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CUSTOMER SERVICE

Errand Boy

This start-up wants to do your shopping, get your dry cleaning and more, all for a small fee. But, will it fly?
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TIM DEMELLO wants to do your food shopping, pick up your drycleaning, and get your lawn trimmed. There will be a small fee, ofcourse

Executive Summary

COMPANY: Streamline Inc., in Westwood, Mass.

CONCEPT: Provide regular home delivery of groceries and othergoods and services

PROJECTIONS: Revenues growing from $1.1 million in 1996 to $49.7million in 1998

COMPETITIVE ADVANTAGE: Fixed delivery schedule and verticalintegration keep costs low

HURDLES: Gaining consumers' trust and loyalty

The CEO

NAME: Timothy DeMello

AGE: 37

PERSONAL FUNDS INVESTED: $45,000

EQUITY HELD: 40%

SALARY: $120,000

FORMER LIFE: Graduated from Babson College in 1981. Took a jobwith a Boston investment bank but promised himself his own company bynoon on Friday, March 13, 1987. Missed the deadline but resignedlater that afternoon. That Monday, started Wall Street Games, whichgrew to $5 million in sales in less than five years

The Concept. Many entrepreneurs launch their start-ups fromgarages and then move them out. Timothy DeMello's aim is to move hisstart-up into lots of garages and keep it there.

DeMello's company, Streamline Inc., is a variation on an oldtheme: home delivery of consumer goods and services. The differenceis that DeMello thinks he has figured out how to make a profit at it.He claims two advantages for a business model he has yet to scale up.First, Streamline doesn't just deliver groceries. It will pick up anddeliver items like film, videos, and dry cleaning. It will also postcustomers' packages. In other words, DeMello plans to earn more thanjust the slim margins associated with the grocery business. Second,the groceries that Streamline does deliver once a week to a servicebox (consisting of a freezer, refrigerator, and a few open shelves)in each customer's basement or garage won't cost the company as muchas those packed by other delivery services. Streamline will purchasegoods directly from wholesalers and manufacturers, just assupermarkets do, and distribute them from its own 56,000-square-footwarehouse. The idea is to avoid supermarkets' costs while pocketingtheir markups. The company-provided service box is nominally free tothe customer, but Streamline recoups the cost of the box in partthrough a $30 monthly delivery fee. "It's our warehouse, our drivers,our trucks. We own everything," says DeMello. "And we want to own thechannel of sale directly into your home."

Or so the plan would have it.

Background. Back in 1993, before he could get even a nibblefrom venture capitalists, DeMello, who had sold his first start-up,Wall Street Games Inc., just one year earlier, put up $45,000 of hisown money and set out to raise enough cash to test the Streamlineconcept. Starting in 1994, DeMello conducted three separate rounds ofprivate placements and raised $1.7 million from 92 investors--some ofwhom now sit on the company's board of directors. That was enoughmoney to set up and operate a scale model of the business with 60 orso customers in tony suburbs west of Boston. But after a little morethan a year, the fledgling company had burned through most of itscapital. DeMello had to sell the only asset he had acquired:information.

Large consumer-goods makers were willing to pay for knowledge ofthe growing home-delivery market. So DeMello set up a partnershipwith Andersen Consulting, based in Chicago, to coproduce a study ofthe home-shopping phenomenon using Streamline's customers as thesample. Andersen put together a consortium of nine manufacturers,including Gillette, Ocean Spray, and Procter & Gamble, that wouldbuy Streamline's data, and the company was suddenly $500,000 richer.

The partnership with Andersen raised Streamline's profile highenough to attract the interest of Saul Steinberg, chairman ofReliance Group Holdings Inc. and a billion-dollar financier in NewYork City. Steinberg was willing to pay $5 million for 40% ofDeMello's company. Now, nearly three years after setting out todemonstrate his idea, DeMello finally has the cash to make itoperational. "If you aren't well backed and you don't have thestrategic partners, this business is going to be tough," he says."Fortunately, we have both."

Markets and Competitors. Like interactive TV, flying cars,Esperanto, and Roger Clinton, home delivery is a recurring idea thathas never quite fulfilled its promise.

Maybe this time, though. Surveys reveal that among householdchores, many people rate grocery shopping only slightly less onerousthan cleaning. Home delivery is already on the rise. An annual surveyconducted by America's Research Group, in Charleston, S.C., revealedthat 9% of respondents were already using a home-delivery service, upfrom 6.9% in 1995. Estimates suggest that home delivery mighteventually capture as much as 20% of the estimated $400 billion spenton groceries each year. So the stakes are high.

Certainly, Streamline is not the first company to chase the fooddollar all the way home. In more genteel days, it was common forsmall stores to deliver grocery orders. Other companies deliveredmilk and meat. But those and similar services faded as supermarketssubsumed smaller stores and small towns became sprawling suburbs.

