April 2000

As UK supermarkets expand cautiously into home delivery, a new-start American operator is taking its own market by storm. e.logistics magazine went to see it in action

Fledgling Internet-based grocery home delivery operations in the UK have so far been set up by existing retail giants. The market has shown a notable lack of willingness to launch full-scale grocery home delivery services without either a physical network on which to base them, or existing supplier relationships to kick-start the procurement process.

The American model has evolved rather differently; here several new operators have emerged to focus specifically on grocery home deliveries. One of these, a six-month-old new start-up based in Dallas, has quickly captured the imagination of consumers and attracted financial backing to the tune of $48.5 million in first-round venture capital.

Moreover, it is growing at 20 per cent per week on a compounded basis, and aims to provide 8 to 12 per cent in operating margins for investors "within the next few months".

GroceryWorks was founded by 29-year-old Kelby Hagar. The seeds of his idea were sown when, as a law student, he was faced with an empty fridge and no time to go shopping. Home delivery offered an answer. When he moved on from Harvard to work for a major law firm he held on to his original idea.

From a consumer point of view Hagar's home delivery business model seemed to make good sense. From a business perspective, he realised the grocery business was a high-volume but low-profit industry. He concluded that if he could eliminate the store itself, he could give customers what they wanted at a far better profit margin. He therefore set about establishing a team to develop the concept in his spare time. In 1998 GroceryWorks.com was born.

The GroceryWorks plan was to deliver groceries using the Internet as the sole ordering channel; and it aimed to focus on three consumer-led concepts.

• A full range of grocery items would be constantly available, including dry, chilled, frozen and fresh produce categories
• Orders would be delivered on time, with a high level of accuracy and no delivery charge
• Time-saving, intelligent Web merchandising would create a unique customer experience that encouraged repeat visits

Hagar acknowledges the extent of the task. "To deliver on our three criteria we had to merchandise correctly, stock the warehouse appropriately, staff the operation, associate with the right suppliers, pick orders accurately, dynamically route our vehicles and make it all look easy when we deliver customers' orders from day one. These were all very big challenges, and will continue to be the measure of whether we succeed or not.

"The difficulty for an operation like GroceryWorks is trying to figure out what you're going to need when you first start. You have no idea if you'll have a hundred or ten thousand customers on day one. You can't equip to serve ten thousand; what happens if you don't? We staffed to a medium range but got the ten thousand. Unfortunately, in the first week we were overwhelmed, both on the Web site and in the distribution centre."

Hagar views GroceryWorks as a new-tier, new-generation, e-commerce company "combining the high-quality Web merchandising aspect of the Web site with a back-end fulfilment and distribution capability. The overall systems have to be extremely integrated and extremely solid throughout the operation. You have to have an extremely sharp front-end Web merchandising capability because that's what consumers expect.

"Similarly, you have to have the best possible capability at the back end, from the warehouse management e-fulfilment system to the distribution and routing systems. All three must tie together in a completely integrated model that allows you to do what you're promising you're going to be able to do. If you don't have 'A-plus software' at all three points you're not going to fulfil that promise."

GroceryWorks was committed to developing its front-end Web merchandising software in-house, but on looking at some of its competitors, it found they had also taken to developing their own fulfilment systems. It concluded this was a complex, unproven and lengthy route, and was not prepared to take it.

Instead, the company chose EXE Technologies to provide the supply chain "infostructure" for the operation, selecting the firm's EXceed eFulfillment System (eFS).

Implementation began last September, and the system was fully functional and ready when GroceryWorks began trading in November. "By using this route we were able to save at least twelve months' in-house development time and avoid an uncertain result. We felt the EXE system did more of what we wanted it to do than the others on the market. The EXceed eFulfillment System makes sense from an e-commerce perspective, thanks to its virtual warehousing capability the ability to handle inventory even if it is not actually within the warehouse."

The Dallas operation is the first of around 15 distribution centres planned by the end of 2000. The 8,360 sq m site employs 120 warehouse workers, 100 drivers and various corporate staff, who manage 10,000 stock-keeping units (SKUs) stored on site and a further 4,000 SKUs through collaborative "virtual warehousing" with suppliers. Ultimately, GroceryWorks plan to extend this offering to 500,000 SKUs via the virtual inventory system.

