Foodhearty?

Duane Sandberg CEO, i-Grocer

Webvan. Peapod. Home Grocer. NetGrocer. Streamline. ShopLink. Grocery Works. The US is awash in dot-com grocers trying to carve out a share of the $450 billion supermarket industry. Like most Internet companies they have yet to bag a profit, but when has that ever held back growth on the Net? This spring, Japan is rolling out its own versions of the virtual grocer. At the head of the pack is iGrocer, a startup headed by Canadian CEO Duane Sandberg. It plans to go nationwide this summer, after completion of a soft launch begun in March. Funding is mainly from North American investors betting that Sandberg's 13 years' experience in Japan's food industry will provide the winning combination of insight, strategy, and connections.

iGrocer is a fast company. It has to be -- the competition is moving in quickly from all directions. The konbini, or convenience stores, huge in Japan, are especially aggressive. Already Sunkus and its partners -- which include distributor Speed Group, Softbank, Hikari Tsushin, and Circle K -- are rolling out an online grocery service called eConvenience. And many small local operations are getting into the game, an example being the three-outlet chain Tokyo Store in Kanazawa, Ichikawa prefecture. Then there are the co-ops, which have been delivering groceries in Japan for years -- moving online seems a natural, and a few, like Internet Seikyo Co-Op Land Tokyo, are doing so now. Large supermarket chains are also eyeing the scene, waiting for the right moment to pounce.

Of course, there's no guarantee that a significant market for online groceries even exists in Japan, though some research is encouraging. Rika Hayashi, director of Media-Net Japan, says women aged 25 to 34 in her Lady Net monitor group show definite interest in Net grocers. "More and more of them have a high degree of awareness about the Internet," she says. "Some may be early adopters, but average women are increasingly used to PCs, and they are interested in e-shopping -- housewives as well as single working women. Younger women don't want to spend as much time shopping and preparing food as they did in the past."

"Eighty-two percent of the customers for online grocery services in the United States are women," says Sandberg. "That's our target market as well here in Japan -- most particularly working women."

Sandberg says he'll unleash a marketing blitz to coincide with iGrocer's hard launch this summer. "We're positioning ourselves along the lines of Meidiya or Kinokunya -- gourmet, high-quality goods, the freshest produce, and a product mix that will appeal both to foreigners and Japanese," he says. The blitz will include blanketing trains and stations with ads designed to catch the eyes of working women rushing past. "You've got to educate the public about shopping options, plus help them place more value on their personal time," he says. "What we're selling is time and convenience."

Convenience, however, is already a cornerstone of Japanese retailing: you can always call someone somewhere in Japan and have something delivered. Aside from a Web interface, the only thing unique about online grocers might be a wide variety of goods. US Net grocers can offer lower prices, but in Japan, forget it. The unwritten rule of Japanese retailing is thou shalt not undercut thy neighbor's pricing structure. Failure to observe this rule can lead to a fatal cut-off in your supply chain. Sony recently announced its intention to be the first Japanese consumer electronics firm to sell its products directly to consumers over the Internet, but if it offers a better deal than consumers can get in Akihabara, the backlash will be severe: in a report by the Nihon Keizai Shimbun, an official from the Nippon Electric Big Stores Association threatened, "If a manufacturer starts Net sales in a manner hostile to volume retailers, we would consider taking all their products off our shelves." True to form, products at the dot-com grocery will cost the same, if not more, than the corner store.

Another challenge for Net grocers in Japan is logistics. US-based Webvan has invested heavily in automated packing/ sorting systems and is undoubtedly the technical role-model to follow -- some day. For now, iGrocer has opted for hand-packing most orders and leasing warehouse space, and it's also contracting a call center rather than setting up its own. "It just doesn't make sense to focus so much of our funding into that area in the beginning," Sandberg says. "We're choosing to spend the money on marketing to build demand." The konbini have impressive logistics systems already in place, but not for online groceries. A supermarket-style mix of product sizes and quantities means building completely new facilities or restructuring existing ones.

Delivery -- and how to charge for it -- is another thorny logistics matter. In a study of the US online grocery market, J. C. Bradford and Co. found that of those interested in home delivery, 77 percent would pay $7 to $10 per order, but only 4 percent would pay $13 to $16. Peapod saw orders jump 600 percent in the Boston area when it test-offered free delivery. iGrocer, Sandberg says, will charge ¥500 to ¥600 for orders under ¥10,000. That strategy could work because iGrocer's gourmet and specialty foods are not readily available to most consumers. A konbini like Sunkus, however, could have a hard time justifying delivery charges (currently e-Convenience plans a ¥500 fee) for products that users can walk over to the corner store and pick up themselves. Sunkus is promising same-day delivery with its e-Convenience service, but that could prove unrealistic: it takes a lot longer and costs significantly more to go one mile in Japan than it does in the US. Granted there's a higher population density in Japan, but it doesn't follow that a driver's 10 a.m customer will live anywhere near the 11 a.m one. Sandberg says iGrocer will offer a more realistic-sounding next-day service. (The startup has partnered with Sagawa, a delivery firm that operates 24 hours a day.)

