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Estimates of the size of the U.S. Internet grocery channel range from $10 billion to $85 billion over the next five to ten years. Today the market is in its infancy, and Peapod holds a dominant market share position. Its challenge to capitalize on this market in the long term is to solve the complexities of order fulfillment in order to deliver a superior customer experience at a very large scale, and on a profitable basis. Peapod believes that it has developed this solution, and is positioned to be the principal beneficiary of the market's growth.
Peapod, Inc. is the largest and most successful Internet supermarket in the United States, providing people with the ability to shop online for their groceries. The company offers its customers a wide variety of product choices, from fresh vegetables to frozen meat to bagels and cream cheese, all delivered to the doorstep in a quick and efficient manner by stores affiliated or in partnership with Peapod. Peapod's membership has grown to approximately 100,000 people, each of which can place an order either by fax, phone, or email after reviewing the most current products and prices by logging on to the company's web site. Currently, the company provides its services in a select number of metropolitan locations throughout the United States, including Long Island, New York; Chicago; Boston; San Francisco and San Jose, California; Austin, Dallas, and Houston, Texas; and Columbus, Ohio. In addition to the online services Peapod provides, the company has grown into one of the leaders in the field of marketing research, and offers its targeted media and research services to large and well-known consumer goods corporations interested in unique promotions and advertising for point-of-purchase sales.
The founders of Peapod, Inc. are two brothers, Andrew B. and Thomas L. Parkinson. Andrew graduated with a B.A. in Economics from Wesleyan University, while his brother Thomas graduated with a B.A. in Design from the same school, and then went on to earn an M.A. in Industrial Design from Pratt Institute. After school, Andrew worked with Kraft and Proctor & Gamble in a variety of product and brand management positions, learning the marketing techniques of the most successful corporations within the food products industry. Thomas also worked at Proctor & Gamble, but in sales management positions where he learned the importance of up-to-date computer technology for the growth of a company in the climate of contemporary business practice. Not satisfied with their respective positions, and fully confident they could build their own successful company, the two men decided to take the plunge and combine the world of the Internet with the food products industry.
In 1989 the Parkinson brothers established a test pilot program designed to last four years while involving 400 households in Evanston, Illinois, a suburb just north of Chicago. With a small amount of start-up money, they arranged for people to purchase grocery products over the Internet, and then delivered those groceries to the homes of their customers. They christened their company Peapod, Inc. In forming their firm and in devising a strategic plan, both Thomas and Andrew were well aware of other people's failed attempts at the same kind of online supermarket service. In 1988, Prodigy, the largest of the online consumer-oriented firms, ran a similar pilot program in nine cities across the United States. However, after a three-year period, Prodigy management decided to cease its attempt due to its inability to attract a large enough subscriber base to make the effort worthwhile.
Yet the Parkinson brothers had carefully studied Prodigy's foray into the online supermarket service and concluded that the large company had repeated the fatal mistake of many other firms that had tried to establish the same business. All of the companies, including Prodigy, concentrated primarily on the telemarketing aspects of the business, and used most of their money to reach out to customers. What they had failed to do was pay adequate attention and provide the necessary funding for the fulfillment aspects of the business. According to the Parkinsons, once these companies had taken an order and transmitted it to the retail grocery store, they considered their job done. But the retailer still had to fill the order, and then contract a third party to deliver the goods. As a result, when customers started to complain that their orders were not filled properly, or delivered days late, none of the parties involved accepted responsibility for the mistakes. In addition, having three parties involved in the service increased prices to such an extent that customers thought it too expensive.
The notion of controlling the entire process, from taking online orders, to transmitting them to grocery retailers, to delivering the goods themselves, was therefore the driving force behind the vision of the two brothers. Not surprisingly, from its inception Peapod guaranteed the satisfaction of every customer order and, in order to learn every detail about the fulfillment side of the business, Thomas and Andrew took it upon themselves to personally pick up and deliver customer orders during the first two years of the company's existence. By the end of that period, the two brothers were more convinced than ever that quality fulfillment and customer satisfaction were the inextricably interwoven ingredients that would make Peapod successful where others had failed.
As Peapod started to grow, its services began to attract women. According to most demographic surveys of online services, approximately 75 percent of those who shop and buy are male. But Peapod marketed its services primarily to women, since it had discovered that women most often made decisions about household purchases. Soon, Peapod's online services were inundated by career women who not only cared for their house and family, but were entrepreneur's themselves with no time to squeeze the cantaloupes in the local grocery store. These women found that it was easier to make a few computer keystrokes than to run to the food mart at midnight to pick up the bare necessities of milk, butter, cereal, and soda. By the end of 1992, Peapod had over 5,000 loyal customers in the Chicago and San Francisco metropolitan areas.
