Market makers

Andrew and Thomas Parkinson opened the first online grocery store a decade ago. Now they're reveling in a flood of Peapod competitors.

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Peapod, Webvan, NetGrocer, HomeGrocer — the fleets of online grocery delivery vans prowling city streets these days could be enemy armies staking out their turf. But one of the competitors in the booming market got a bit of a head start: Peapod began selling groceries via dial-up connections as early as 1989. Working at Procter & Gamble in the 1980s, Peapod chairman Andrew Parkinson, 41, says he “saw a lot of research that people disliked shopping for groceries.” So he and his brother, Peapod CTO Thomas Parkinson, 39, founded the Chicago company, which they have since expanded from its hometown, to serve eight major U.S. markets, with revenues of $69 million in 1998.

Peapod certainly won the first-to-market prize — but the competition is hot on its heels. HomeGrocer closed a $100 million round of financing in November and filed for an IPO in December. Webvan, which has committed to spend $1 billion on warehouses, went public last year and has a market capitalization of about $6 billion — while Peapod’s valuation hovers around $165 million.

But Peapod’s sibling team seems pretty pleased that the world has woken up to their market. In fact, they’re welcoming the competition, with the belief that more online grocers will help popularize the idea — and maybe teach Peapod some new tricks. The company opened a 70,000-square-foot central distribution center near Chicago early this year and just launched its Peapod Packages service for shipment of items to nonlocal delivery areas, but the brothers Parkinson say they don’t expect to grow the business too fast; they’d rather focus on human service than exponential growth and impersonal automation.

You were the first company to deliver groceries using online systems. What was your biggest technological disaster?

Thomas: Well, one of the biggest was when, early on — in 1991 or 1992 — my nephew [Andrew's son] came into my office, where the data center was. He saw the cigarette switch on the server and turned it off — and brought the whole service down.

Andrew: That’s my son.

Did it cause major problems?

Thomas: We were out for about five minutes before somebody realized what happened. The people that found out were our customer care people, because instantly their systems went off, so they came running upstairs.



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Andrew: We’ve never had a major outage; we’ve had power outages here, but we have a backup generator.

Thomas: The most critical spot if we have a failure is at the warehouse. That’s why you have to be careful about the amount of automation you put into the warehouse. If something fails and you don’t have the backup to be able to pick those groceries and deliver them to the customers, you get a cascading effect. Because now you have all of these orders you can’t deliver, and you’ve got to try to schedule them in for tomorrow, but there are already orders that are scheduled for tomorrow. So it can be a major disaster if your warehouse systems go down.

Our architecture from day one was a lot different from most because we create dynamic Web pages from the database — they’re not static — so I think that scaling issues were more severe for a company like ours. You start to get more customers, and no matter what, more customers means more usage on your computers. We’ve always had to upgrade our computers about every 18 months. Every page is driven from the database — custom making that page for the customer depending upon his profile. No matter what, that takes CPU power. But the benefit is that customers [have personalized] information, and that keeps a loyal customer.

How dependent are you on human labor? Are the grocery orders packed by people right now?

Andrew: Yes they are. There’s no one that’s not packing [orders] with people. It’s just a question of how much automation you use. So to answer your question, the company is still very dependent on people, and we want it to be so, because one thing we learned early on is that technology has a way of isolating consumers. People are very important, whether it’s the person picking out a good apple, or the driver at the door smiling and getting to know you. A lot of our business is about people.

So you always want to maintain a human component and not just hand everything over to automated solutions?

Andrew: Yes. In fact, I think that’s how you win, because in the end, we’re a service.

What kind of growing pains or hurdles have you experienced that your competitors still have to face?

Andrew: Like any business, there’s a lot of continual improvement that happens. In a business like this, you don’t realize it until you’ve made the error, so there are many, many areas where we’ve made mistakes over the last nine to 10 years. We have then embedded those [solutions] into either our process or our systems. So I think the learning that we’ve had here is invaluable.

Thomas: Let me give you a good example. We deliver to all over Chicago, but there are some areas in Chicago where, on Sunday mornings, you can’t deliver liquor. It depends upon the day and the time that you choose to have delivery.

I don’t know that while you’re shopping, so at the point when you send your order and choose your delivery time, I need to quickly check your basket. And if this is an area that can’t receive liquor, I then have to give you a warning that we can’t deliver liquor to you at that time. It’s that kind of detail that we’ve built into our system over years.

This is a hard business. It’s all customer service, and it’s the most personal item you can deliver to a customer — their groceries. And customers get upset. I think one of the biggest shockers I had when we started this company was a woman who got upset that we picked the wrong color toilet paper, and she went absolutely berserk. She had her bathroom colors, and she got toilet paper that was the wrong color. That’s how sensitive they are.

Your competitors are obviously spending to expand; Webvan announced that it’s spending $1 billion on fulfillment centers. Do you have the money to compete with their spending?

Andrew: Well, it’s known that we are out raising capital, and we have a lot of offers on the table, but we really feel that the focus that we have to have is on customer service. We know that in the end, you can [attract] a ton of customers, but if you don’t perform, they’ll leave you — no matter what the price, no matter how much you advertise to recruit them. Our focus as a company is to grow smartly, to give our shareholders a good return on their investment. And I think we, probably more than anyone, have shown the ability to do that. I think over the 10 years we’ve been in existence we’ve used less money than they may use in half a year.

Do you foresee future mergers or cooperation between various online grocery companies if the market becomes too saturated?

Andrew: I think in each [region] there’s room for two or three at least, because it’s such a large market — a $450 billion market. If you just take a 5 or 10 percent slice, you’re going to have several very large companies, and the customers will be working with the one they think provides the best service.

Right now you’re centered in eight markets. How soon and how aggressively will you be branching out?

Andrew: You’ll see us grow aggressively. We don’t announce where we’re going and how many markets we’re going into. We think what’s most important is that you serve the markets that you’re in well, and that you penetrate them deeply, and that you don’t get way ahead of yourself in terms of spreading yourself so thin you can’t deliver on the customer promise.

Thomas: We’re not just sitting around twiddling our thumbs. The greatest thing about having some competition is that [our competitors have] stolen everything that we ever did, and perhaps even made some improvements on it — and now we can take that back and do a big leapfrog. So having other competitors with other Web sites — we’re eating it up and learning as much as we can from what they’re doing, because that’s what they did to us.

Andrew: It’s funny because for eight years we had no competition. And now there is competition and in most categories it actually just helps build and popularize the service. [Seeing online grocery services everywhere] gets people over the lifestyle-change issue about doing something like this. It’s kind of like wireless phones: In the beginning, people weren’t sure they deserved a wireless phone, and then it became popularized and [now] everyone uses one. That’s happening in the online grocery business — by having competitors, and by staying in the category, we’re seeing more people willing to try it. [Competition] builds the business for us — and our competitors.

Andy Dehnart is a writer living in Chicago.

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