Executive Summary
“Consumers across the country have made it clear that they’re ready for online grocery shopping. They see it as a way to save time and simplify their lives.”
- Vic Orler, Partner, Andersen Consulting
Four hundred and forty-six billion dollars were spent on groceries in the United States in 1998. The average American makes 2.2 trips to the store each week. Conservatively estimated at a half-hour per trip, the average person spends over 57 hours, (2 days, 9 hours, and 7 minutes) in the store each year. A study conducted by Andersen Consulting in late 1997, found that 41 percent of Americans "hate grocery shopping" and 42 percent are interested in ordering groceries from home. Another study conducted by the University of Michigan, asked people to rank 22 household tasks in terms of enjoyment. Grocery shopping ranked next to last. With the number of dual-income households rising, Americans are finding themselves with less free time. Consequently, the value placed on their free time continues to skyrocket. The management of Savetime.com sees a tremendous opportunity in a growing market that is expected to reach $460 billion in 1999.
The Internet grocery market has grown from zero in 1993 to approximately $4 billion (one percent of the total grocery industry) in 1998. Despite this tremendous growth, the few players operating in the online grocery marketplace are unprofitable and do not adequately meet consumer needs. Now is the right time for Savetime.com.
Savetime.com will leverage the Internet and technology to provide a service which allows its customers to outsource their mundane weekly tasks. The strategy is to establish a beachhead in the online grocery marketspace to develop a weekly channel into the home. Over time, Savetime.com will earn the trust of its customers and partner with them in their quest to add value to their lives. By providing online grocery service Savetime.com will eliminate the most time-consuming of its customers’ weekly tasks and own the weekly channel into the home. The fact that Savetime.com’s customers will come to its site intending to make weekly purchases provides enormous potential for Savetime.com to offer other products and services.
Marketing
eMarketer estimates that by 2002, sales of online groceries will total $7 billion and Andersen Consulting projects online grocery sales to reach $85 billion by 2006. Industry experts estimate that one percent of all grocery consumers currently use personal computers to do their shopping, and that twelve to fifteen percent will do so by 2005. Shoppers with access to the Web at home or at work spend more dollars per shopping trip than shoppers who do not have access to the Web. Consumers who shop online are likely to be more loyal to their electronic supermarkets and spend more time per “visit.”
Savetime.com plans to model the branding strategies of Yahoo! and Amazon.com. This strategy is designed to reach the target with a Savetime.com impression multiple times everyday. Savetime.com will spend $2.1 million during the first year of operations in order to build the Savetime.com brand in Denver. Savetime.com will use a combination of traditional vehicles such as outdoor advertising, newspaper, radio, and direct marketing as well as grassroots efforts such as promotions, community sponsorships, and local media partnerships to build brand awareness and increase frequency of use.
Competition
Savetime.com faces two main categories of competitors. The first includes conventional grocery stores, such as Lucky’s and Safeway. Currently Savetime.com’s potential customers are shopping in these conventional stores. To entice consumers out of their conventional grocery stores, Savetime.com will differentiate itself from these competitors in three ways: 1) convenience of shopping on the Internet from home or work, 2) significant time savings (estimated at 70 to 90 minutes depending on previous habits), and 3) choice of delivery to home or work, or pickup from one of the Customer Convenience Centers (CCC’s).
The second category includes existing online grocery services such as Peapod, Streamline, and Shoplink. These companies will not be immediate competitors for Savetime.com in because they do not offer services in the Denver Metropolitan area. However, as Savetime.com expands into other markets beginning Year 2, it will differentiate itself from other online grocers in two major areas: 1) time savings and ease of use and 2) customer service. Savetime.com plans to expand into 16 markets over the course of five years.
Operations
Savetime.com has designed a business model which provides maximum flexibility. The company will use a central warehouse as a hub and conveniently located retail storefronts as spokes. The spokes will serve a dual purpose; they will provide convenient locations for customers to pick up their orders and will also act as forward staging areas for delivery. This operational model is supported by a flexible information technology (IT) infrastructure which allows Savetime.com to easily integrate new services and respond quickly to customer needs. By combining the hub and spoke model with a flexible IT infrastructure, Savetime.com will serve customers’ grocery needs today and numerous other mundane tasks in the future.
Management
The core management of Savetime.com has been working together successfully for over two years on multiple time-sensitive projects. The members of the founding team have been carefully selected for their commitment to teamwork, desire to work together, and ability to accomplish tasks at Internet speed. The five MBA’s responsible for business management of Savetime.com bring 42 years of experience in such diverse areas as marketing, finance, operations, sales, distribution, project management, corporate training, human resource management, and technical consulting.
In February of 1999, the company accomplished the critical milestone of adding necessary electronic commerce expertise to the team. The technical team brings 31 years of experience in e-commerce, system architecture, object oriented and Internet technologies, electronic cataloguing, search engine technology, Web design, and human factor design. The exceptionally high quality of the technical team creates tremendous strategic advantage for Savetime.com. (Please refer to Appendix A for detailed information about the management team.)
