Assessing the E-Commerce Strategies of Grocers

by Julia Heilig, Stan Ernst, and Neal H. Hooker1 * The Ohio State University

* Contact author Neal H. Hooker, Assistant Professor Department of Agricultural, Environmental and Development Economics The Ohio State University 231 Ag Admin, 2120 Fyffe Road Columbus, OH 43210-1067 Tel: 614-292-3549 Fax: 614-247-7066 hooker.27@osu.edu http://aede.osu.edu

The authors acknowledge the research assistance of Shawn Carpenter and other members of the E-Agribusiness

Working Group at The Ohio State University, especially Jong-Youn Rha and Richard Widdows. The groups web page: http://aede.osu.edu/programs/e-agbiz/ provides reports from related research projects.

Assessing the E-Commerce Strategies of Grocers

Abstract Most forecasts of the potential share of online food retailing are small, perhaps only 2% of sales. One reason for this small market share may be the inherent inability of E-Grocers to select optimal E-Commerce strategies. Absent traditional organoleptic signaling, other product and

firm signals, a focus on customer relationship management tools, and product depth are critical to E-Grocers. This article discusses an ongoing research project, providing an analysis of food E-Commerce strategies. Data collected through an exhaustive quantitative evaluation tool

developed by the authors and applied to E-Grocery Internet sites in the third quarter of 2001 provides the basis of our discussion. The strategies of 30 U.S. E -Grocers are compared using the resulting set of numerical scores.

Keywords E-Commerce, food retailing, quality signaling, CRM (Customer Relationship Management)

Introduction Most forecasts of the potential share of food retailing likely to be conducted over the Internet in the coming years are small, perhaps only contributing to 2% of sales. Although a

modest share, this would lead to more than $23 billion in sales in Europe and some $32 billion in the U.S. by 2005 (Reuters, October 11th 2001). One reason for this slow adoption rate, we suggest, is the inherent inability of E-Grocers and other E-Agribusinesses marketing food directly to consumers online to select optimal business strategies. In particular, perishable (fresh and frozen) items present a challenge for E-Agribusinesses attempting to signal product quality. Organoleptic (touch, smell, sight) experiences in selecting meat and poultry, seafood, produce, and other sensory-oriented items do not yet transfer well online. This may mean these

gateway products are limiting the growth of E-Grocery shopping to items with more reliable and/or more easily communicated quality attributes. On a related note, the authors mourn the

early 2001 financial passing of Digiscents.com an attempt to transmit smells over the Internet. This technically feasible concept would have solved many of the organoleptic marketing problems discussed in this paper. It was, nonetheless an idea ahead of its time and behind in its ability to pay for initial deployment. Other signals of the overall reputation or quality of the firm itself may prove to be just as important to the success of E-Grocers. As discussed in Rha et al. (2001, p. 8) E -Grocers are selling "experience goods" and, as such, models of the economics of information and firm/reputation signaling are appropriate when evaluating their business strategies. The novelty

of purchasing food online also makes the E -Grocer itself an experience s ervice and requires close attention to how signals of firm quality are presented to potential customers. This indicates that how well the firm presents itself as a reliable supplier is as important as how the E-Grocer

signals the quality of its foods.

Until further along the adoption curve, E-Grocers must

constantly evaluate the needs of customers who are not currently using their services and determine how to attract these consumers as quickly as possible. Given this role and recent

business failures in the E-Commerce sector due to insufficient customer depth, tools that enhance response to customer demands (CRM or customer relationship management) are essential. The supreme goal of any business is to satisfy its customer (Blackwell, Miniard, and Engel, 2001). All efforts made by the E-Grocer to maintain and grow its current customer base are, therefore, of paramount importance. Recent trade publication discussions have raised the additional issue of product depth being offered online. There is some c onflict of opinion by researchers and industry analysts as to the approach firms should take in defining their online inventory. Rha et al. (2001) reported that many firms had apparently moved their traditional store inventory online, with a critical assessment being that this demonstrated a weak bricks-and-clicks strategy showing no effort to target online customer demands. However, that previous study failed to provide quantitative

