The Grocery Cart In Your Pc

With two young daughters and a 60-hour-a-week job, Beth Mansfield of Libertyville, Ill., doesn't have time to squeeze the cantaloupes at her local supermarket. Up until six months ago, the frazzled 42-year-old owner of a sports-equipment franchise would make late-night runs for the bare necessities. But now, when the cupboard is bare, all it takes is a few computer keystrokes--and the problem is solved.

Mansfield's secret is Peapod, a five-year-old online grocery-shopping service based in Evanston, Ill. While many computer shopping ventures have fallen flat or failed to live up to their hype, Peapod has built a loyal following of more than 10,000 households in Chicago and San Francisco. It's currently negotiating a partnership deal that will allow it to enter Boston early next year.

Although still tiny, Peapod has turned much of the conventional wisdom about online shopping on its head. In survey after survey, consumers say they won't pay extra for the privilege of shopping online. But Peapod's customers fork over a $29.95 startup fee, a $4.95 monthly service fee, plus $6.95 and 5% of their grocery total per order. The service recently raised those prices with scarcely a ripple of protest.

80% RETENTION. And Peapod's demographics are the mirror image of those at most other online services, where 75% of shoppers are male. Almost 75% of Peapod's shoppers are women--an important skew, since women usually make household buying decisions. And while most other online-shopping services have trouble retaining their customers, Peapod has kept almost 80% of the people who have tried it. "If you create an online service that answers a need, people will fall in love with it on their own," says Tim Dorgan, Peapod's executive vice-president.

Peapod is the brainchild of Andrew Parkinson, 37, and his brother Thomas, 35, both veterans of Procter & Gamble. Andrew says sales will top $20 million this year. But Peapod has yet to turn a profit, and some online shopping experts doubt it ever will--unless it raises prices dramatically to pay for the high level of service it provides. Peapod, with 450 employees, hires its own shoppers to fill orders and its own drivers to make deliveries. Software development is another big expense. This fall, for example, the company expects to offer those customers who are worried about fat, sugar, or salt the ability to sort groceries by nutritional content. Andrew says that, once Peapod can spread its high fixed costs over a larger customer base, it can make money without raising rates or cutting services.

TAKEOFF POINT. For now, the company is using cash from equity investors to fund its expansion plans. Peapod has attracted the interest of big media players such as Tribune, Ameritech, and most recently, Providence Journal, all of which have purchased minority stakes in the privately held company. Although they won't disclose the size of their investments, all three have cable interests and think Peapod could someday make the jump to interactive TV. Beyond that, they're betting that the online grocery business is about to take off. In June, Microsoft Chairman William H. Gates III startled a group of top food retailers by predicting that one-third of food sales would be handled electronically by 2005.

That would be a huge shift in the highly competitive, $400 billion U.S. grocery business. Currently, fewer than 1% of groceries are bought from home--and mostly by phone rather than computer. "This industry is very much in its infancy," says Fred Schneider, executive director of food-industry research at Andersen Consulting. "The important thing Peapod is showing is that consumer demand is out there."

How does it work? Peapod's supermarket partners zap it daily price updates on more than 18,000 items, from laundry detergent to lettuce. At-home shoppers can peruse whole categories, much as they would in a store, or jump straight to their personal shopping list. Since items are broken down by cost per ounce, it's easy to comparison-shop. Customers can tell Peapod's in-store shoppers whether they will accept a substitute if the preferred item is out of stock. B. Joseph Pine II, a Ridgefield (Conn.) marketing consultant, says this sort of customization binds customers to Peapod's service. "They're enabling the software to remember you. That makes it more difficult for you to go somewhere else," he says.

Once an order is complete, shoppers select a next-day delivery time. Peapod then forwards the order to the nearest participating grocery store. In Chicago, it's a Jewel/Osco; in San Francisco, it's a Safeway. The stores may lose something in impulse purchases, but they gain in volume. Orders are filled by Peapod employees, checked out at special Peapod counters, and taken to a holding area where items are kept frozen or refrigerated as needed. Then, the groceries are picked up and delivered by another set of Peapod employees. For busy, dual-income families, Peapod can cut the weekly shopping trip from a couple of hours to just a 20-minute session at the keyboard.

FEW RIVALS. Besides saving time, Katherine M. Howard, a 33-year-old computer systems manager and mother of two, says Peapod makes her a better shopper because she makes fewer impulse purchases, compares prices more easily, and uses more manufacturers' coupons, which Peapod credits to her bill. "It pays for itself in what you don't buy. I love it," she says.

Given the size of the potential market, it's surprising that Peapod has so few competitors. Of the handful out there, none are following the same game plan. Shoppers Express in Bethesda, Md., lets consumers in 40 markets including Miami, Seattle, and Washington, order groceries through America Online, but it acts more as a middleman. Grocery-store employees fill the orders and a local courier delivers them. No prices are quoted, and no comparison shopping is possible. Another Bethesda company, Shopping Alternatives Inc., provides grocery-shopping and delivery services in 10 cities through partnerships with chains such as Cub Foods and WalMart. But the service isn't online yet: Customers pick up a floppy disk or catalog with estimated prices.

For all its high-tech razzle-dazzle, Peapod's greatest strength may be the care it takes in delivering exactly what people want when they want it. "You tell them you want four green bananas and two ripe ones, and that's what they'll give you," says Mansfield. With service like that, lots of other time-pressed consumers may steer their shopping carts for the supermarket in cyberspace.

Peapod's Virtual Supermarket

-- Items can be chosen from menus organized by broad category (snacks), narrow category (pretzels), or brand name (Rold Gold)

-- Items can also be sorted by cost per ounce or by what's on sale to figure out the best buys

-- Shoppers can add comments to their orders ("Get only ripe tomatoes") and tell Peapod's in-store shoppers whether they'll accept substitutes

-- Shoppers can see a running tally of their bill as they compile their shopping list

-- The service takes coupons and accepts credit cards, checks, or online payments

    Before it's here, it's on the Bloomberg Terminal.