Berning, Casie

Ernst, Stanley C.

Hooker, Neal H.

English

Research Papers in Economics

CHOICES
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1st Quarter 2005 • 20(1) CHOICES 77
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1st Quarter 2005 • 20(1)
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Are E-Grocers Serving the Right Markets?
Casie Berning, Stan Ernst, and Neal H. Hooker
Buying Food Online?
Prior to 2003, the biggest news in the E-grocery sector had
been the dramatic implosion of high-profile operators. Sil-
icon Valley and Wall Street saw “dot.bombs” in many sec-
tors during the 1990s, but failings in the grocery business
seemed magnified due to unique supply chain relation-
ships and, most importantly, strong con-
sumer expectations about product and
service quality that do not disappear
when customers move online. Online
grocers like Webvan were among the
myriad of startups that failed to balance
true market potential with their invest-
ment in technology and business strategy.
Some firms simply subsidized online
operations as long as they could as an
“experiment” before giving up; reasons
for these failures ranged from market
selection problems to corporate culture
and commitment. Others simply tried to run before they
had crawled. Some thought that new technology offset the
need for strategic ways of dealing with known consumer
expectations and industry practices—and failed accord-
ingly. The exit of Publix Supermarkets from the E-grocery
arena illustrated risks from trying to build such an enter-
prise in areas with limited online subscribers or consumer
suspicion of online purchasing. Despite these early stum-
bles, the E-grocery market rebounded and has grown dra-
matically since 2003. New entrants—many of them
traditional grocery retailers venturing into E-commerce—
are offering more products and services to broader geo-
graphic areas. The question we address here is whether sur-
viving E-grocers are entering the right markets—ones
containing enough of the kinds of customers inclined to
use this service and generate profits—and what a right
market looks like.
Consistent estimates of current market size and pro-
jected growth in the E-grocery industry are elusive targets.
In 2002, sales for online food, beverages, and groceries
were estimated to range between $4.25 billion (Keenan
Vision) to $6.4 billion (Yankee Group). Forrester Research
called 2002 online grocery sales at $5 billion. A more
recent estimate by Jupiter Research predicts that online
grocery sales will hit $2.4 billion in 2004, or 0.4% of the
total grocery market of $570 billion. By
2008, the estimate grows to $6.5 billion,
just 1% of the total forecasted market of
$641 billion, but showing an annual
growth rate of 42%. Clearly this sector
continues to grow:
• Safeway.com doubled its business in
two years (2001–2003) and expected
it to double again in 2004.
• Ahold-owned Peapod reports that it
has 150,000 active customers in its
system, which includes Chicago and
parts of the East Coast. By 2006, Peapod expects to
nearly double its reach to areas serving 14 million
potential households.
• In 2004, New York-based pure play Fresh Direct had
100,000 active customers—four times the number of
just a year earlier.
What are the Right Markets for E-Grocers?
A major factor in determining the future viability of the E-
grocery sector is understanding whether these retailers are
entering and servicing the right markets. Based on a com-
prehensive literature review and our research group’s previ-
ous firm, manager, and consumer research, the
characteristics of an “ideal” E-grocery consumer can be
identified (see papers and presentations at http://
aede.osu.edu/programs/e-agbiz). Age, gender, household
income, household size, and level of education are key
indicators of willingness to buy food online. Factors such
as computer literacy and access, time pressure, and focus
on convenience also play a role. The question becomes
What is an E-grocer?
E-grocers use the Internet to sell 
perishable and nonperishable 
grocery items. Products are 
ordered online for delivery or 
pick-up. E-grocers are divided 
into two categories: Bricks & clicks 
are traditional grocers that also 
offer Internet-based ordering; 
Pure plays organizations lack tra-
ditional grocery stores.78 CHOICES 1st Quarter 2005 • 20(1)
whether sufficient densities of cus-
tomers with ideal characteristics
show up in the markets in which E-
grocers operate. Information we
gathered from E-grocery managers in
2001 and 2004 indicated they gener-
ally recognize the value of these vari-
ables but were inconclusive on the
role they played in selecting markets
to enter. Marketing managers of gro-
cers who were less active online
appear to discount the importance of
time/convenience and focus more on
household income as a potential indi-
cator of online grocery acceptance.
Are E-Grocers Targeting Ideal 
Consumers?
To explore the proportion of ideal E-
grocery consumers in markets cur-
rently serviced by firms, we first
obtained a list of 2003’s top 75 gro-
cery stores (based on sales) and iden-
tified their subsidiaries, creating a list
of 143 different grocery chains. To
this list we added all full-service pure-
play E-grocers identified in our previ-
ous research. Each grocer’s website
was visited to determine
whether they had full-
service E-grocery opera-
tions. Of the 143 firms,
23 operations offered
delivery and/or pick-up
of both perishable and
nonperishable items (see
Table 1). These firms
operate in 26 states and
the District of Colum-