assessments of the role of product depth in overall E-Grocery quality, highlighting the need for further analysis. Alternatively, some firms have been accused of being too limiting in their online offerings. Again, little has been done to evaluate efforts from either side of the product depth question. Nor has much research b een conducted on consumers preference on product depth or breadth in the food sector. To assess the role of these four key factors (firm quality signaling, product quality signaling, CRM, and product depth) a quantitative analysis of food E-Commerce strategies was conducted. The authors feel that frequent and consistent tracking of such Internet marketing This paper presents the first

practices will highlight useful lessons both good and bad.

observations in this project.

Data collected through an exhaustive quantitative E-Commerce

evaluation tool applied to E-Grocery sites in the third quarter of 2001 provides the basis of our discussion. scores. The strategies of 30 large U.S. E-Grocers are compared using a set of numerical

Background Socioeconomic characteristics such as growing demands on consumers time, increased wealth, and heightened levels of stress in many regular situations are among those factors dramatically changing many consumer markets. These pose both challenges and opportunities

for firms dealing directly with consumers. The previous concept of consumers who spent a lot of time getting advice about product attributes from small talk with friends and family, researching a product, and then selecting and purchasing articles from specialized retailers has disappeared. Groceries are rarely bought from small, mom and pop stores that offer

personalized experience. That lifestyle for better or worse has been replaced by big grocery stores and adventure shopping centers. Consumers prefer the convenience of one-stop-

shopping. In response, grocery stores have expanded to offer many products other than food. To attract consumers traditional grocery retailers must offer more services and a larger range of products and varieties. It is not clear how these trends in grocery retailing can be converted into an effective online model. Early adopters of E -Grocery strategies (clicks) have found it difficult to mirror the level of service provided by these current store formats (bricks). High total costs (including time and money) of picking and distributing items from such a wide range of possible products may be delaying the wider adoption of online shopping by consumers and businesses alike. Does the

availability of particular food and non-food items online drive the decision to buy online? Are consumers averse to E-Grocery shopping because they cannot use traditional search processes to determine the quality of produce, seafood, or meat? If so, is that constraint on E-Grocery

shopping causing consumers to avoid online purchases of other less quality-signaling-dependent items from the center of the store (dry goods) even when those products are available online at a lower total cost. Alternatively, are E -Grocery shoppers making their purchases because of prices or unique services (e.g., home delivery or at-store pickup options, bundling with non-food items such as pharmacy orders) offered online? Although the supply of items to purchase on the Internet is multifarious and online ordering constitutes a tremendous advantage for time-constrained consumers (after an initial learning period), the question remains whether or not (and what type of) customers are willing to switch from their traditional purchase behaviors to these new ordering systems. Customers

reluctance to change may be due to a range of concerns (e.g., Internet access and familiarity, ease of transactions, and data security) with which they will be confronted when adopting ECommerce. Morganosky and Cude found, for example, that many respondents of their survey

had concerns about the security of online transactions (Morganosky and Cude, 2000, p. 24). Further, Bielski discussed many different ways of making online payments; such as e-cash to make secure nonrepudiatable non-credit card payments efficiently (Bielski, 2000). However, no study to date has factored in these behavioral constraints with quality issues in assessing the potential of E-Grocery enterprises.