Konbini talk a good e-story, but they seem more adept at generating press releases than popular online services. The sort of costs convenience stores are looking at for introducing online grocery services could be justified if dot-com grocers were increasing profit margins 10 percent, but that's not happening. Even in the US, the entire market for online groceries has yet to reach 1 percent of the whole. And it's questionable how dedicated konbini will be to the online grocery format if it extends much beyond standard convenience store offerings. Many konbini are letting their partners have a large share of the e-venture risk. Sunkus, for example, holds only a 20 percent stake in e-Convenience. Speed Group is the largest shareholder with 50 percent, Hikari Tsushin and Softbank hold 10 percent each, and Circle K and Unyu Supermarkets both have 5 percent.

Another problem for konbini -- one that a startup like iGrocer doesn't face -- is that they have a pre-conceived public image. "There's a real problem with using the convenience stores for this," says ING Baring's senior researcher and retail sector expert Michael Allen. "The main customer for convenience stores is a male teenager or young man in his early 20s. The online grocery target is working women. There is a gap here to be bridged which the convenience stores are not automatically going to win over."

Good news for Sandberg and iGrocer, but the konbini are too powerful to not worry about. 7-Eleven and its partners' online store, 7dream.com, is not presently in the grocery business -- its main interest is in commissions from online sales and expansion within its existing product lines -- but 7-Eleven PR manager Minoru Matsumoto doesn't count it out of the game. "If our customers tell us they want the service," he says, "then we will provide it for them." Family Mart, tired of living in 7-Eleven's shadow, is rumored to be gearing up for entry into the virtual grocery market. eConvenience plans to kick off with 4,000 grocery items, including fresh and processed foods, detergent, pet food, et cetera. Customers will choose between home delivery or store pick-up.

Sandberg also cannot afford to take the supermarket chains lightly. One of them, Seiyu, is not only his former employer, but also the first company he approached with the iGrocer concept. "They were not interested," he says flatly. Now, however, sources inside the company say Seiyu plans to watch the competition develop the market and then -- with partners to provide the funding it now lacks -- move in forcefully with the full weight of its supply chain behind it. "Suddenly they've established a multimedia division with a staff," laughs Sandberg. Supermarkets in Japan aren't exactly dinosaurs, though. In the past few years they've aggressively expanded their product selection, developing private label deli foods designed for the ready-made, take-home market. And next year they'll benefit from changes in retailing law that will liberalize their operating hours. Currently it's difficult for supermarkets to obtain permits to stay open after 8 p.m., but the new rules will allow them to place themselves in the late-night convenience slot.

Another potential threat to Sandberg is co-ops. About 20 percent of the fresh-food sales nationwide move through the co-op system, according to fiscal 1999 data from the Japanese Consumers' Co-operative Union. Should the co-ops move into online groceries -- as Seikyo Co-op Land has -- they have the advantage of well-established supply chains for fresh food, existing warehousing, and their own delivery services. The question is whether they appeal to the right segment of consumers.

Co-ops traditionally depend on a joint purchase system, whereby five to seven households in the same neighborhood come together to place a weekly order. According to the JCCU, around 46 percent of co-op sales are from such groups. But this han format, as it's called, doesn't really appeal to working families, because someone must take the delivery and help out with all the sorting.

Co-ops that deliver on an individual basis have been gaining popularity -- particularly in the Tokyo area -- despite slightly higher costs. Seikyo Co-op Land is aiming for 20,000 online members in its first year (currently it has about 2,400, according to a spokesman). But Seikyo, like all co-ops, is limited by retail law to its own prefecture.

Gross margins on food are much lower in Japan than in the US, often 25 percent or less depending on the level of fresh food. Margins for the dot-com grocers could fall below 20 percent. Coupled with the high costs of delivery, infrastructure, and wages it means a very costly year for first-comers. Japanese dot-com grocers will have to risk going public to keep the funding coming, though stocks of US online grocers haven't soared as high as other Net ventures. iGrocer is already considering an IPO.

A lot of opportunity exists for online grocers in Japan to partner up and offer other services, from photo developing to dry cleaning. "Instead of having three delivery trucks come to your house, you could have just one," envisions Sandberg. Many food retailers and merchants may opt to team up with an existing dot-com grocer when they finally decide to go etail.

In 1999, Japan's consumer e-commerce market was worth ¥336 billion, up nearly 300 percent from 1998, say the Electronic Commerce Promotion Council of Japan and Andersen Consulting. Some of that revenue is bound to find its way to dot-com grocers. "Nobody in America thought you could do groceries online," says Allen, "but we've learned almost anything can be sold once you have critical mass of users. We're a long ways from that point in Japan, but even if this business doesn't start out very well, we can't write it off."