Grocery at the
Crossroad: Creating Virtual Space for Real
Groceries
Martin BARNETT Lecturer School of Management Information Systems Edith Cowan University Perth WA 6018 Australia Tel: +61 8 9273 E-mail [email protected]
Janice BURN Professor School of Management Information Systems Edith Cowan University Perth WA 6018 Australia Tel: +61 8 9273 8717 E-mail [email protected]
❒ Abstract
This paper proposes models for retailing using an electronic market environment. The authors advance a set of models of virtuality to describe an electronic market consistent with popularly used definitions. These are related to electronic grocery retailing to describe avenues to efficient expansion. Virtual forms that may be adopted are constrained both by pre- defined communication links and the extent to which these can be substituted by virtual ones and also by the intensity of virtual links which define the virtual form adopted. It is argued that seven models suffice to provide and describe a comprehensive dynamic framework of change. It is suggested that for strategic advantage e-groceries must align management and communication strategies in accordance with the business model adopted but further that they need to develop a process of continual change management to reflect continuous evolution of the models in an e- market environment.
Key-words :Virtual Organisations, Organisational Change, Global Retailing, e-Grocery, e-Business.
Creating Virtual Space for Real Groceries
Martin BARNETT et Janice BURN
number of large grocery retailers, each of which operates Introduction a large number of stores (on average the large grocers Inexpensive advances in computer-enabled operate 113 stores each, compared to an average of 1.3 communication have provoked a varied usage of the term stores per retailer for the food sector as a whole), genera- ‘virtual’ as applied to organisations. One definition ting a large per-store turnover. The top five large grocery suggests that organisations are virtual only when retailers account for 48 per cent of all sales (London cooperating to produce deliverables across different Economics, 1997). locations, at differing work cycles, and across cultures
(Gray and Igbaria, 1996; Palmer and Speier, 1998). Another suggests that the single common theme is In comparison, clothing retailers represent 7 per cent of temporality. Virtual organisations centre on continual total UK retail turnover. There are some multiples in this restructuring to capture the value of a short term market sector, although nowhere near as many as in food opportunity and are then dissolved to make way for retailing, with an average of 1.9 stores operated by each restructuring to a new virtual entity. (Byrne, 1993; Katzy, retailer. Electrical and music goods retailers make only 5 1998). Yet others suggest that we define virtual per cent of all UK retail sales. organisations by the intensity, symmetricality, reciprocity and multiplexity of the links in their networks (Powell, The emergence of larger retail operators has enabled the 1990; Grabowski and Roberts, 1996). Whatever the use of more efficient methods of distribution. Over time, definition, there is a consensus that different modes of wholesalers have more or less disappeared from many of virtual being are appropriate responses to inter and intra- the retail markets, with large retailers dealing directly organisational transactions (Hoffman et al,1995; Gray with manufacturers. This trend has probably been greatest and Igbaria, 1996; Goldman et al, 1995) and in the grocery retail market; between 1982 and 1992, consequently, different organisational structures are retail turnover increased by 125 per cent whilst turnover appropriate responses to different situations. (Palmer and from delivered wholesale trade increased by only 59 per Speier, 1998; Davidow and Malone). cent. At the same time
the method of delivery has changed enormously as Different situations may be typified by different market retailers have become more efficient. Before the products. Whiteley (1999) makes an a priori division emergence of multiple retailers, most deliveries to between "Hot Cakes" and "Dead Ducks". He argues that retailers were made by manufacturers or wholesalers. internet business channels only work for some trades. Such deliveries were of an assortment of products to Delivery problems, uncertainty factors and costs will individual retail outlets. Nowadays, manufacturers tend to prevent items such as groceries, clothing and consumer deliver large amounts of a particular product in each durables - the Dead Ducks - succeeding in an e-market. delivery to a retailer’s own centralised warehouse. The Hot Cakes are items such as software, intangibles, books retailer has, in effect, internalized the wholesaling and and CDs, and specialist items. Whiteley asserts that transportation function into its own activities. The difficult deliveries, costs and delay, coupled with the advantages of centralised warehousing include: reduced (asserted) inability to charge less, inhibit the development stock levels; reduced delivery visits per store; reduction of e-business in the majority of physical goods. He argues of necessary storage space in stores themselves; fewer that for these types of goods there will be "large operators incidents of running out of stocks and empty shelves in who run a marginal e-commerce operation on the back of the outlet; and lower shrinkage. their conventional facilities. However for these types of goods most shoppers will want to visit a conventional store and see/feel the goods, possibly stop off for coffee The increasing quantity of data that can now be collected and then take their purchases home, real time, in a plastic and collated by retailers has improved their ability to bag" (p. 20). Why then is the so-called Dead Duck of the judge how consumer preferences change over time. As a retail grocery market worthy of study? method of exploiting this new information advantage, many grocery and other retailers have developed stronger relationships with suppliers and have become involved in Retailing and e-grocery markets product development (Hogarth-Scott and Parkinson, 1994). The retail grocery trade in developed countries accounts for between 30 – 50% of all retail spending on physical products, depending upon income levels and definitions It has been suggested that Interactive Home Shopping (Wileman and Jary, 1997). As each person in a cash- (IAHS) might threaten the established supermarket