Methodology To further assess E-Grocery strategies a very detailed quantitative evaluation tool was constructed and applied to a set of 30 E -Commerce sites (see Table 1). More than 370 indicators were reviewed for each E-Grocer. The evaluation tool had two broad sections: firm quality

signals and product quality signals. Within the firm quality section, types of indicators evaluated included return policies, delivery options, general pricing strategies, payment options, the use of feedback forms and other CRM tools, security issues, the use of customer profiles, measures of the ease of use of the web site, and coordination strategies between the traditional grocery store formats and the E-Commerce strategies. Product quality signals included nutritional information

made available on the web site, background on agricultural production practices, recipes, the depth of products offered (including the brands for sale), and the use of any meal solution or bundling strategies for food and non-food items. The evaluation tool was developed with input from a group of E -Agribusiness researchers familiar with a previous qualitative tool used to assess E -Grocery sites (Rha et al., 2001). Issues of clarity, length and depth of inquiry, and, in particular, the ability to measure the CRM strategies of E-Grocers were highlighted through this process. A final validation of the

quantitative tool came through a trial run performed on an E-Commerce site excluded from the data analysis discussed below. This validation step uncovered a few minor areas for refinement. Presence or absence of indicators within the four factors was recorded along with numerical (actual count) measures for several key variables. The tool was applied by one

researcher to remove the potential of multiple reporter bias. Each E -Grocery site took between 3 and 6 hours to evaluate. There were 12 pure-play E-Grocers and 18 bricks-and-clicks operations.

Various industry reports were searched prior to deployment to ensure complete coverage of all significant U.S. E-Grocers. (http://www.supermarketnews.com), These sources included the Supermarket News Top 75 list the Top 100 (Internet) Retailers List for 2000/1

(http://www.stores.org and http://www.stores.org/m100internet.html), and additional sites such as http://www.gomez.com, http://www.kiplinger.com, http://www.gmabrands.com,

http://www.fmi.org, and http://trfic.umn.edu. and pure-play grocery sites.

These sources reported major bricks-and-clicks This

E-Grocers were divided based on their product offerings.

article reports our findings from a broad-range of business models, providing offerings analogous to traditional groceries. Specialized food E-Commerce sites (e.g., sellers

concentrating on tea or coffee) were excluded from this analysis. The data was coded into an Access database for analysis and preliminary statistical interpretation. For each of the simple indicators scores of 0 (absence), 1 (presence), and For more complex indicators, ranges were established, based on

(uncertain) were awarded.

industry norms, and also assigned a score of 0, , or 1. Each indicator was then assigned a n importance criteria (weight) ranging from 3 to +3 in integer values. Each indicator score was multiplied by the assigned weight to achieve an end-variable score. End variable scores were summed over each of the four factors firm quality, product quality, CRM and product depth. In this way each E -Grocer can be described using a numerical score for each of the four factors. The final step in this process required the construction of a simple sum over each of the four factors. This allowed the creation of a Top 30 E-Grocers list (see Table 1) along with a The

comparison of the strengths and weaknesses within the factors for each E-Grocer. maximum scores possible in each of the four factors is also included in Table 1.

Over the four factors several Key Indicators received particular attention and were allocated the highest weight (+ or 3). The presence/absence or high counts of such indicators played an important role in the resulting factor totals. For the signals of firm reputation Key

Indicators included; the clarity of presentation of the E -Grocers return policy, privacy policy, and money-back guarantees, the ability to use coupons and loyalty (frequent shopper) cards when purchasing online, the range of payment options offered, and ties to stores (bricks-and-clicks). Key Indicators for product quality were the provision of n utritional advice and information in the Nutrition Facts (NLEA) format, and the availability and certification of detailed product descriptions in particular those for production attributes such as GM-free, organic, and enhanced animal welfare. As previously discussed in Rha et al. (2001) communications with consumers are of great importance to E -Grocers. Key Indicators of a customer-centered (CRM) focus include providing customers ways to enter into a dialogue with the firm within a few clicks (e.g., online feedback forms, e-mail addresses, and dedicated CRM phone numbers). Consumer ratings and

recommendations are an interesting tactic, providing evidence that the firm recognizes the power of word-of-mouth or viral marketing. Indicators of ease of search were given a heavy weighting in our ranking process for customer retention and attraction reasons. Key Indicators in the final factor, product depth, included actual counts for a range of products in representative categories, the availability of foods for special dietary needs (e.g., allergies, diabetic/low sodium, and childrens meals). Examples of creative bundling of food and non-food items were also assigned a high weight in this factor.

