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.
