Why the First-Mover Advantage Doesn't Work for Online Grocery
The first-mover advantage is one of the biggest myths of modern day business thinking. Business history is replete with stories of followers who have outsmarted the early movers. Apple didn't invent the first portable music player, but its iPod was a runaway success. Google wasn't the pioneer of the pay-per-click search engine and advertising, but AdWords is now its major revenue generator.
Similarly, the current market shares of grocers and retailers Kroger , Wal-Mart Stores , Amazon.com in the online grocery market don't speak much about the future. In fact, the first-mover advantage won't do a good job predicting the winners and losers of the online grocer battle because of the industry's characteristics.
Cost advantages from economies of scale
One of the key drivers behind a first-mover strategy in a new market is that the early mover takes significant market share quickly and generates sufficient volumes to spread the fixed costs of operations over a larger revenue base. Under this ideal scenario, the first mover benefits sufficiently from scale economies, lowering its costs to a point that makes it uneconomical for late movers to compete. However, the relatively low amount of capital required to enter the online grocery industry and fragmented nature of the industry suggest that economies of scale won't work well in this instance.
While it will take a more significant amount of investment to expand online grocery on a national level, the initial cost of entry is relatively low. For example, Amazon has utilized the warehouse-delivery model for its online grocery initiative Amazon Fresh, avoiding the need for the buildup of any physical stores. Peapod, the largest online grocery retailer in the U.S., has relied on its parent Royal Ahold's Giant Food and Stop & Shop retail chains for delivery. In a nutshell, the current players haven't had a need to invest heavily.
Another validation for the lack of scale economies is the fragmented nature of the industry, suggesting that the absence of high fixed-cost investments required has essentially rolled out the welcome mat for new entrants. The three leading players in the online grocery space, Royal Ahold's Peapod, FreshDirect, and Safeway, have a combined market share of below 20%. Since no single online grocer has a significantly larger market share than its peers, no one has reached the minimum scale required to derive cost advantages.
Another often-touted reason for an early mover advantage is that the incumbent will build its brand equity and superior positioning in the minds of customers that will protect its market leadership. Again, this hardly applies to the online grocery market. According to Fitch, grocery has the lowest penetration of online sales in various product categories at only 1% of the U.S. grocery market.
U.S. online grocers simply haven't figured out what online consumers want. This is especially obvious if you look at the varied distribution models. Besides the warehouse-to-home and store-to-home delivery models adopted by Amazon and Peapod, respectively, other retailers have experimented with a self-pickup model. French grocer Chronodrive allows customers to pick up their orders from warehouses, while products are ready for pickup at Harris Teeter's (to be merged with Kroger) stores under its "Click & Collect" online service..
The different delivery models are affected by both business characteristics and customer preferences. For groceries, unlike other products, consumers still prefer to 'see and feel' their products to check for freshness, making the pick-up model (like Harris Teeter) more attractive. On the other hand, Amazon will prefer to leverage on its existing warehouse facilities. This explains why it has relied on the warehouse-to-home delivery and why warehouse pick-up is also a possibility in the near future.
Potential winners and losers
Interestingly, while more people are referring Amazon as the Wal-Mart of online retailing, Wal-Mart isn't about to concede. While its U.S. grocery-delivery service To Go is currently only available in certain cities such as Denver and San Francisco, Wal-Mart has the luxury of leveraging its learning experiences from operations located abroad. These include its operations in Japan (Net Super), the U.K. (Asda), and also China, where Wal-Mart has a 51% stake in Yihdaodian, a leading online grocer.
Once Kroger completes its merger with Harris Teeter, it will have two different online grocery-distribution models: King Soopers HomeShop's store-to-home delivery model and Harris Teeter's "Click & Collect" online service. It remains to be seen if Kroger will choose one over the other or keep both.
Amazon Fresh benefits from its long history in online retail. Furthermore, Amazon Fresh has adopted the same ratings and reviews systems for its grocery products, which brings a small element of network effects. As more grocery buyers use Amazon's online grocery service and contribute reviews, it will bring more customer traffic to Amazon Fresh as the destination site for grocery reviews. This is something that has worked to great effect for its books division.
Foolish final thoughts
Faced with uncertainty over the growth trajectory of online grocery and customers' favored distribution models, the most pragmatic approach will be avoiding over-investment. Instead, online grocers should stay on top of any new developments in the industry and remain well-prepared. Along this line of thought, my bet is with Wal-Mart, which can learn from both its peers in the U.S. and its own overseas experiences in coming up with the right business model.
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The article Why the First-Mover Advantage Doesn't Work for Online Grocery originally appeared on Fool.com.Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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