pre- based economy buys food, this puts retail grocers in a sence by disintermediating the bricks and mortar real market class of their own. This has given rise to estate and associated management capital. Supermarkets sophisticated networks of supermarket chains expanding are currently testing the potential for IAHS to alter their by virtue of their advantages of economy of scale, buying methods of dealing with customer requests. Trials are power, brand marketing and cross-marketing with loyalty under way on at least seventy Web sites in over 17 coun- and group promotion packages. tries at present (Bos, 1999), but what is not clear is the management strategies behind the deployment of resour- Food retailers are by far the largest retailing group in the ces in this way. It is likely that virtual forms of organisa- UK accounting for almost 38 per cent of UK retail sales, tion will arise to extend or replace existing business mo- whilst the large grocery retailers alone account for 30 per dels in the grocery trade. To understand therefore the cent of all UK retail sales. There are a relatively small stages of growth and management of organisational Creating Virtual Space for Real Groceries
Martin BARNETT et Janice BURN change it is helpful to identify useful models for this in- dustry. Seven virtual models, derived from empirical study of more than sixty e-grocery operations, are proposed. Each of these requires different management and communica- tion processes to maximise and maintain strategic advan- tage but also to embrace dynamic change. The paper dis- The virtual face model commends itself, especially to cusses the implications within the context of each model small companies, as a starting point. Vince Belladonna, and the e-grocery business. The authors suggest that manager and co-owner of Dewsons, a franchised retail transformation from one model to another may be the grocery store in Perth Western Australia was the first efficient response to market stimuli, and that choice of person to make interactive home shopping a reality on the some forms may preclude the efficient transformation continent, purely as an opportunistic extension of existing into others. It is not suggested that there is a correct or business. His store had always provided a home delivery evolutionary direction of change, rather that there are service, mainly for the elderly who had difficulty in more predictably appropriate configurations in given shopping. It was a free service that spread by word of circumstances. mouth. As a result enquiries came in from younger cus- tomers who, for a variety of reasons, wanted to use the Models of Virtuality service. The cost of providing the service on a wide- This paper identifies seven different models as: virtual spread and regular basis was becoming prohibitive, so faces, co-alliances, star alliances, value alliances, market Belladonna looked for ways to recover this cost before he alliances, virtual brokers and virtual spaces. The value of was forced to drop the service altogether. The idea of a each of these forms lies in their being an appropriate res- Web based computer shopping system commended itself ponse to the communication and transaction needs within and Belladonna found a small local company willing to a given nexus of market forces and opportunities. design and provide the web site and online ordering sys- tem. The virtual face Put simply, virtual faces are the cyberspace incarnations The system viability was tested simply by asking custo- of an existing non-virtual organisation (often described as mers whether they would use an available web order and a “place” as opposed to “space” organisation). They home delivery service. From US models, Belladonna create additional value such as enabling users to carry out estimated that the service provision cost of A$10 (US$6) more sophisticated interactions over the Internet as they could be recovered by imposed surcharges. could otherwise do by using telephone or fax. The inte- ractivity of communications now available may provide an impetus for a shift in focus of activity as these services In April of 1997 a pilot system, lacking full ordering and need not simply reflect and mirror the activities of the database functionality, was tested on the Web. The favou- parent organisation but even extend these. We already see rable response, with inquiries coming from a radius of the scope of activities extending by use of facilities such twenty kilometers, pushed the full site into operation in as electronic procurement, contract tendering, electronic June 1997. Three unexpected facts emerged from the auctions or trying for new markets by participating in an operation. Firstly, the number of customers was greater electronic mall with or without added enrichment such as than expected. Secondly the range of goods purchased a common payment mechanism. There is obviously an was wider than expected. Thirdly the shopping basket extremely tight link between the virtual face and the pa- was up 30% on store customers with less price sensitivity rent organisation as what is happening here is that a fresh displayed. communications channel has been forged between the existing corporate structure and supply chain and the So what has the website meant to Dewsons? The virtual customer. This model is used by the vast number of com- face has transcended previous limitations set by geogra- panies offering web pages with varying degrees of inte- phy and pre-established supplier links set by the terms of ractivity to complement rather than replace other chan- a franchise. It has enabled them to expand into areas nels to market. In some cases organisations find that the beyond their primary catchment area. They have establis- different communication challenges require them to esta- hed new regular users, both domestic and commercial. A blish an entirely new management model independent one-on-one relationship has been established with these from the parent group – this has been proposed in a num- newly loyal customers. It has also given them the oppor- ber of electronic retailing situations where the traditional tunity to directly market to these clients. The total basket forms of supermarket management cannot be successfully purchased is profitable due to the volume and fewer pro- maintained in an electronic market. motional items being purchased. In dollar terms, the home delivery section returned on average A$ 6,000 (US$4,400) in sales per week by mid-1999.