Orders are currently processed through a single channel; the company sees no reason to sell via phone or fax. However, it does have active plans to extend the service to WAP phones, interactive TV and other intelligent appliances such as refrigerators, considering that the importance of the Internet will greatly diminish as these devices become more widely available. When it comes to fresh and chilled produce the company employs a "virtual warehousing" approach. In order to ensure quality standards it buys from local distributors, many of which also supply local restaurants. When a customer orders a steak, the cut actually comes pre-packaged directly from what is regarded as the best meat products distributor in the city. There is little or no handling by GroceryWorks. This allows the firm to offer a wide range and availability of fresh produce without any of the spoilage risk of stocking it in-house.

The van delivery operation ties in neatly with the virtual warehousing system. As vehicles finish a delivery round they call at any suppliers on the way back to collect whatever orders have been prepared since the last GroceryWorks truck called there. This adds little cost to the operation but offers significant savings.

The aim of the fulfilment system is to process 300 to 350 pick lines per hour at the Dallas warehouse and to do this at a near-100 per cent accuracy rate (almost unheard-of in classic distribution management). "If you get to 50 SKU counts per order and you're only running at 99 per cent accuracy then you've missed one product in every second order," Hagar comments. In controlling all of these activities, Hagar describes EXE's EXceed eFulfilment System as "the brains of Grocery Works". The company's Web site links directly into EXceed and takes the customers order into it. The software then sends those orders down to suppliers of virtual inventory and to the warehouse itself all the time interacting dynamically with a vehicle routing module. "Without EXceed running these operations for us, we wouldn't be able to do what we do today," Hagar says.

GroceryWorks operates within an 8 sq mile radius of the distribution centre, ensuring vans are no more than 45 minutes from base in rush-hour traffic. Delivery windows are provided in one-hour time units from 12 noon to 10 pm, and orders placed by 10.30 am on the Web site can be delivered the same day after 6pm. By linking into the dynamic routing system, the system can also interrogate orders placed after the cut-off time and offer same-day delivery if a truck is scheduled to be in the area.
eFS Fulfill takes the order from the Web site and breaks it into sub-orders. In-stock items at the warehouse are accepted into a pick sequence and the pickers are directed by radio-frequency technology to pick-to-light shelving. The hand-held RF units act as mobile terminals, directing pickers to the next logical location as items are picked. Within the warehouse, the pickers themselves operate within set aisles, picking two to four orders at a time. This ensures consistent workforce utilisation, eliminates "run-around" and allows larger orders to be picked in parallel across the warehouse. Each item in the warehouse has been assigned a cube and weight by the system to ensure totes cannot be overloaded by the pickers, either by weight or by content.

Virtual stock orders such as deli, seafood, meat, and other fresh produce have a purchase order raised by the system and sent automatically to the suppliers. The EXE system then manages the inventory as it comes into the warehouse and guides the order picking into unique cooler totes. The totes are insulated and carry one of two sealer tops depending on the produce inside. Frozen products have a vented dry-ice cap which forces cooled air down into the tote. Chilled and fresh products use a sealed dry-ice cap that maintains a constant temperature within the tote.

It is testament to the design of the cooler tote and refrigerated delivery vehicles that at the height of a Texan summer the picked order will survive up to eight hours before spoiling well in excess of the typical GroceryWorks delivery time. Warehouse-picked and virtual supplies are then transported by automated conveyor to vehicle route lanes and matched together on the loading dock using the barcode tote tags. The system then confirms loading and despatch data. Once a delivery is made, the driver confirms the customer signature and location via a portable GPS terminal, and the details are captured by eFS Fulfill. GroceryWorks' success clearly gives traditional retailers food for thought. One of the most worrying aspects for them must be the fact that the company has been able to achieve phenomenal growth with no prior brand awareness. "If we were trying to build brand awareness as a traditional grocery store we'd have difficulty, but as a completely new concept in the marketplace we've found it much easier to build awareness. People are interested in what you're doing, so you are able to compete against a traditional marketplace very quickly."

He is also quick to dismiss rivals' store-pick methods. "The distribution centre model is far superior to a store-pick model. The supermarket industry as a whole is very good at getting stock into the store, but that's where their cost ends. The store shoppers themselves cover the cost of picking the product. When you add a picking and delivery process, you've added significantly to the cost of fulfilling the order. From a DC point of view, by using a warehouse you've eliminated the real estate side and substantially eliminated the employee side. All we have are pickers; we don't have butchers and bakers and the sort. "As a result, we can charge the same price as a traditional supermarket, but we can also provide picking and delivery. If you tried to do all that together you'd lose your shirt."