bia, with most in large
cities such as Los Ange-
les, New York, Detroit,
and Salt Lake City. Sev-
enteen are bricks-and-clicks and six
are pure plays. Some offer delivery
within 30–40 minutes of placing an
order; others offer next-day delivery
in a temperature-cooled tote.
Service areas for these E-grocers
were determined at a zip code level
from their websites, creating a data-
base of 1,371 distinct
areas out of the more
than 29,000 zip codes
nationally. Using a com-
mercial zip code-level
database (Microsoft
MapPoint), a socioeco-
nomic analysis was com-
pleted for each market
currently serviced by one
or more E-grocer (Figure
1). This analysis consid-
ered key demographic
measures: age, gender,
household income, level
of education, and size of household.
Other characteristics, such as number
of households with Internet access,
Figure 1. Zip-code-level distribution of E-grocery service—September 2004.
Ideal E-grocery 
consumers are:
• women, aged 35 to 
44;
• college educated;
• in households with 
income greater than 
$50,000;
• more likely to have 
children; and
• looking for conve-
nience and therefore 
less price sensitive.1st Quarter 2005 • 20(1) CHOICES 79
adults with a credit card, average
commute time to work (a proxy for
“time-starved” consumers), and the
average amount that households
spend on food, were also assessed.
These data are key to determining
whether E-grocers are currently serv-
ing markets with a large proportion
of ideal consumers.
What We See...
Initial analysis of our work suggests
that households in areas serviced by
E-grocers have the financial and tech-
nical means, tools, and time-starved
incentives to purchase groceries
online. There also appears to be a
critical mass of optimal consumers
for E-grocers to target within these
zip codes, because they contain three
times more people and households
than the national average. Household
incomes in these zip codes are
$10,000 greater than the national
average, and households spend about
$1,000 more per year on groceries
than average. These households have
three times more 25- to 44-year-olds
and teenagers, indicating a significant
likelihood of both higher spending
on food and time constraints on rou-
tine household activities such as gro-
cery shopping. Gender does not
appear to play a role, separate of the
fact that E-grocery service is offered
in high-population areas having more
of both women and men. Zip codes
currently targeted by E-grocers have
households that are three times more
likely to have credit cards and to
adopt E-commerce more generally—
other leading indicators of market
potential. A final indicator of the
importance of convenience is that
wage earners in zip codes targeted by
E-grocers are three times more likely
than average to commute 45 minutes
or more. These findings indicate
that, to some extent, existing E-gro-
cers seem to be targeting the correct
geographic areas. What is less clear to
us, and yet to be clarified by research,
is whether these geographic selections
are truly intentional or merely ones
of convenience. Given the nature in
which this industry has emerged,
there is evidence to suspect both sce-
narios.
Questions remain as to the future
adoption rate of online grocery shop-
ping by consumers. After four years
of research and observation in this
area, we can be reasonably confident
that although analysis typical in loca-
tion decisions for traditional grocery
stores may have some value in decid-
ing where to offer online sales of gro-
ceries, other variables are potentially
more important. Convenience and
consumer comfort with the technol-
ogy are logical considerations. These
factors are more likely to drive the
proportion of households that adopt
within a service area than to indicate
which new zip codes are optimal for
growth. Time-starved consumers, or
those facing other constraints on
their ability to shop traditionally, are
primary drivers of expansion in this
sector. As internet and E-commerce
adoption continue to grow, it
remains to be seen how much advan-
tage is gained by targeting the right
geographic regions suggested by our
research and when such service will
become sufficiently efficient and
accepted to be seen as a mass market
practice making the selection of indi-
vidual geographic markets less
important.
Casie Berning is a former undergrad-
uate student; Stan Ernst is an out-
reach program manager; and Neal H.
Hooker is an assistant professor. This
work is part of a broader longitudi-
nal study of online food retailing (see
http://aede.osu.edu/programs/e-agbiz
).
Table 1. Number of zip codes 
serviced by individual E-grocers by 
type and state—September 2004.
Z
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Bricks & clicks—deliverya
Stop & Shop (Ahold) 80 CT, MA, NY, RI
Giant (Ahold) 21 D.C.
Safeway 16 CA
Vons/Pavilions (Safeway) 178 CA, NV
King Soopers (Kroger) 55 CO
Albertsons 383 WA, OR, ID, 
NV, TX, CA
Acme (Albertsons) 54 PA
Hy-Vee 226 IL, MO, KS, NE, 
IA, SD, MN
D’Agostino’s 31 NY
Schnucks 162 IL, MO
Bashas 55 AZ
Bricks & clicks—pick-upa
Lowes 33 NC, SC
Sentryonthego 18 WI
Norkus 14 NJ
Santoni’s 27 MD
Dorothy Lane Markets 3 OH
FarmFreshMarkets 28 VA
Pure playb
Peapod (Ahold) 41 IL
YourGrocer 47 NY
Fresh Direct 58 NY
Whyrunout 57 CA
Xpress Grocer 38 NY
Simon Delivers 55 MN
a “Bricks & clicks/delivery” refers to traditional 
grocery stores offering E-commerce and delivery 
or pickup at the store.
b “Pure play” firms have no traditional store 
front.

Are E-Grocers Serving the Right Markets?

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