Growth and Expansion During the 1990s
By the beginning of October 1994, Peapod had tripled its revenues over the previous 12 months. The company had arranged exclusive agreements with Jewel Food Stores and with Safeway Food Stores, in Chicago and San Francisco respectively, to fill hundreds of orders per day for its customers. By this time, the Parkinson brothers had hired full-time employees called "shoppers" who worked next to Jewel and Safeway store staff. Nearly 40 such shoppers were working at each of the seven Jewel stores in Chicago and three Safeway stores in San Francisco. One of the reasons the system worked so well was the sophisticated evaluation of the efficiency of Peapod's shoppers, tracking the number of each item chosen by every shopper, how quickly the shoppers filled orders, and the number of mistakes when the order was completed. Deliveries were then made according to a 90-minute window the customer had chosen. Outstanding work was rewarded with additional incentives, while inefficient work was improved upon.
The cost of such service was not cheap. Customers paid a startup fee of $29.95, a monthly service fee of $4.95, plus a fee of $6.95 for delivery and a five percent fee of their total grocery bill order. Although this system of Peapod's was quite expensive to implement and maintain, the Parkinson brothers were correct in their assessment that consumers were more than willing to pay more for efficient and timely service. Over 80 percent of the people who initially tried Peapod's online service decided to keep it. By the end of 1995, Peapod had expanded its customer base to over 10,000 people in Chicago and San Francisco, and had over 450 employees shoppers and drivers filling orders and making deliveries.
Peapod, Inc. was growing by leaps and bounds. The company's 1995 revenues had doubled to just over $16 million, and its 1996 revenues skyrocketed to over $30 million. Over 1995 and 1996, Peapod was adding approximately 2,000 subscribers a month to a total customer base that had already reached 27,000, with new partner stores including Kroger in Columbus, Ohio, Safeway Stores in San Jose, California, Stop&Shop in Boston, Massachusetts, and plans to negotiate partnerships with more stores in the near future. The founders of Peapod had clearly reached out to a large section of the U.S. population--young, time-starved married couples with demanding dual careers and children that required time to raise. Rather than spending time shopping twice a week sometimes at their local grocery store, these couples had decided to pay more and shop less--the typical Peapod customer ordered once every ten days--for the opportunity to spend more time with their family.
Preparing for the Future
By the end of 1997, the company was operating in Chicago, San Francisco, San Jose, Boston, Columbus, Austin, Dallas, and Houston. At the time, Peapod counted over 100,000 subscribers in its customer database. Part of Peapod's unrivaled success to this point consisted in its ability to provide simple access to shopping categories that people had come to rely upon. For example, a person could choose items from menus on the Peapod web site organized in three categories, including narrow categories such as potato chips, broad categories such as snacks, or brand names such as Jay's. Food items were also sorted by cost per ounce or cost per pound, and by the current items on sale. In addition, what pleased a great many customers was their ability to add personal comments to any order they made, including statements about their desire for only ripe avocadoes, and whether they would accept alternatives if such avocadoes were not available. Peapod's marketing research indicated that this service alone accounted for a significant number of repeat customers.
In 1998 the Parkinson brothers reached a major strategic decision and implemented a warehouse distribution network unlike anything the company had known before. Not losing any time, during the autumn of that year a dedicated warehouse facility was opened by Peapod on Long Island, New York. By consolidating its fulfillment operations into a single large warehouse, Peapod reduced its reliance on third party pickers, namely local distributors and supermarket chains. The intention was to enhance control over the service quality, lower costs from the order fulfillment, and consequently reduce consumers' costs in order to increase membership. Yet the company did not do away with third party participation entirely, since it had reached an agreement with Giant Food and Edward's supermarkets to provide certain product procurement and inventory management services in the greater New York metropolitan area. In January 1999, the company opened a 70,000-square-foot warehouse, termed a "consumer direct center," and consolidated 12 separate fulfillment locations at various supermarkets and groceries throughout the Chicago metropolitan area. Peapod reached an agreement with Jewel/Osco to provide its warehouse in Chicago with product replenishment in the same way that it handled more traditional retail supermarkets and groceries.
Total revenues for 1997 reached $56 million, while 1998 revenues increased to just over $69 million, an increase of nearly 22 percent. By the end of 1998, the company had surpassed its one-millionth order via the Internet, which was widely regarded by industry experts as an impressive, even unique, achievement. By the summer of 1999, Peapod counted some of the most prestigious and successful companies in the United States as its retail partners, including Jewel/Osco in Chicago, Safeway Stores in San Francisco/San Jose, Kroger in Columbus, Stop&Shop in Boston, Tom Thumb in Dallas, Randalls in Austin and Houston, and Edwards Super Food Stores in New York. In March 1999, Peapod finalized a product alliance with Walgreen Company, the largest U.S. drugstore chain, to supply the firm's San Francisco warehouse distribution center with a variety of over-the-counter beauty and health products which would be sold via the Internet.
Peapod's future appeared promising. As more and more time-starved people sought ways to make their lives easier and more convenient, the Internet provided them with the opportunity to do so. In turn, Peapod, the largest and most successful online grocery provider, would no doubt continue to use its sophisticated and efficient order fulfillment and delivery services to help people shop for groceries in the most cost-effective manner possible.