Findings The quantitative E-Commerce assessment tool and scoring scheme provided numerical rankings for each E -Grocer in each of the four factors. These scores are found in Table 1. The final column presents the total based on a simple summation across the factors. This provisional measure of overall strategy excellence requires further refinement (see discussion below). simple sum equally weights each of the four factors. Turning to the final ranking of E-Grocers, a sample of both bricks-and-clicks and dotcoms are represented in our top 10. It is especially interesting to note the presence of three The

Ahold E-Grocers (Giant Foods, Peapod, and Stop & Shop). While these firms have obviously attempted a degree of consistency, diversity still remains with an explanation perhaps following the differing initial business models of the brick chains. Without prior data for comparison, it is dangerous to draw conclusions on the relevance of this. However, the presence of Ahold firms with similar scores is some indication of emerging trends toward a prevalence of brick-and-click firms over pure play E-Grocers. Such firms gain advantage by spreading their technical infrastructure and core strategies across all entities owned by the parent company while still capitalizing on the names and market space owned by the individual (brick) entities. Further examination of our Top 30 illustrates another grocery retail trend worth mentioning. Walgreens.com (a drug store chain) and Bluelight.com (general retailer Kmart) are examples of non-traditional firms moving into the grocery space. Several other major players in these two categories (Wal-Mart and CVS Pharmacy) are also in the grocery business but had not moved these products to their online stores in the 3rd Quarter 2001. It is also important to mention that several of the major national and regional grocery chains have not rolled out their E-Grocery operations or are testing them in limited markets and, therefore, dont score well in

our evaluation. Repetition of this evaluation in future quarters should show the growth of such enterprises. This technique will also allow the tracking of improvements in E-Commerce

strategies and their individual indicators.

Discussion This article has presented the first data collected with a new quantitative E-Commerce assessment tool. This tool illuminates considerable room for improvement in each E-Grocers

approach to online marketing. The Top 30 E -Grocers list allows the comparison of a range of E Commerce strategies. This tool can be used to create an Ideal E-Grocer or perform as a

benchmark document by which E-Agribusinesses can compare themselves. Indeed, an interesting technique we are developing for presenting this data is highlighted in Figure 1. Each of the

factor scores can be applied as Cartesian coordinates. Clusters or grouped strategies can then be discovered over the set of such plots that can be constructed (the various pairings of the four factors provide 6 such plots). Obvious outliers (good and bad) are easily detected. As an early report in this on-going research project we recognize the need for refinement. The weighting scheme must be further validated through consumer (adopter, non-adopter, and drop-out) surveys. assessment tool. themselves. These surveys will follow, as closely as possible, the content of the

An important additional validation step involves questioning the E-Grocers

Their intended or stated E-Commerce strategies can then be compared to the

revealed or actual strategies as reported by the evaluation tool. Preliminary efforts toward this have begun with a subset of firms in the 3rd Quarter 2001 study. Given the particular attention placed on CRM solutions additional research must be conducted on the ability to transfer traditional grocery customer-centered tools (such as frequent

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shopper or loyalty programs) online.

Some firms are already attempting this transfer, but as a

factor the CRM totals left much room for improvement. The updating of this data set on a quarterly basis is called for given the rapidly changing environment of online food shopping. Given the quantitative nature of our E-Commerce

evaluation tool, direct comparisons can be rapidly constructed, providing a description of the changing E-Grocery strategies. An international comparison of food E-Commerce strategies, based in cross-cultural research techniques is clearly needed. While success stories, such as Tesco.com are still rare in the E -Grocery space, there is much that can be transferred from the lessons of others, regardless of base country. The research team is exploring two further applications of this E-Commerce evaluation tool. One involves other E-Agribusinesses marketing specialty food products online. Limited

range ventures such as those selling cookies, ice cream, or fruit and vegetables will be assessed and compared to the strategies of E-Grocers. Finally, the evaluation tool can be adapted and applied to other E-Retailers, particularly those for which quality signaling aspects are important.