Dewsons On-line The co-alliance
Figure 1. Virtual Face Creating Virtual Space for Real Groceries
Martin BARNETT et Janice BURN
Co-alliances are shared partnerships with each partner The core comprises leaders, normally dominant players in bringing approximately equal amounts of commitment to the market, who supply competency or expertise to mem- the consortium whose composition may change to reflect bers. These alliances are commonly based around similar market opportunities or core competencies of each mem- industries or company types. While this form is a true ber. Focus can be on specific functions such as collabora- network, typically the star or leader is identified with the tive design or engineering or in providing virtual support virtual face (perhaps by brand ownership) and so is very with a virtual team of consultants. Links within the co- difficult to replace - whereas the satellites may have a far alliance are normally contractual for more permanent greater level of substitutability. As communication chan- alliances or by mutual convenience on a project by pro- nels are controlled by the core this may lead to hierarchi- ject basis. There is not normally a high degree of substi- cal communication structures. tutability within the life of that virtual creation. This or- ganisational form is not new, but its attractiveness as a virtual model are a consequence of the benefits flowing from low friction communications in real time and the ease with which such structures can be assembled and restructured. This form of cooperation is no novel response to business circumstances: the novelty lies in the speed and efficiency with which such alliances can usefully form, perform their tasks, and reform owing to efficient communica- tions, and hence the ease with which the other partners can treat the partners as a virtual (single) entity existing for a specified time.
Figure 3. Star Alliance An example of a star alliance is that of Doug Carlson's Greengrocer.com, a startup supplier of fresh fruit and Figure 2. Co-Alliance vegetables in Australia This was founded on the belief that others, like him, would appreciate groceries of choi- ce delivered. Accustomed to the ease of having a regular boxed grocery delivery, Carlson had come to resent the An example of this model in practice is found in a group fact that the selection was chosen for him, so he looked to of small breweries who formed an alliance as an alterna- implement an IAHS site, believing that it would make tive channel to market and as a means of reaching a wider money. In this case, Greengrocer.com is not tied to market by sharing marketing cost The Scottish Craft specific satellites – fresh fruit markets and wholesalers Brewers Co-operative (SCB Co-op) is the common vir- are visited according to season and product range. The tual face of six small Scottish breweries, all now highly success of this venture has led to plans for expansion into dependent on each other. The co-op was formed to de- other cities. liver wide area sales and marketing functions for the par- ticipant enterprises formerly serving their immediate lo- cales within Scotland. SCB was created to lever usage of the companies’ limited resources through a common in- terface, ordering and partnering system. The Value Alliance
As the virtual face of the co-alliance, the website (http://www.lugton.co.uk) has advertising and trade po- Value alliances combine a range of products, services tential but further extends this by linking to two other and facilities in one package and are based on the value partners in market alliances: Safeway and Asda stores, or supply chain model. Participants may come together each of which stock some SCB products in regional sto- on a project by project basis but generally the general res. Both Asda and Safeway supermarket chains are expe- contractor provides coordination. Where longer term rimenting with IAHS in different forms to provide them- relationships have developed the value alliance often selves with virtual faces. Interestingly, away from this adopts the form of value constellations where firms sup- market alliance linked by SBC, Asda and Safeway are ply each of the companies in the value chain and a com- rivals in the fiercely competitive UK supermarket envi- plex and enduring communications structure is embedded ronment. within the alliance. Substitutability has traditionally been a function of efficiency and transaction costs: searching The star alliance for, evaluating, and commencing operations with poten- tial partners has been a costly and slow business proce- dure, relying as it does on information transfer, the esta- Star alliance models are coordinated networks of busine- blishment of trust and business rules across time zones, ses reflecting a core surrounded by satellite organisations. culture, currency and legal frameworks. These have de- Creating Virtual Space for Real Groceries
Martin BARNETT et Janice BURN termined the relative positioning of partners on the chain solicits active Web recruitment partners by offering a and the reciprocity of the relationship. reward program to owners of web sites who accept links on their sites – rewards are provided in the form of set payments for each referred customer’s first and third pur- chase. The company developed proprietary software and logistics to support its operations and then spun these away from the core grocery delivery business.
