’s small size and lack of buying power, its service still comes at a premium. But once it grows, watch out, Katz warns. “Our prices will become better than Whole Foods’, and independents will see price competition like they have never seen before,” he says.

Relay is just one among dozens of new Web-based delivery services shaking up the food retail space, much like Amazon.com disrupted the books, video and electronics space (remember Circuit City?). Some of these services, such as Relay Foods, New York City–based FreshDirect and Lafayette, Colorado-based Door to Door Organics, are rethinking the grocery-store-centric food system entirely, instead delivering food directly from producer to plate—no middleman required. Others, such as San Francisco startup Instacart, bill themselves more as retail partner than competitor, with their freelance shoppers navigating grocery aisles and checkout lines at Whole Foods, Trader Joe’s and independents like Washington, D.C.-based Yes Organic Market and California’s Berkeley Bowl. Consumers simply click, order and wait by the door at home. “Never set foot in a grocery store again,” Instacart promises.

Those who’ve been in the grocery business for a while might feel a twinge of déjà vu. In 1999, in one of the more famous dot-com implosions, Foster City, California-based online grocery delivery service Webvan made similar promises leading up to its initial public offering. Eighteen months later, it filed for bankruptcy, prompting many financial analysts to conclude that Webvan was “a decade or two before its time.”

But it appears that time may finally be here—and brick-and-mortar retailers best be paying attention, says Jehan Hamedi, senior manager at Boston-based Crimson Hexagon, which tracks consumer trends via social media analytics. “We are witnessing a fundamental marketplace shift as a direct result of changing consumer preferences,” he says. “This is not a fad.”

Who’s buying online?

According to Bellevue, Washington-based market research firm the Hartman Group, 14 percent of U.S. households now purchase at least some of their food online. Among those who don’t, 32 percent expect to do so within the next year, and 23 percent say they’ll ultimately try it. Since 2004, packaged food sales via online outlets have risen from $836 million to $2.2 billion.

Companies in the nascent space are quick to note that online still represents only about 2 percent of overall grocery sales. But that number is expected to rise as more consumers get smartphones, companies work out glitches in their Web platforms, deep-pocketed venture capitalists invest in the space, and shoppers warm to the concept that someone else can be trusted to pick out the freshest tomato for them.

“I thought that one barrier to adoption might be the perception among consumers that the food they are ordering isn’t fresh enough, but that is not the case,” says Hamedi, whose research found that 18 percent of the social media buzz about FreshDirect has to do with complimenting the freshness of its offerings.

Although many consumers once assumed they couldn’t afford the convenience of ordering online and having groceries delivered, that assumption—thanks to supply chain efficiencies in the online grocery model—no longer holds true in some cases. According to Hartman research, 39 percent of shoppers turn to online grocers to save time, while 36 percent do it to save money, 27 percent do it to save on gas and 15 percent do it to order in bulk. Once they’ve tried online grocery, consumers come back, Crimson Hexagon research suggests, because they like the discount programs and the fact that they can be alerted electronically when a new or unusual item comes in—something traditional stores have yet to master.

Old idea with new twists

Chad Arnold

When Door to Door Organics founder David Gersenson launched the company in 1997, he had a simple vision: To get then-scarce organic produce to consumers, he would deliver it straight from the farm to their doors. Each week, consumers got a box of produce containing nine to 15 in-season items from different farms—essentially a CSA delivery service.

“It was a simple product with a simple operating model and a high level of customer engagement,” says Chad Arnold, who came on board as president and CEO in 2009 (when annual revenues hovered around $3 million). His vision was to ramp up the company by “adding value at the intersection of technology and shopping.” In 2011, Door to Door launched its Shop by Recipe Platform, which allows users to pick a dish—an apple pie perhaps—click one button and have all of the ingredients delivered. It has also expanded its offerings to include items like grass-fed beef and fresh-baked bread and revamped its website to feel like a virtual grocery store.

Ultimately, Arnold hopes the website will be able to interface with consumers’ other health-related sites, such as ones that help them stick to diet and exercise plans. That way, if someone is trying to lose 10 pounds and she clicks on that apple pie recipe, it might put lower-calorie pie ingredients in her cart. “We are much less of an organic produce company now and much more about helping a mom solve the fundamental problem of getting her family healthy food in a more convenient way,” Arnold says. Door to Door now does $40 million in business annually and operates in 10 states.

Relay Foods, launched in January 2009, has a similar farm-to-plate model. But rather than have a fleet of trucks deliver to individual doorsteps, which can burn through gas money, Relay sends purchases to one central location such as a park or community center. Then, rather than wandering the aisles after work with cranky kids on tow, customers simply drop by the site on their way home to pick up the bagged groceries they purchased online.

“We can do 20 deliveries in an hour versus three per hour for home delivery,” Katz says. The company now counts 170 employees and a fleet of 50 vehicles in Maryland and Virginia, and has visions of expanding nationally with help from new private-equity funding. “There will be at least one, and maybe only one, online grocery company that replaces Whole Foods as the dominant power in the natural foods industry,” Katz predicts. “We are aiming to be that company.”

Collaboration and adaptation

Lior Lavy, co-founder of Dallas-based Artizone, sees online delivery service not as a threat to small natural grocers but as a means of keeping them alive. “I don’t want to see the streets empty of retailers—that would make the city very boring,” he says. “But if retailers want to stay in business, they need to find a market that is more spread out. That’s where we come in.”

Lavy and four other software-savvy, foodie partners from Israel founded the company in 2009 to provide an artisan-focused take on what companies like FreshDirect in New York and Peapod in Chicago were already doing with produce and packaged food. Artizone started small, with just six small-batch artisans: a butcher, a cheesemonger, a microgreens farmer, a jam maker, a baker and an Italian foods importer. Shoppers could hit all those shops virtually with a few clicks. And unlike with Instacart—which hires freelance shoppers to pick up the items—the artisans curate the basket, assuring the best quality possible.

Today, Artizone has about 80 member artisans in each of its locations—Dallas and Chicago—including the independent natural food store Green Grocer, which has locations in both places. (Artizone even helped fund the opening of the Dallas Green Grocer).

“You are always going to have people who want the experience of shopping in a retail store,” says Green Grocer owner Cassie Green. “But there is a fraction of people who just have so much going on in their lives—working parents, new moms, people who travel. They don’t have time to come to a little store like ours, but they want the quality we have. We are now able to do business with people we would not otherwise do business with.”

Boulder, Colorado-based Alfalfa’s is so determined to serve those busy customers that it launched its own in-house delivery service in 2012, offering free delivery within the Boulder city limits. Customers email or phone in their order, and two dedicated employees do their shopping for them and deliver it via Alfalfa’s electric van. The store now does 170 deliveries per month—so many that it is developing an online ordering portal linked to its point-of-sale system. Within a few years, Alfalfa’s would like to see 5 percent to 7 percent of all sales come via delivery.

“With companies like Door to Door Organics out there, people are able to get the quality food they want with the added convenience of delivery,” says Ashley Mullis, special programs manager at Alfalfa’s. “If we don’t keep up with that, we could be
left behind.”

End of the grocery store as we know it?

Just what impact the online grocery delivery boom will have on brick-and-mortar shops remains to be seen. But all agree it will be a while before these services become anything close to mainstream. Thirty-one percent of those surveyed by the Hartman Group say they are unlikely to ever shop for groceries online. Crimson Hexagon’s social media surveys reveal that consumers are strongly put off by minimum order fees (like AmazonFresh’s delivery fee for orders under $100). Of note: 27 percent of the social media conversation around FreshDirect during Crimson Hexagon’s survey period centered around calls to boycott the company because its trucks were polluting the area and its workers were not paid enough.

While it’s important for traditional retailers to figure out how to incorporate online delivery service into their plans, Hamedi believes they’d also be wise to identify, perhaps through social media surveys, exactly why their in-person customers walk through their doors. This will help them make sure that they keep doing things right and allow them to ramp up those perks shoppers just can’t find online, such as free samples, community gatherings and customer service with a personal touch.

Arnold of Door to Door Organics says predictions that today’s stores could someday be obsolete are “way overblown.” Surveys show that customers now go to four different stores on average to meet all their grocery needs. “One of those those trips is going to become an e-commerce trip,” he says.

As for the other trips? “The brick-and-mortar retailer will have to identify which piece of the basket they really fill and adapt around that,” Arnold says. “I don’t think they’re going away.”