Two major trends helped to reawaken interest in home delivery.Starting in the mid-1970s, the growing ranks of working women hadless time to grocery shop, but they could order in by phone, socompanies such as Domino's Pizza flourished. The second trend, thegrowth of home computing, beginning a decade later, enabled harriedhomemakers to place orders more complex than a large pepperoni withextra cheese--a week's worth of groceries, for instance. Here's whereStreamline and its competitors come in.

Today a number of companies, including Peapod, based in Chicago,and Shopping Alternatives Inc. (SAI), based in Maryland and operatingin 19 cities across the country, will take orders, fill the bags atlocal supermarkets, and deliver them to people's homes. Peapod, forexample, has an exclusive relationship with one retailer in eachmarket. In Chicago, it's the Jewel-Osco supermarket chain; inNorthern California, it's Safeway; and the company has recentlyannounced deals with Stop & Shop in Boston and the Kroger Co. inColumbus, Ohio. Peapod and SAI provide consumers with software thatallows them to create customized shopping lists, view prices andspecials, and place orders. Peapod's software even lets users viewnutritional labels, sort groceries by price or by nutritionalcontent, find recipes, and send E-mail via the Internet. While bothservices allow customers to order groceries at any time, there aresome limits to deliveries. Peapod doesn't deliver on Mondays, and SAIdelivers only Monday through Friday.

Streamline, in contrast, is not a partner with local markets. AndStreamline delivers to each of its customers on a weekly fixedschedule. As long as customers get their grocery orders in bymidnight the day before, the goods will arrive by 6 p.m. on thedesignated delivery day. Streamline customers will get word ofspecials and promotions via modem, and the Streamline driver willalso leave free samples or flyers in the customers' service boxes.

DeMello admits that his service won't replace the quick run to theminimart. "Our service is for the big weekly shopping," he says. Thecompetition, in contrast, offers on-demand delivery. Say yourout-of-state cousin calls to say she and the kids will be arrivingtomorrow. Call Peapod, and it will bring you whatever you want, whenyou want it. Streamline won't. "That's the big difference," DeMellosays. "But it's what lets us cut down on our variable costs, whichcan kill you."

At $30 a month, Streamline's service costs about the same as orless than that of the competition. Peapod, for instance, charges$4.95 in Boston and $6.95 in some other areas. The charge includesInternet E-mail and three hours of on-line time. But for eachdelivery, Peapod charges an additional $4.95 plus 5% of the order'svalue. SAI typically charges $9.95 each time it stops at your door.

There are really two business models here. Peapod and SAI leveragethe existing supermarket infrastructure and therefore require arelatively small capital investment to start. Their high variablecosts and an expensive supply chain have, however, made profitselusive. "These companies have shown that there is a great demand forhome-delivery service," says DeMello. "But they don't make anymoney." Peapod president Andrew Parkinson says it's the continuingcosts of expansion that have kept the company's bottom line red.

And don't imagine that supermarkets haven't noticed thecompetitive threat. They're investing heavily in automation and storeredesign. Do-it-yourself checkout counters could cut the timecustomers wait in line, and expanded prepared-foods sections andtake-out choices could cut the time they spend cooking.

Financials. While the average supermarket captures barely apenny's worth of net profit from every sales dollar, Streamline hopesto grab 6¢. DeMello projects the higher net partly because only72% of Streamline's sales will be from low-margin groceries. Thebalance will come from products and services, such as dry cleaningand specialty foods, on which markups are higher. For example,DeMello contracts with a dry-cleaning service that charges Streamline95¢ for shirts, which the company retails for about $1.50. Asuit that costs Streamline $3.75 brings in $6.50. The company alsocontracts with a caterer for specialty meals that it marks up by asmuch as 60%.

But higher margins are only half the profit trick. DeMello alsoprojects significantly lower operating costs for Streamline. (See"Streamline Versus Supermarkets," below.) Whereas supermarkets payabout $20 per square foot for their retail stores, Streamline paysonly $6.50 per square foot for warehouse space.

But Streamline's numbers won't add up to profits unless itscustomers keep ordering on a weekly basis. Currently, Streamlineclaims an 87% order rate, which means that the average customerplaces an order 45 weeks each year. A customer who orders at a rateless than 50% would be unprofitable, DeMello says. High customerturnover and small average-order size would also affectprofitability. DeMello estimates that Streamline will need 1,600customers to break even at its first warehouse, which can service asmany as 4,000 customers.

Competitive Edge. The home-grocery-delivery business is notsimple. Order fulfillment, for instance, can be a trouble spot.Workers must sort through dozens of similar but different food items,distinguishing one canned soup from the next in seconds. SaysDeMello, "It's easy to make a mistake." To avoid that, DeMello uses astate-of-the-art automated warehouse system. Streamline workerscruise through warehouse aisles with portable processors strapped totheir wrists. These tiny computers receive individual grocery ordersfrom Streamline's central computer via radio waves. In effect, theworker is carrying an electronic shopping list. When workers pick anitem from the shelves, they pass it by a ringlike optical scanner ontheir fingers, and the wrist computer confirms that they've chosenthe correct item.

