Walmart and Amazon won't stop investing in a category that is 'bleeding cash'
Peapod, a 27-year-old online grocery company, is only profitable in three markets, despite doing business in 12 states plus Washington, DC, reports the Wall Street Journal.
"It's tough to make money on every order. When we see others, we just know they're bleeding cash," Thomas Parkinson, Peapod's chief technology officer and co-founder, told the Journal.
According to Parkinson, fulfilling online grocery orders is expensive due to the combination of automation and skilled employees. The grocery business has thin profit margins in the best of times; profits in online grocery are currently even thinner.
Peapod is one of oldest companies that has focused solely on online grocery. However, in recent years, there has been a major push to invest in the area.
Companies including Kroger, Walmart, and Target have invested billions of dollars each into building their online grocery business, and have pledged to invest billions more. Tech companies such as Amazon and Google are also entering the industry, with AmazonFresh launching in limited markets in 2007 and Google Fresh launching in Los Angeles and San Francisco in February.
Still, with examples such as Peapod, many analysts are still unsure if the industry is actually profitable.
"We remain unconvinced of long-term viability of home deliveries for grocery," HSBC retail analyst David McCarthy writes in a recent note that called the category the "emperor's new clothes."
Customers value lower prices over delivery of online grocery, McCarthy argues, noting that the online grocery market continues to grow at only half the rate of discounters that aren't online, like Aldi and Lidl.
Business Insider/Hayley Peterson
Business Insider/Hayley Peterson
HSBC isn't the only one questioning the viability of online grocery. Last year, a BMO Capital Markets report revealed that the vast majority of consumers are still unwilling to shop for groceries online.
"Silicon Valley can disrupt a lot of things, but it can't find an app that will help you squeeze an avocado," Business Insider wrote of the issue. "The biggest hang-up for consumers remains needing to pick out their own foods."
Peapod is dealing with many customers' lack of interest with online grocery and increased competition by expanding. The pending merger between Peapod parent company Ahold and Delhaize Group could allow the company to expand into new markets in the southern US, as well as the company's current target of New York, reports the Wall Street Journal.
The company has built a 400,000 square-foot fulfillment center in New York, hoping to beat out the competition by winning over loyal customers with a mix of speed and quality.
However, the industry more widely may need to realized that online grocery may not be the silver bullet that they're looking for. If one of the most established players in the online grocery game is only profitable in three markets, there is good reason to believe that competitors are, in fact, "bleeding cash."
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
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