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References Bielski, L. 2000. New wave of e-money options hits the web. American Bankers Association, ABA Banking Journal, Vol.92, No.8, p.39-43. Blackwell, R. D., Miniard, P. W. and J. F. Engel. 2001. Consumer Behavior, ninth edition, New York: Harcourt College Publishers. Hooker, N. H., J. Heilig, and S. Ernst. 2001. What is Unique about E -Agribusiness? Paper presented at the IAMA World Food and Agribusiness Symposium, Sydney, NSW, Australia. June 27. Available as AEDE working paper at: http://aede.ag.ohio-

state.edu/resources/docs/pdf/452062D4-9BC8-11D5-ABF200C00D014775.pdf Morganosky, M. A., and B. J. Cude. 2000. Consumer response to on-line grocery shopping. International Journal of Retail & Distribution Management, Vol.28, No.1, p.17-26. Reuters. 2001. Report: Online Groceries Set for Growth Explosion. October 11th . Rha, Jong-Youn, Julia Heilig, Stan Ernst, Richard Widdows, Curtis Haugtvedt, and Neal H. Hooker. 2001. Product and Firm Quality Signaling in E-Business: Interstices for

Smaller Businesses. Forthcoming in the special E -Commerce issue of Journal of Business and Entrepreneurship. 25 pp.

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Figure 1. An Example Factor Comparison

CRM & FIRM QUALITY

60 50 Firm Quality 40 30 20 10 0 -60 -40 -20 0 CRM 20 40 60

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Table 1. Ranking Over Key Categories and Overall

Firm URL www.giantfood.com www.albertsons.com www.peapod.com www.stopandshop.com www.marsh.net www.harristeeter.com www.staterbros.com www.whyrunout.com www.Bashas.com www.walgreens.com www.ingles-markets.com www.hy-vee.com www.schnucks.com www.publix.com www.mywebgrocer.com www.easygrocer.com www.netgrocer.com www.pricechopper.com www.simondelivers.com www.kroger.com www.ethnicgrocer.com www.housecallsonline.com www.metrofoodmarket.com www.electricfood.com www.groceronline.com www.marketonestop.com www.groceries-express.com www.giantpa.com www.yourgrocer.com www.bluelight.com Maximum Factor Scores

Firm Quality 45 30.5 45 44 45.5 51.5 38.5 34.5 53 29 32.5 45.5 29.5 38 23.5 31 26 47 31 35.5 18 27 32.5 16.5 17.5 28 22.5 26.5 22.5 27 99

CRM 25.5 29.5 25 27 29.5 19.5 31 24.5 24 49.5 36.5 7.5 11.5 24.5 27.5 22.5 28 40.5 16.5 36.5 44 32 28 32 21.5 8.5 21.5 39.5 27 -51 104

Product Quality 82.39 77.26 82.39 70.39 35.5 47.5 42.39 44.39 29 58.39 22 60.39 38.5 36.5 31.39 22.5 43.39 28.5 30.5 27.5 30.5 11.5 25 30.5 40.39 12.5 28.63 10 7 11 148

Depth 64 78.5 63 63 93.5 79.5 72 71.5 63.5 27.5 64.5 41.5 65.5 40 52.5 58.5 37 6 32 7.5 8 29.5 8.5 9.5 8 36 12 4 4 15.5 183

Simple Sum 216.89 215.76 215.39 204.39 204 198 183.89 174.89 169.5 164.39 155.5 154.89 145 139 134.89 134.5 134.39 122 110 107 100.5 100 94 88.5 87.39 85 84.63 80 60.5 2.5 534

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