1 © Arvind Rangaswamy (2009), All Rights Reserved January 21, 2009 e-Marketing Some Observations Regarding Online Grocery Retailing Arvind Rangaswamy

2 © Arvind Rangaswamy (2009), All Rights Reserved Success Factors ² Selection of right target segment u High purchase volume per year u Dual income u Households with children u Dense geographic areas ² Large order size ² Ability to deliver the order accurately most of the time ² Limited but regular delivery schedules ² Low picking/delivery costs ² Exploit the Internet to redefine the grocery business (e.g., FreshDirect.com)

3 © Arvind Rangaswamy (2009), All Rights Reserved Cost-structure ² Customer acquisition costs ² Cost of goods sold ² Administrative costs ² Warehouse costs ² Picking costs ² Delivery costs

4 © Arvind Rangaswamy (2009), All Rights Reserved Webvan – Sample Calculations ² Hub revenue (5 days per week operation) (1)Max orders/day 8,000 (2)Days per week of operations 5 (3)Orders per week (1  2) 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

5 © Arvind Rangaswamy (2009), All Rights Reserved Webvan- Sample Calculations ² 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

6 © Arvind Rangaswamy (2009), All Rights Reserved Webvan Calculations ² 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 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 (20  18) 10 Hub profits from operations = 53,560,000 – (2,080,000  11.25) = $30,160,000

7 © Arvind Rangaswamy (2009), All Rights Reserved 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% è 8,000,000 customers needed in catchment area to support a hub!

8 © Arvind Rangaswamy (2009), All Rights Reserved Projected Sales

9 © Arvind Rangaswamy (2009), All Rights Reserved Chain Ratio Method (Estimate of Online Grocery Opportunity) ² Number of households (2000 census) 105 million ² Avg. grocery purchases per household per year (52x100)$5200 ² % of sales from Supermarkets and grocery stores 84% (Progressive Grocer) ² Households with children (married and unmarried – Census) 35% ² % of households with Internet access (Census Bureau) 58% ² Will order groceries online if available (Survey) 25% ² Discount of survey intentions 50% ² Online grocery shopping availability (guess) 40% ² Awareness given availability (guess) 50%  Market forecast:$2-4 Billion