Last month I worked with Local Food Lab to put together a panel focused on the online grocery delivery business model, in its various manifestations. We had the pleasure of hosting the event at the Dutch consulate’s beautiful space on the 31^st floor of 120 Kearny thanks to the Netherlands Office for Science and Techology. Full recap below.

Panelists:

• Lauren Bass, CEO, LolaBee’s Harvest
• Rahmin Sarabi, Product Manager, Good Eggs
• Gary Dahl, Former VP, Distribution, Webvan
• Glenn Parker, GM of West Coast Operations, Plated
• Toby Hastings, Founder, Free Spirit Farm

History + context

Moderator Austin Kiessig

My partner at Edible Startups, Austin Kiessig, moderated the event. He kicked off the presentation by providing some history and context on the online grocery delivery business model: the early 2000s Webvan boom and bust, Webvan competitor PeaPod’s position as the top Google search result for “online grocery delivery” (followed by Safeway and Walmart), and the role of AmazonFresh: Amazon is currently the #1 ecommerce grocery site able to operate with the luxury of selling groceries at a loss to deepen relationships with customers (cue warning siren for competitors…). AmazonFresh expanded to LA this June and plans to roll-out to 20 additional markets in 2014.

As context for the conversation, Austin cited the 2012 Kantar Retail report entitled, The Future of Online Grocery Shopping in the US…Is Here. The report reveals the lack of online penetration in groceries compared with other categories: online sales constitute 27% of computer hardware purchases, 24% of music and videos, 10% of clothing, 7% of home furnishings, and just 1% of food, beer, and wine. Reasons shoppers cite for not buying food online are delivery fees, lack of trust in selecting fresh items, ability to explore and buy items not on the shopping list, and enjoyment of the in-store experience. Given the lack of traction thus far, the consumer biases against buying food online, and the distribution challenges of delivering fresh food among a geographically dispersed customer set, how are the new models planning to succeed?

Webvan learnings

Gary Dahl, former VP of Distribution at Webvan, sat on the panel. As context for Gary’s role, Austin quoted the Webvan Wikipedia page, “While the company was popular, the money it spent on infrastructure far exceeded sales growth, and the company eventually ran out of money.” For example: Webvan placed a $1 billion order with engineering company Bechtel to build its warehouses, then bought a fleet of delivery trucks, 30 Sun Microsystems servers, dozens of Compaq computers, several Cisco Systems routers, more than 80 21-inch ViewSonic color monitors, and at least 115 Herman Miller Aeron chairs at over $800 each. Gary represented his former employer candidly and with a good sense of humor. When each panelist was asked to characterize their company as a food company, a logistics company, or a technology company, Gary responded, “#4 – bankrupt.” Although he did contest the ridicule of their Aeron chair spend – “great engineers at that time wouldn’t sit in anything but them…”

When asked what’s changed between 2001 and today to make online groceries more feasible, the answer was that Webvan was ahead of its time, and certainly ahead of consumer willingness to buy food online. Of course in hindsight it’s easy to point out mistakes that were made. TechCrunch, courtesy of the former founding head of technology at Webvan, recently covered the online grocery space and cited three lessons learned by the demise of Webvan:

1. Targeting price sensitive customers with what should’ve been an upscale offering
2. Investing in complex, customized, and costly infrastructure
3. Succumbing to pressure to get big too fast

Online farmers’ markets (Good Eggs and Lolabee’s Harvest)

The “online farmers’ market” model offers customers the ability to buy groceries online from a disparate community of producers which are coordinated via a third party and delivered weekly to doorsteps. I covered LolaBee’s earlier this year and remain very much a fan of their offering. They expanded delivery to the East Bay this June and are continuing to invest in growing the business.

Toby Hastings, Free Spirit Farm

To highlight the perspective of the food producer on this model, Toby Hastings, founder of Free Spirit Farm, joined the panel. Toby runs a seven acre farm in Winters, CA producing fruits, vegetables, and eggs. He sells his produce via Lolabee’s, as well as directly to Bay Area restaurants. He shared the challenges for a farmer in marketing products, specifically for low batch, seasonal crops that are not dependably available week-to-week. The online platform lets him market exactly what he has in stock each week. Toby is making a name for himself in the farming world, having been named in Zagat’s SF Food World Up-and-Comers top 30 under 30. He also was the only panelist representing a venture that’s currently profitable (and has been profitable every year since inception). Who would’ve thought that the farmer would win that honor?

Good Eggs, another Bay Area-grown online farmers’ market, is also growing aggressively, currently piloting their model in Los Angeles, Brooklyn, and New Orleans. Rahmin shared that the New Orleans pilot has met with early success especially due to the strong local sense of community around food. Rahmin echoed the role this model can play in supporting and enabling local food producers. For example, Josey Baker is an SF producer that began selling 100% via Good Eggs which allowed him to expand. Good Eggs isn’t yet profitable but plans to have the SF market reach profitability within six months.

Recipe delivery boxes (Plated)

Plated is one of a number of recent food startups delivering ready-to-cook ingredients and recipes directly to your door (others include Blue Apron and PlateJoy). Plated began on the east coast but launched in San Francisco this September and has done a great job getting their brand out there. Seriously, I see their materials everywhere from my office to a private cooking lesson I did in a chef’s home with some colleagues a few weeks ago (by the way, highly recommend Chef James…). I tried out Plated a few weeks ago, and although I was skeptical of the $15 per serving price point, I was blown away by the quality of produce included in the order. Glenn from our panel is the man in charge of sourcing high quality ingredients around the Bay Area and it seems like he’s doing well so far.

Wooing the fickle online grocery shopper

Coming full circle, the main challenge faced by online grocery startups is the lack of current penetration today. These companies will have to continue converting and wooing brick-and-mortar food shoppers. How will they do that? When asked by the moderator what is the most surprising thing they’ve learned about online grocery shopping behavior, the panelists’ answers provide some insight:

• Lauren, LolaBee’s: There is often no discernible rhyme or reason to the orders her customers place. She frequently cannot imagine a meal coming together from the collection of groceries. She believes there’s lots of room out there to guide customers into crafting meals while they shop online. That’s certainly an advantage of online shopping: the ability to search recipes online while making your selections. A lot easier than scanning through pinterest pins in the produce aisle… (PlateJoy helps meet this need with meal-planning services, as does Design My Meals, which auto-loads your CSA box inventory into your virtual pantry to pull recipes based on what’s in your kitchen)
• Toby, Free Spirit Farm: Customers don’t like branching out and trying new things. They’ll choose an apple over a quince very day. But it’s easier to get people to try new things online versus in the store; it’s less intimidating. You don’t have to know how to pick out a ripe piece, you don’t have to make the decision on the spot, with others shoving around you. Featuring new products online helps customers experiment (especially when paired with a recipe guiding them on how to use the new ingredient.
• Gary, Webvan: Gary’s most surprising observation from customer shopping behavior is that most people start to think about dinner at ~4pm. In the online world it’s really hard to deliver on that. Plated requires orders by Monday at noon for a Tuesday delivery, which seems like an impressive turnaround to me. But you’re out of luck if you want to go online at 4pm and get groceries delivered that night.

Thanks again to NOST for the amazing venue. The Netherlands Offices for Science & Technology links local science, technology trends, and R&D (in agriculture and food, among other areas) to their counterparts in the Netherlands. Check out NOST’s recap of this panel on their blog as well.

Also thank you to our food sponsors for the evening: Kama Food Lab and Rip van Wafels!

Panelists from left to right: Glenn, Lauren, Rahmin, Gary, and Toby