Online Grocery Delivery Battle Rages As Google, Amazon, Whole Foods Face Off

Google, Amazon and eBay are spending tens of millions to fend off fledgling upstarts for preeminence in a burgeoning service sector that experts believe will revolutionize yet another basic area of modern life. The fight for the online grocery delivery market is heating up as more and more players enter the ring, and the topic drew attention this week with the Wednesday announcement that Whole Foods is getting in on the action.

As recently as the 1990s, buying groceries for a family was about loading the kids in the van every Sunday afternoon and heading to the neighborhood supermarket for an hour or two. Food was a pretty straightforward affair then, and one could generally get whatever one wanted in a single building. All that has changed over the past 15 to 20 years, as the rise of organic and health food consciousness has combined with the explosion of specialty markets and awareness of questionable food production methods to revolutionize the way Americans see food.

Now another sea change in the way food makes its way from distributors’ shelves to consumers’ refrigerators and cupboards may be on the horizon.

On Wednesday, Whole Foods Market Inc. (NASDAQ:WFM) announced that it is overhauling its mobile and Web offerings to support a home-delivery initiative set to launch Sept 1. The move was long anticipated by many observers, like Gary Lee, CEO of the InReality customer experience and design firm, who believes food retail is undergoing a major shift toward the online delivery model.

“The use of Web and mobile apps to allow for a consumer to shop at home or in-store is becoming a necessity for today's ‘anywhere consumer,’ and delivery will eventually become the norm as business models shift to make delivery more and more economical for the entire supply chain,” Lee said via email.

Despite long being seen as an innovator in many ways, Whole Foods is actually a latecomer to the online grocery shopping game, having been beaten to the punch long ago by a slew of competitors.

The wide-open, new field has enabled a lot of experimentation with different models, and there are a number of distinct but often overlapping camps in which the various services fall:

· First are the localized but comprehensive offerings of smaller, often well-established companies like FreshDirect Inc., which engage in direct sales of groceries, delivering both fresh and non-perishable goods from their own warehouses to customers’ doors.

· AmazonFresh is a larger-scale adaptation of that concept, as Amazon.com Inc. (NASDAQ:AMZN) CEO Jeff Bezos’ brainchild already delivers the company’s own stockpiles of fresh and dry grocery items to much of the West Coast, with plans to enter other markets.

· At the other end of the spectrum are services like Google Shopping Express and eBay Now, which emphasize same-day service, but only ship non-perishable items. More interesting, they have chosen to go lean, delivering to customers in their limited (so far) distribution zones goods they choose online from a number of existing brick-and-mortar retailers, eschewing the expensive task of sourcing and storing groceries of their own.

· Retailers have also taken steps to deliver groceries themselves, doing away with middlemen. Safeway already delivers groceries to customers, and Wal-Mart Stores Inc. (NYSE:WMT) is reportedly exploring a direct grocery delivery service. In 2000, Dutch grocery conglomerate Koninklijke Ahold N.V. (AMS:AH) chose to acquire the middleman, in its case Peapod Inc., which is dedicated largely to delivering groceries for Ahold’s Stop & Shop Supermarket Company and Giant Food of Maryland LLC grocery chains.

· A startup called Instacart Inc. introduced yet another grocery delivery model two years ago that uses the magic of the “sharing economy” to keep its overhead and labor expenses low while providing same-day service in its limited distribution areas. The startup offers personal shoppers, who pick up goods at stores on buyers’ lists and deliver them by bicycle. A number of other startups like Good Eggs Inc. and Greenling Inc. have also gained attention and multimillion-dollar funding rounds.

· Whole Foods has yet to outline its grocery delivery model in any detail, but co-CEO Walter Robb said Wednesday that the chain is partnering with Instacart for its service, suggesting it could borrow from the firm’s innovative approach.

Despite the crowded field, the two biggest names with delivery services currently up and running in at least part of the country are Google Inc. (NASDAQ:GOOG) -- which has announced that it is dedicating $500 million to its effort -- and Amazon. The two represent what many see as the two mainstream models in the competition to be king of the grocery delivery hill. And Instacart “is like Uber but for groceries,” according to Susan Lee, a project manager at the global strategy agency Brand Union in New York, N.Y., who provided a succinct breakdown of what differentiates the three services.

“Google is going to be partnering with retailers and Amazon will be warehousing its own produce and food. Even though Amazon’s overhead costs are low, with produce it will be a more challenging feat,” she said. “Instacart doesn’t have any physical brick and mortar locations; they don’t provide the groceries. What they do is connect personal shoppers with people looking for groceries who don’t have time to go to the store, pick out groceries, pay for them and bring them home.”

Lee predicts that there will be consolidation in the delivery market as time passes, with the bigger, better-heeled players -- be they Google, Amazon, eBay Inc. (NASDAQ:EBAY), Wal-Mart or someone else like Target Corporation (NYSE:TGT) or even Kroger Co. (NYSE:KR) -- acquiring smaller outfits to hone and augment their services, or to move into markets already dominated by a localized service. Google is already setting up partners with retailers like CostCo to deliver to their customers in test markets.

Competition will drive down prices while storage and other expenditures will keep overhead high, according to Joseph Agnese, an analyst at S&P Capital IQ.

“It’s extremely difficult to run a profitable online grocery delivery operation,” Agnese said, adding that it might be particularly challenging for Whole Foods and other higher-end grocers to make money on delivery. “It may be more difficult at least to expand it broadly across the United States because they’re not extremely price-competitive. Typically online businesses are more price-competitive, such as Amazon and Wal-Mart. The market opportunity for Whole Foods [products] is a lot more narrow than it is for selling cheap, commodity-type goods.”