1 © arvind rangaswamy (2009), all rights reserved january 21, 2009 e-marketing some observations...

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© Arvind Rangaswamy (2009), All Rights Reserved

January 21, 2009

e-Marketing

Some Observations RegardingOnline Grocery Retailing

Arvind Rangaswamy

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Success Factors

Selection of right target segment

High purchase volume per year

Dual income

Households with children

Dense geographic areas

Large order size

Ability to deliver the order accurately most of the time

Limited but regular delivery schedules

Low picking/delivery costs

Exploit the Internet to redefine the grocery business (e.g., FreshDirect.com)

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Cost-structure

Customer acquisition costs

Cost of goods sold

Administrative costs

Warehouse costs

Picking costs

Delivery costs

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Webvan – Sample Calculations

Hub revenue (5 days per week operation)

(1) Max orders/day 8,000(2) Days per week of operations 5(3) Orders per week (12) 40,000(4) Weeks per year 52(5) Orders per year (4 5) 2,080,000(6) Average order ($) 103(7) Dollar revenue per hub/year(6 7) 214,240,000

Gross margin = 214,240,000 0.25 = $53,560,000

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Webvan- Sample Calculations

Picking costs

(8) Average items per order 28(9) Items picked per year (5 8) 58,240,000(10) Items picked per person per hour 450(11) Person hours for picking (9 11) 129,422(12) Employees for picking (11 2000) 65(13) Cost of picker per year 40,000(14) Total cost of for pickers (12 13) 2,588,444

Variable picking cost per order = 2,588,444/2,080,000 = $1.25

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Webvan Calculations

Delivery costs

(15) Orders delivered per day per van 20(16) Delivery days per week 5(17) Orders delivered per week per person (15 16) 100(18) Orders delivered per person/year@ 50 wks 5000(19) Number of delivery persons required (5 18) 416(20) Cost per year (van+delivery person) 50,000(21) Average cost of delivery per order (2018) 10

Hub profits from operations = 53,560,000 – (2,080,000 11.25) = $30,160,000

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Webvan Calculations

Number of customers to support 8,000 orders per day:

1 order per customer every 10 days

= 80,000 customers needed to support volume of required orders per day

If market penetration is 1%

8,000,000 customers needed in catchment area to support a hub!

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Projected Sales

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Chain Ratio Method(Estimate of Online Grocery Opportunity)

Number of households (2000 census) 105 million

Avg. grocery purchases per household per year (52x100) $5200 % of sales from Supermarkets and grocery stores 84%

(Progressive Grocer) Households with children (married and unmarried – Census) 35%

% of households with Internet access (Census Bureau) 58% Will order groceries online if available (Survey) 25% Discount of survey intentions 50% Online grocery shopping availability (guess) 40%

Awareness given availability (guess) 50%

Market forecast: $2-4 Billion

1 © arvind rangaswamy (2009), all rights reserved january 21, 2009 e-marketing some observations...

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