Streamline wants new customers to get up to speed quickly. Beforea household receives its first delivery, a start-up team, consistingof a company representative and a service-box installer, visits thehome. Team members go through the cupboards using a bar-code scannerattached to a laptop PC to note the household's product and brandpreferences. Then they help the customer prepare the first order tobe faxed, phoned, or E-mailed to Streamline.

The next innovation? Streamline expects to be able to lease tocustomers a handheld pen-based computer that will mount on thekitchen wall and plug directly into a phone jack. Streamline can thentake the customers' orders right off their scribbled shopping lists.

Outlook. With $5 million in the bank, four freshly paintedtrucks, and a warehouse full of goods, DeMello is ready to deliver.By the end of the year, he expects Streamline to have 350customers--4,000 by mid-1997. "We want to build the company slowlyand make sure we get all the kinks out," says the founder. "We don'thave to start making a profit right away." For DeMello, the conceptof home delivery goes beyond groceries, movie rentals, and drycleaning. He envisions a company able to sell many products andservices into the home--plane or theater tickets, lawn care orupholstery cleaning.

To show potential customers (or skeptics) how Streamline's servicemight ultimately work, DeMello has constructed a fully functional,three-room house in the middle of his warehouse. Painted in the lightblue and bright yellow company colors, the model allows visitors toorder groceries from a handheld computer in the kitchen or to pickout a movie from the PC in the living room. DeMello maintains hispersonal office in the model--in the garage, of course.

Financials (projected)
1996
1997
1998
Revenues
$1,107,187
$10,426,550
$49,697,367
Cost of Goods Sold
$405,444
$6,648,480
$33,244,500
Operating Expenses
$1,600,000
$4,200,000
$9,442,500
Operating Profit (Loss)
($898,257)
($421,930)
$7,010,367
Number of Warehouses
1
3
7
Number of Customers
350
4,228
14,300
Streamline Versus Supermarkets: More Net Per Revenue Dollar
TYPICAL SUPERMARKET*
STREAMLINE
Cost of Goods Sold
$.75
$.72
Operating Costs
$.17
$.13
Distribution
$.04
$.06
Corporate Overhead
$.03
$.03
Net Profit
$.01
$.06
*Figures compiled by Smart Store, a research-and-development initiative at Andersen Consulting.

Feedback

What the Experts Say

Reality check: Is a weekly delivery enough?

Some say no. Kevin Sheehan of Shopping Alternatives Inc.(SAI) says his company offers customers multiple delivery windowseach day because shoppers want and need the flexibility: "Streamlinehas a rigorously planned delivery schedule. That's great for it butnot always the best thing for the consumer." With only one deliveryday a week, Sheehan suggests, Streamline's customers may find thosequick trips to the minimart adding up.

Will consumers give drivers access to their garage or basement?

DeMello insists that it's not a problem, arguing that of his 60 orso test customers, only one has raised the security issue. But Raymond Burke, the E.W. Kelley Professor of BusinessAdministration at Indiana University in Bloomington and aconsumer-behavior expert, sees it as one more hurdle to enrolling anew customer. Sheehan says SAI explored but rejected the concept. "Wefound that customers like to be at home when the groceries arrive sothat they can go through the bags."

What do food buyers really want?

Streamline offers convenience, but that's not the firstcharacteristic grocery shoppers look for. Research conducted by the Food Marketing Institute (FMI), based in Washington, D.C.,reveals that consumers choose one supermarket over another primarilyon the basis of the relative quality of its meats and produce. Peoplewill go out of their way to buy freshness. Burke contends thatStreamline's toughest task will be to build brand identity andconsumer trust. "The advantage for companies like Peapod is that theyare working off a well-known and trusted supermarket brand name," heexplains. "On the other hand, while it might be harder for a companylike Streamline to gain acceptance initially, the potential for astrong customer bond exists."

Can DeMello bring the model to scale?

Robert Lieb, an expert in logistics and the Walsh ResearchProfessor at Northeastern Business School, points out that theconcept of secured delivery isn't anything new. "We've seen this sortof thing in the industrial sector for some time, and it's a modelthat works," he says. Even SAI's Sheehan admires DeMello'sdedicated-warehouse concept. "But it's a model that requires asignificant volume to create profitability," he says. Others concur."The major barrier to this business is route density," explains H. Perry Boyle Jr., principal and securityanalyst in the business-service area for Alex. Brown & Sons, inBaltimore, Md. "Offering other products and services is great becauseit increases the average order size and gross margins. But if eachroute has only a limited number of customers, it becomes hard to makemoney."

Last updated: Nov 1, 1996




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