Savetime.com is very excited about the fit and resulting synergies created by the meshing of the management and technical teams. The individuals involved in the company combine to fit the profile of a team committed to creating and defending a competitive advantage for the long term.
Advisory Board
The management team of Savetime.com is fortunate to have a seasoned advisory board with diverse experience to help guide the company through the startup process. (Please refer to Appendix B for detailed information about the advisory board.)
The board members are as follows:
Timothy R. SchiewePresident and Chief Executive Officer, netLibrary.com
Caryn EllisonChief Executive Officer, ZAND Herbal Formulas
Former Chief Financial Officer of Alfalfa's Markets
Sanford KeziahPresident, Kindred/Keziah, LLC
James H. ThomasManager, e-business Solutions, IBM Corporation
Financial Summary
Savetime.com's revenue model uses a conservative customer conversion rate of less than one percent of the target market for Year 1. The company recognizes that the market in the Denver Metro area is immature and will take some time to educate and grow. Summary revenue and net income numbers for the first five years of operations are:
YEAR / 1 / 2 / 3 / 4 / 5REVENUE / $20,007,106 / $43,221,763 / $130,578,383 / $264,841,748 / $544,469,699
NET INCOME / $(2,305,926) / $(2,155,428) / $5,003,652 / $14,904,701 / $ 35,387,282
Offering
Savetime.com seeks a total of $8 million in outside investment in three rounds. Round one will consist of a $2 million offering in exchange for 22% of the company. Round two will consist of a $3.5 million offering in exchange for 12% of the company. Round three will consist of a $2.5 million offering in exchange for 2% of the company. The total ownership for outside investors after round three will be 36 percent. This offering will provide start-up capital for Year 0 and working capital for the first two years.
Exit
Exit for outside investors will take place in Year 5 through IPO or merger/acquisition. The company is valued at $574 million at the end of Year 5. The outside investors ownership stake of 36 percent will provide a return of $193 million. This provides an IRR of 110%, 80% and 50% for rounds one, two, and three respectively.
Partners
The management team of Savetime.com is committed to finding individuals or a firm that is interested in developing a partnership. Potential partners will be expected to provide management expertise, investment experience in the Internet space, numerous business contacts, and capital. The management team is deeply committed to making this company successful; while they are committed to leadership, they are not necessarily committed to being in charge.
Marketing
Industry Overview
E-Commerce
Current
Internet commerce reached $7.8 billion in 1998. Businesses in virtually every sector of the economy are using the Internet to cut the cost of purchasing, manage supplier relationships, streamline logistics and inventory, and reach customers more effectively. A major driver in the trend toward Internet commerce is that consumers are finding themselves more time-starved and are looking for ways to increase their free time. As the percentage of women in the workforce increases, families are finding themselves struggling to balance work and family. Internet commerce allows them to reduce the time involved with tasks such as errands and shopping, thus allowing them more time for work and family.
The fact that there are more access options available than ever before is also driving consumers onto the Internet. Decreasing costs of access further reduce barriers to Internet use. TV top units such as WebTV cost less than $250 and Internet-ready PCs are being sold for under $1,000. TV top unit sales are expected to reach 8 million by 2002 and Bill Gates has stated that he expects non-PC devices to overtake the number of PCs sold within ten years. Currently it is estimated that 40 percent of all households have a computer at home. Of those households, 72 percent have a modem, 31 percent have an online or Internet service, 31 percent use email and five percent use the Internet for shopping. Industry experts report that Internet users spend 2.5-9.8 hours online per week.
In a 1998 study conducted by Ernst and Young, 76 percent of respondents indicated that their companies either were selling or planning to sell through the Web (a 210 percent increase over 1997). Consumers are recognizing the cost savings and convenience of purchasing online and the online experience has become more enjoyable. In 1998, more than half (51 percent) of online shoppers made purchases online on at least five occasions, up 300 percent over 1997.
Projected
As the Internet matures and consumers continue to gain confidence in this medium, purchases (in terms of frequency and dollars) will increase. eMarketer estimates that there will be 64 million Internet users in the United States by 2002, an average annual growth rate of 53 percent. Some make much bolder predictions. Nicholas Negraponte projects one billion users worldwide by 2000. Household Internet user projections vary by source.
U.S. Internet User Households (in millions) / 1999 / 2000Jupiter / 33.0 / 36.5
Forrester / 31.0 / 33.0
New Century Communications / 26.8 / 29.4
eMarketer / 17.6 / 23.4
The momentum created by companies increasing communications and commerce options on the Web has not gone unnoticed by consumers. Projections for e-commerce revenues vary greatly.
E-Commerce Projections (in billions) / 1999 / 2000eMarketer / $6.1 / $10
Forrester / $3.9 / $6.6
Multi Media Research Group / NA / $6.5
Jupiter / NA / $7.3
Cowles/Simba / NA / $4.3
IDC / NA / $117
In late March 1999, The Red Herring released a new perspective on the growth of internet access, the number of households that shop online and total online retail sales.
