DO NOT DISTRIBUTE. Online Grocery Business Models. Paul Farris and Phil Pfeifer. Formulating a good question

Transcription

1 Online Grocery Business Models Paul Farris and Phil Pfeifer Formulating a good question 2,000 What is the area, in square miles, of the continental U.S.? What is the length of the coastline of England? 1,500 1

2 What is a business model? a business model is the method of doing business by which a company can sustain itself -- that is, generate revenue Michael Rappa, The best Internet business models are those that allow something that never could have been possible without the Net. C. Dunlap of Carter Dunlap, Industry Standard 2/7/00 Economic Factors of the online grocery business model Real estate expenses are reduced Inventory management may show efficiencies Contributions to cover investment and fixed costs depends on customers, fees, order frequency, order size, product categories, and margins. 2

3 Case Discussion Questions What are the fundamental differences? Economics of various models? LTV of grocery customer? Online customer? Membership fees? VIC programs? Role of marketing/positioning? Which will win? Decision perspective: investor, current retailer, or manufacturer Other models on the horizon? THE CLICKS-AND-MORTARSPECTRUM Separation greater focus more flexibility access to venture funding Spin-Off (barnesandnoble.co m) Strategic Partnership (Rite Aid and Drugstore.co m) Joint Venture (KBkids.com) The integration-separation decision is not a binary choice. Different companies will need to follow very different paths in deciding how closely or loosely to integrate their Internet initiatives with their traditional operations. In-House Division (OfficeDepot.com ) Integration established brand shared information purchasing leverage distribution efficiencies Source: Get the Right Mix of Bricks & Clicks, Ranjay Gulati and Jason Garino Harvard Business Review (May- June 2000, p. 110) 3

4 A ROAD MAP THROUGH THE DECISION PROCESS Which clicks-and-mortar approach should you adopt? Although the integration-separation decision is not an either-or choice, the following questions will help you discover which aspects of your on-line channel you should integrate and which you should keep distinct. Separation Brand Integration Does the brand extend naturally to the internet? Will we target a different customer segment or offer a different product mix on-line than in stores? Will we need to price differently on-line than in stores to stay competitive? Management Do current executives have the skills and experience needed to pursue the internet channel? Are they willing to judge the Internet initiatives by a different set of performance criteria? Will there be major channel conflict? Does the Internet fundamentally threaten the current business model? Operations Do our distribution systems translate well to the Internet? Do our information systems provide a solid foundation on which to build? Does either system constitute a significant competitive advantage? Equity Are we having trouble attracting or maintaining talented executives for the Internet division? Do we need outside capital to fund the venture? Is a certain supplier, distributor, or other partner key to the venture s success? Source: Get the Right Mix of Bricks & Clicks, Ranjay Gulati and Jason Garino Harvard Business Review(May -June 2000, p. 114) Bricks & Mortar Advantages (Investment Bank) Brand Low customer acquisition costs Revenue & operating income predictability Sourcing advantages Product returns to a physical store Superior economic model 4

5 JIT Quick Response Efficient Consumer Response Taiishi Ohno, general manager of the manufacturing department at Toytota in the early 1950 s was inspired to look for ways to improve efficiency of the assembly line. He was inspired by his observation of an American supermarket. In essence, his thinking went this way: In a supermarket the shelves were restocked when they needed to be, as goods were sold to customers. The stock on the shelves was not controlled by the producer of goods, but by the end user. You didn t walk into a supermarket and see goods piled on the floor because there was no room on the shelves.. In effect, final demand pulled goods through the system rather than the manufacturer pushing them through. Maryann Keller, Collision: GM, Toyota, Volkswagen and the Race to Own the 21 st Century, 1993 Objectives Articulate different models Think more deeply about the potential synergies of bricks & clicks Give a real-life of rapidly evolving business models. 5

6 Business Development Competition: Click & Bricks Profit & Economic Model Business Function & Value Chain User Activity Financing Model Operating & Technology Human Resources Knowledge Management Economic Factors of the online grocery business model Real estate expenses are reduced Inventory management may show efficiencies Contributions to cover investment and fixed costs depends on customers, fees, order frequency, order size, product categories, and margins. 6

7 Logistics or Marketing? Go the last mile, avoid last mile...leverage last mile Focused assortment.sam s Club at your Door Expand assortment..shopping Mall at your Door What is the consumer value? Low price? Better service? Costs to develop business? LTV of a grocery customer? Segmentation? High maintenance vs. low maintenance? Most expensive customers? LONG-Term Customer Value Comparison Assumes 15% discount rate, 4-year customer life for all but Rx which is 7-year customer life. $40 Per $30 Order Contribution $20 $10 0 *Bookstore *Pure-play Apparel *Drugstore *DirectMail Apparel *Dept Store Apparel *Cash Rx *Off-price Apparel *Vertically Integrated Specialty *3 rd Party Rx *Grocery -$250 0 $250 $500 $750 $1,000 Customer Lifetime Value 7

8 Kroger Quarter ended May 20, 2000 And Safeway 1999 Results Kroger Qtr Sales $14,329 Qtr COGS* 10,502 *includes advertising, warehousing, transportion Margins = 26.7% Safeway 1999 Sales $28.9 billion Gross Profit 8.5 billion Margins 29.4% Kroger Stores U.S. P&E/store Sales/Store Margin/Store 2,319 stores $3.5 million $26 million $6.76 million Safeway Stores U.S. & Canada 1,660 P&E/Store $3.8 million Sales/store $17.4 million Margin/store $ 5.1 million 8

9 JIT Quick Response Efficient Consumer Response Taiishi Ohno, general manager of the manufacturing department at Toytota in the early 1950 s was inspired to look for ways to improve efficiency of the assembly line. He was inspired by his observation of an American supermarket. In essence, his thinking went this way: In a supermarket the shelves were restocked when they needed to be, as goods were sold to customers. The stock on the shelves was not controlled by the producer of goods, but by the end user. In effect, final demand pulled goods through the system rather than the manufacturer pushing them through. Maryann Keller, Collision: GM, Toyota, Volkswagen and the Race to Own the 21 st Century, 1993 Observations Margins are relatively similar Capital savings appear limited Labor savings questionable Delivery efficiency may be big key $70,000/van/year about right.. 9

10 Online grocery was born out of an increasing need for convenience in consumers busy lives... The Food Marketing Institute (FMI) estimates that the average household (HH) made two trips to the grocery store a week and spent $86/week on groceries The average grocery trip takes 47 minutes, not including time to drive, park and unload groceries The biggest motivations to buy groceries online are convenience, simplicity and minimal physical effort LONG-Term Customer Value Comparison Assumes 15% discount rate, 4-year customer life for all but Rx which is 7-year customer life. $40 Per $30 Order Contribution $20 $10 0 *Bookstore *Pure-play Apparel *Drugstore *DirectMail Apparel *Dept Store Apparel *Cash Rx *Off-price Apparel *Vertically Integrated Specialty *3 rd Party Rx *Grocery -$250 0 $250 $500 $750 $1,000 Customer Lifetime Value 10

11 Economic Factors of the online grocery business model Real estate expenses are reduced Inventory management may show efficiencies Contributions to cover investment and fixed costs depends on customers, fees, order frequency, order size, product categories, and margins. 11