Split Pea Software was formed in December 1998 to act as an independent licensing arm for the IAHS shopping
and delivery systems and technology. These systems in- Figure 4. Value Alliance clude the server-based shopping application together with business applications such as fulfillment management, product database administration, customer support and This model is particularly suited to taking advantage of Peapod’s one-to-one targeting engine. Peapod is only a communications efficiencies not previously available and minority interest in Split Pea which is majority owned by therefore changing components extremely rapidly in res- senior management. ponse to evanescent market forces and opportunities. An Split Pea, was formed upon the successful conclusion of example of a value alliance is Peapod.com, described negotiations leading to a licensing agreement with the below as a virtual component of a market alliance model. large Australian Retail chain operator, Coles Myer Ltd.. Grocery manufacturers are currently exploring the poten- Coles Myer has exclusive use of the Split Pea technology tial of such value alliances, as Nabisco, the large US- within Australia and New Zealand, but Split Pea is see- based maker of packaged consumer goods, announced in king to license its software and delivery services elsew- September its intention to partner and work closely with here. Coles Myer is currently testing the system for Coles virtual grocer, Netgrocer.com. Netgrocer focuses on non- Online, the virtual face of its Coles retail grocery chain, perishable grocery store items not found, or not willingly with an introduction in Sydney. purchased from brick-and-mortar supermarkets. Its deli- very mode is currently through Federal Express across Coles Online is the virtual face of a large retail grocery the USA. Nabisco hads achieved market prominence chain operating across much of Australia under the name (38% in the biscuit category) through strategies such as of Coles. This company has no links (as of mid-2000) to direct delivery to retail stores. It has been asserted (Allen other companies or services on its site as yet and operates and Fjermstad, 2000) that Nabisco's competitive advanta- by selecting goods from existing Coles grocery stores and ges ( such as supply chain efficiency and brand posi- operating a home delivery service in association with tions) will disappear in a market dominated by online Australia Post, despite the fact that Coles Myer owns and shopping. The nature of this alliance and how benefits are operates other large chains with non-competing interests , to accrue have not yet been made clear. such as the Target clothing stores and the Officeworks office supply and stationery chain.
In addition, Peapod has formed an alliance with another The market alliance major internet food distributor, GreatFood.com, which is dealt with in more detail below as an example of the bro- Market alliances are organisations that exist primarily in ker model in its own right. cyberspace, depend on their member organisations for the provision of actual products and services and operate in The virtual broker an electronic market. Normally they bring together a Virtual brokers are designers of dynamic networks. These range of products, services and facilities in one package, prescribe additional strategic opportunities either as third each of which may be offered separately by individual party value-added suppliers such as in the case of com- organisations. In some cases the market is open and in mon web marketing events or as information brokers others serves as an intermediary. These can also be des- providing a virtual structure around specific business cribed as virtual communities but a virtual community information services. This has the highest level of flexibi- can be an add-on such as exists in an e-mall rather than a lity with purpose built virtual organisations created to fill cyberspace organisation perceived as a virtual organisa- a window of opportunity and dissolved when that win- tion. Fast and responsive communication channels are dow is closed. New intermediaries using the Internet essential to preserve such alliances which could only (such as e-Bay and the many auction enterprises) epito- have formed occasionally and relied on duration to be mise the growing trend to take fast and inexpensive cost-effective hitherto. An existing example of a market communications across time and space for granted and to alliance in the grocery trade is depicted in figure 5 as configure themselves for advantage accordingly. seen below:
Peapod.com operates in eight major US conurbations (at November 1999) supplying grocery and pharmacy items using interactive home shopping through Web ordering, credit card processing and home/office delivery. They offer a range of items selected from partner stores in each area. [Only three are displayed for clarity.] The company Creating Virtual Space for Real Groceries
Martin BARNETT et Janice BURN
HomeGrocer.com, a similar esatablished Internet grocer with customer fulfillment centers and fleets of tri- temperature trucks for home and office delivery. While Webvan expects to deliver to a person in place, at office or home within a 30-minute window, Streamline offers to install shelving and refrigeration units at the customer's premises, secured by combination locked ac- cess control. This removes the need to accept physical delivery. While the grocery supply chain come through the company's own warehouse and distribution service, the company also has alliances with other internet- Figure 5. Virtual Broker enabled suppliers for goods and services (www.webvan.com). Within the Streamline order bran- ded services from, among others, Starbucks (coffee), Ko- Greatfood.com, founded in Seattle. Washington USA in dak (film and processing) and UPS (package collection). 1996, focuses on the specialty food industry. It claims to In addition their Web site offers links to alliance partners provide a “best of category” selection with more than Barnes and Noble for books, CDNow for music, eToys 4,000 products and gifts from invited suppliers. It provi- for games and Outpost .com for small office and home des on online catalogue, accepts and processes orders and office equipment supplies. arranges for direct delivery from the maker to the custo- mer. Greatfood currently has a partner program with America Online, Yahoo, Excite and Peapod. Like Pea- Peapod, once a coordinator and market alliance leader, is pod.com. GreatFood advertises on its web sites for affi- now creating and operating purpose-built centralized liates: other parties willing (for incentives) to provide distribution centers to replace picking from existing sto- links to the GreatFood site for potential customers. res owned by others. It predicts that the new warehouses The virtual space will improve service, improve gross margins and allow for the charging of lower fees. Success of the initial ven- The seventh category proposed is that of the virtual tures may impel the company to move to this model enti- space. In IAHS this is instantiated by companies such as Webvan, Streamline and to some extent, Peapod: three rely. companies with the avowed aim of becoming large net- Change mangement strategies works of IAHS for groceries in North America. Each of these models require different management stra- The virtual space is characterized by being wholly de- tegies and communication channels relevant to the parti- pendent upon virtual contact with the client. There is no cular structure of alliances. Furthermore, as the e-market other channel to market, nor need they be dependent evolves this may call for different sets and structures of upon any particular existing intermediaries between alliances to be formed. Moore (1997) suggests that busi- themselves and the makers/suppliers of goods and servi- nesses are not just members of certain industries but parts ces. Unlike companies such as Peapod who form allian- of a complex ecosystem that incorporates bundles of ces and act as the virtual face for small chains of retail different industries. The driving force is not pure compe- shops with walk-in retail outlets and existing brand tition but co-evolution. The ecosystems evolve through image, these companies hide their warehousing and dis- four distinct stages: tribution chain from the customer. They may elect to choose goods and services from companies with a retail face, but they may equally elect to operate (or sub- • Birth contract) warehousing and delivery service specifically • Expansion designed for this channel to market. Different forms are currently emerging using this basic form, although there • Authority is evidence that the temptation to focus on 'core compe- • Death tencies' and form market alliances with others still opera- tes, as shown by Streamline below. And at each of these stages the system faces different leadership, cooperative and competitive challenges, as Webvan has been operating from June 1999 in the San outlined in Table 1 (below) Francisco bay area of the USA with plans to extend across the United States in 26 cities within two years. Webvan offers major branded grocery and drugstore items with more than 300 fresh vegetables, 300 cheeses and 700 wines. In addition it operates its own kitchens for prepared meals, all from a 330,000 square foot dedi- cated warehouse with no public walk-in facilities. The company does not rely solely on a single supply chain and sources from major fish, vegetable and meat markets in addition to manufacturers and wholesalers, opening new channels to market for local growers and suppliers (Cone, 1999). In September 2000, Webvan merged with Creating Virtual Space for Real Groceries
Martin BARNETT et Janice BURN
EcoSystem Leadership Cooperative Competitive models from the range described above are adopted. Each Stage Challenges Challenges Challenges transformation will create new opportunities for kno- 1Birth Maximise Find and Protect wledge management for strategic advantage in this com- customer Create new your ideas petitive market but also demand new forms of inter and delivered value in an value * efficient intra-organisational management. In the e-grocery world way communicating and cooperating for advantage will de- 2 Expan- Attract Work with Ensure termine whether Dead Ducks can learn to fly in virtual sion Critical Suppliers market space. Mass of and * standard Buyers Partners approach 3. Authori- Lead co- Provide Maintain References: ty evolution * compelling strong vision for bargaining Allen, E. and Fjermestad, J. (2000) <
Table 1. E-Market Ecosystem Byrne, J. (1993). <
Martin BARNETT et Janice BURN
Palmer J. W. and Speier, C. (1998). <
Whiteley, D. (1999). <