1999 / 2000 / 2001 / 2002 / 2003# of U.S. Households with Internet Access (millions) / 33.5 / 38.3 / 43.5 / 48.6 / 52.8
# of U.S. Households that shop online (millions) / 13.1 / 17.7 / 23.1 / 30.3 / 40.3
Total online retail sales (billions) / $18.1 / $33 / $52.2 / $76.3 / $108
General Grocery
Current
The Food Marketing Institute (FMI) estimates that in 1998 total grocery sales in the United States were $446 billion. The large scale grocery and supermarket chains have been slow to react to the online grocery expansion. This hesitation is primarily due to high costs and lack of expertise. Several of the large supermarket chains have created Web sites although the primary purpose of these sites is to provide information (specials) and coupons to consumers who are then directed to local supermarkets.
Projected
In a retail survey conducted by Ernst and Young, 71 percent of grocers said their companies have a Web site and 18 percent said they plan to have one in the next year. Furthermore, 67 percent said they plan to offer products to consumers on their Web sites. In 1998, 16 percent of grocers said that they expect a significant portion (11-30 percent) of their revenues in 2000 will come from online sales. However, a source from the top grocery retailer in the industry reports that grocery stores are currently not promoting online ordering because the costs to retailers are too high. Furthermore, many grocery stores which already offer Web site ordering are currently reducing the number of products available online to discourage online ordering.
Online Grocery
Current
As of July 1998, approximately 75,000 homes were purchasing groceries on the Net, representing a
$5 billion business. According to FMI, seven percent of shoppers said that their store offered grocery ordering by fax or Internet in 1997. Less than one percent said they used this service one time per month or more. In 1998, 35 percent of shoppers whose stores offered fax or Internet ordering said they used it one time per month or more. Of those shoppers who said their store did not offer fax or Internet ordering, 11 percent said they would use it one time per month or more if it were available.
FMI also found that shoppers with access to the Web at home or at work spend $96 per week on groceries versus $79 for those who do not have access to the Web. According to FMI, online grocery shoppers are more educated, have higher household incomes, and are more likely to live in the suburbs than conventional grocery store shoppers. Furthermore, online grocery shoppers are relatively less satisfied with their primary supermarket than those who do not shop online. Consumers who shop online are likely to be more loyal to their electronic supermarkets, spend more time per “visit,” and take greater advantage of coupons and premiums than traditional bricks and mortar consumers.
Projected
Consumers are ready to reduce the 47 minutes that it takes the average family to stock up on the week’s groceries (plus time spent driving and the hassle of plodding up and down the aisles). The Food Marketing Department of St. Joseph’s University in Philadelphia found that two-thirds of adults actively dislike shopping for food and over one-third of grocery shoppers are willing to pay a fee for the convenience of home shopping.
Industry experts estimate that one percent of all grocery consumers currently use personal computers to do their shopping, and that 12 to 15 percent will do so by 2005. Andersen Consulting estimates that the number of U.S. households using online services to buy food and other household goods and services will grow to 15 to 20 million by 2007. eMarketer suggests that online groceries will achieve a penetration rate of up to 20 percent of U.S. households by 2007. Jupiter Communications suggests that only a small percentage of the population needs to convert to online shopping in order to make the industry a profitable venture. The projected size of the online grocery market varies by source and time frame:
(In billions) / 2000 / 2001 / 2002 / 2003 / 2004 / 2005 / 2006 / 2007 / 2008 / 2009eMarketer / $2.4 / $7
Forbes / $60+
Andersen / $85
Forrester / $7 / $10.8
Jupiter / $2.2 / $3.5
Yankee Group / $6
HBS / $12
Competition
Savetime.com faces two main categories of competitors. The first is comprised of conventional grocery stores such as Kroger, Safeway, Vons, Lucky, and Albertson’s. Conventional grocery stores are attempting to make the shopping experience more convenient by adding services such as banking and photo processing. They are also trying to make the shopping experience more enjoyable by offering food samples, better lighting, wider aisles, special carts for children, and more attractive layouts. Savetime.com’s potential customers are currently shopping in these stores because of habit and the lack of other options.
The second category of competition for Savetime.com includes existing online grocery services. These services can be divided into three categories based upon their distribution: national, regional and local. Savetime.com's competition will vary by market depending on the presence of online grocers. Please refer to Appendix C for profiles of primary competitors.
Target
Consumer Groceries
During its first three to five year of business, Savetime.com will target age 25 to 44, educated, dual-income households (HH) who are Internet users. This target displays the following demographics and psychographics:
DemographicsPsychographics
- Age 25-44- Interested in saving time on mundane tasks
- Two adults in HH working full or part time - Comfortable making transactions over the Internet
- One adult in HH with a Bachelors degree or higher- Sent for information on product advertised on Internet in past
- With or without children in the household 30 days
- Used an Internet service in past 30 days - Sent for product advertised on Internet in past 30 days
- Married, living together, roommates- Printed ad or article from the Internet in past 30 days
- Household income $60,000 +- Made travel plans on the Internet in past 30 days
- Access to the Internet at home or at work
- Media habits: magazines, newspapers, noticers
of outdoor advertising
By focusing marketing efforts on this target during the first three to five years of business, Savetime.com: