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Help Online Grocery Services Create a Winning Business Plan

Online grocery delivery services such as WebVan suffer a high failure rate. Those that survive do so only with massive changes to their original business plans, such as not dealing in perishables or adding commercial deliveries to their mix. Even so, not much profit is generated.

Which seems odd, doesn't it? It's just a simple matter of taking a local order, filling up some bags with groceries, and then delivering them within a distance of a few miles. Why is it so difficult making a dime on this business model?

Harvard Business School professor John Deighton knows why. One key component is fundamentally flawed: the little trucks.

"Entrepreneurs have solved the other problems: warehousing, taking orders online and convincing customers to pay a small delivery fee. But the true cost of the little trucks that drive the groceries to the door can be very high, particularly when they're serving unprofitable customers," Deighton writes in a New York Times piece on the challenges at FreshDirect.
The problem is those trucks are delivering to singles who place small orders, users who don't live in close proximity to one another, and people who want deliveries during prime time weekend hours. "That tends to eat up the savings in the other parts of the system," Deighton writes.

He has several suggestions for improvement.

"How about drop-off points that customers can walk to? To save the business, it needs to fire some customers and ask others to cover what it costs to serve them."

The competitive picture is becoming more heated for existing players. Just last month Amazon.com announced a food delivery service trial in the United Kingdom, hoping to learn from its AmazonFresh program in the U.S.

How would you make the online grocery business thrive? Are there other industries that companies such as Peapod and NetGrocer can learn from?

(FreshDirect image by Ed Yourdon, CC 2.0)

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