Nobody’s wondering anymore whether online grocery delivery can make for a viable business. It already is one. The field is crowded with competitors, business is booming and, on the whole, the industry is making money.
What will all this growth mean for the food system at large? It’s a mixed bag. While the move away from local bricks-and-mortar food sales will likely have its downside within some communities, online businesses definitely have the potential to boost sales of sustainable, organic, and local foods. And they could lighten the toll that getting groceries takes on the environment as well.
While delivery services represent less than 2 percent of the total grocery business in terms of revenue, growth has been rapid, especially in the last couple of years. A recent report by IBISWorld reveals that the business has grown by an average of 14.1 percent a year for the past five years. That growth will level off some, according to the report, but it will still grow by nearly 10 percent a year between now and 2019. Revenues stand at $10.9 billion, with about $1 billion in profits. There are now about 2,700 businesses delivering groceries in the United States.
The implosion of Webvan at the end of the dotcom crash 14 years ago was so stunning that it scared both investors and customers away from the business for a while. But Webvan didn’t fail because people didn’t want grocery delivery, it failed mainly because it tried to grow too big, too fast, as many companies did at the time.
Thereafter, unlike just about every other consumer-facing enterprise, the grocery business stayed mostly offline. But investor confidence started to revive right around the time smartphones became ubiquitous, removing one of the chief elements of friction in the business: the need to place orders while sitting at a computer. Now it can be done anywhere, at any time.
Shopping in the Information Age
In some ways, the now-burgeoning business of grocery delivery has its roots in Community Supported Agriculture or the CSA movement. But while CSAs help support local farmers, they generally aren’t that efficient. CSA members buy farm shares, often receiving a weekly box of seasonal produce, but still have to get the bulk of their groceries elsewhere.
Outfits like Good Eggs and Relay Foods have run with the CSA model, while broadening the selection, offering more delivery choices, and working with many different suppliers. Zach Buckner, the CEO of the Mid-Atlantic-based Relay Foods, has said that businesses like his are “replacing the traditional CSA,” by offering a full range of groceries along with fare from local farmers. While Relay focuses heavily on local, sustainable foods, the total selection is similar to that which is offered by Whole Foods, including prepared meals.
CSAs and farmers’ markets offer a remarkable level of transparency, but they are only reaching a relatively small slice of eaters (farmers’ markets numbers, for instance, are in danger of reaching a plateau). Customers of online grocers that specialize in local and sustainable fare, on the other hand, can instantly see a great deal of information about any given product, including where it was grown or manufactured–and in a way that can be scaled up.
“It’s an irony,” says Chad Arnold, CEO of the Colorado-based company Door to Door Organics. “It takes an online company to bring the producer closer to the consumer again,” the way it was before the industrial food system began to dominate.
The natural assumption is that grocery delivery is good for the environment because one truck making multiple deliveries spews less carbon dioxide into the air than a lot of individual cars making trips to the supermarket. And all indications are that this is true, but it’s slightly more complicated than that.
A 2013 study by civil engineers at the University of Washington, Anne Goodchild and Erica Wygonik, found that grocery delivery emits between 20 and 75 percent less carbon dioxide than individual trips to the store. That’s a huge range, mainly because different modes of delivery yield radically different results. The best method, according to the study, has the grocer deciding on delivery times. The worst method is one that allows customers to choose their own delivery times. When the grocers decide, they can plan routes with an eye toward efficiency. When customers decide, grocers don’t have that advantage.
The latter method is more convenient for customers, of course, but it means that grocers have less flexibility in determining the most efficient routes.
(Some caveats here: the study didn’t take into account people who walk or take public transportation to grocery stores, nor did it account for refrigerated trucks. It simply compared driving to the store with having groceries delivered.)
Relay Foods’ Buckner says his company uses an even better approach. While he offers home delivery, most of his customers opt for a method whereby a single, large truck plants itself at some location, usually in a heavily trafficked area near office buildings or industrial parks. Customers then just stop by and pick up their groceries. “We handle 40 or 50 orders all at once that way,” he says. “People just stop off on their way home from work.” Even compared to home delivery, he says, “it’s a gigantic savings” of carbon emissions, time, and money.
A rarely mentioned aspect of grocery delivery is that it is, in some ways, a vast improvement over farmers’ markets, efficiency-wise. Since farmers’ markets, like CSAs, are so popular and have done so much to support local agriculture, it may be that people hesitate to criticize them.
Buckner has no such qualms. Besides the need for customers to get to the market just as they would get to a grocery store, “each farmer has to truck all that stuff to the market, too, sometimes to several of them. And they don’t know how much they’ll actually sell, so there’s waste. It’s an environmental nightmare.” Plus, most farmers are not born salespeople. Better, Buckner says, to leave the sales and distribution to folks like him.
But online grocers aren’t always a panacea. The implication of the University of Washington Study is that companies like Instacart are among the most wasteful. That company, which recently landed financing valuing it at about $1 billion, is getting the most buzz right now, partly because customers find it very convenient. Instacart promises near-immediate delivery, or delivery whenever a customer wants it. It works sort of like Uber in that contractors in private vehicles take orders online, and go to grocery stores–often more than one–to pick up whatever customers want. It’s convenient, and totally inefficient.
“It doesn’t seem any different [efficiency-wise] than people going to the store by themselves,” says Door to Door’s Arnold. “It might even be worse, if the [order] sizes tend to be smaller. They deliver groceries but it’s really more of a personal shopping service.”
If Instacart makes deals similar to the pilot program it is running with Whole Foods, that might help some. That service has Instacart personnel on-site at the store, so the trip out to the store is eliminated, at least. But it still offers the same one-hour service, and so isn’t nearly as efficient as services offered by the likes of Good Eggs, Door to Door Organics or Relay Foods.
Meanwhile, outfits like AmazonFresh and Google are making slow moves into the business, and have the potential to become huge. The IBISWorld report concludes that profit margins will fall for everybody as competition heats up, but it’s hard to know what effects such giants (assuming they become food giants) will have on the sustainability of business. Either way, says Arnold, “They’ll be serving a very broad swath of the market. But they’ll reinforce the thesis that the consumer is finally ready for this.”
About the Writer
Dan Mitchell is an independent journalist in Oakland, Ca. He has written for The New York Times, Fortune, Modern Farmer, Wired, and many others.