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posted: 10/13/2013 6:57 AM

Grocery stores try fresh idea: Food pickup service

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The Washington Post

WASHINGTON -- My wife and I pulled up to a Washington, D.C., gas station a couple of weeks ago, and I was surprised to see that it was owned by Giant Foods.

I knew Giant operated 170 grocery stores in the Washington region. But I didn't know the supermarket chain was in the gasoline business. Then I noticed something even stranger.

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Giant had turned the former Sunoco station into a drive-through grocery store for online ordering. It is part of Giant's new pickup service. Instead of its traditional Peapod home delivery, you drive to the store, where a Giant employee deposits your order, from a loaf of bread to 50 bags of groceries, into the trunk.

You don't even have to unbuckle your seat belt.

Giant's 20-store pickup offensive is part of a broader invasion into the Washington region by grocery businesses disrupting the current big-box model by offering an online alternative to the weekly grocery store trip.

Starting last fall, Charlottesville, Va.-based Relay Foods, founded by entrepreneur Zach Buckner, has established 35 pickup locations around Washington, with a goal of hundreds eventually. Safeway, the other dominant Washington grocer, has started a pickup business. New York-based FreshDirect and Seattle-based Amazon Fresh, owned by my new boss, Jeff Bezos, may not be far behind.

"This is undoubtedly the future of grocery shopping," said Buckner, who predicts that grocery stores will go the way of the video store. "Netflix, Apple iTunes and others have wiped the video store category off the map. The same thing is on its way for groceries."

Buckner, 35, is a Baton Rouge, La., native with electrical engineering degrees from the University of Virginia. He had a "flash of insight" while fixing the dehumidifier at his Charlottesville home six years ago.

"I had to go back to Lowe's for the third time for sheet metal screws, and it was 20 minutes away."

He thought there might be a business in delivering the stuff instead of constantly going to the store. Buckner then decided that food was the sweet spot for the delivery business because you had to keep buying it.

"If I sell you an $8 block of French cheese," he said, "it doesn't take much space, it's got a big margin, and you eat it and you're going to buy it again."

He wrote a business plan and in 2008 won a $2,000 award from U.Va.'s Darden School of Business. He used the money to buy a laser printer and make a down payment to lease a rental truck. He borrowed from his 401(k) investment fund.

The business, like many start-ups, had its beginning in his house -- in his dining room, to be exact, which he converted into inventory holding area. He used a church parking lot next to his home to sort customer orders. He worked on the business through 2008, using systems engineers to help him fine-tune the software for the online ordering. He opened to the public in Charlottesville in early 2009.

By the summer of 2009, he was making enough money to cover the truck lease and then some.

Relay Foods has 110 employees, and the company has raised $14.5 million from venture capital firms, including investments from Google Chairman Eric Schmidt's investment vehicle, Tomorrow Ventures, and from Massachusetts-based Battery Ventures. Buckner said the firm has about $10 million in revenue.

The grocery delivery business isn't new. Webvan, the 1990s pioneer, famously went bankrupt in 2001 in what some regard as one of the biggest flops of the dot.com era. But consumers are much more comfortable with online commerce than they were a decade ago.

Buckner said his business is built around eliminating the high costs associated with owning, building and maintaining traditional grocery stores, which he said suck out all the profits from selling food. He estimates that current grocers command a few dollars in profit out of every $100 in revenue. Minus the cost of the grocery store, Buckner is shooting for a $25 profit on every $100.

The engineer looks upon grocery delivery in terms of the cost of freight.

"Freight is a classic engineering problem," he said. "I thought it was really interesting, because freight moves around at 10 cents per ton per mile. Consumers buy groceries and move them at about $45 per ton per mile. So it's astronomically less efficient. I got in the business to solve that problem."

Relay, like Giant's Peapod, starts by relying on central warehouses to fill the initial order. The groceries are then loaded in trucks and delivered to select pickup locations. Relay's orders must be made online the night before the pickup. The food is put in refrigerated "totes," where it is taken to central locations such as the Trohv Shop in Takoma Park, Md., or the Mint Gym in Washington. Customers can stop by between 3 and 7 p.m. to grab their groceries.

Peapod trucks the grocery orders during the night to designated grocery stores or to pickup-only locations such as the gas station on Connecticut Avenue. Customers must order by 6 p.m. for an 8 a.m. pickup the next day. They have until midnight if they want to pick up the groceries the next afternoon.

"This is something new we are trying," said Mike Brennan, 49, a 16-year veteran of Peapod and its chief operating officer. "The goal here is to give customers an option. They order online or on their mobile, you pick a time and you go to the store."

With Americans spending hundreds of billions of dollars a year on groceries, Brennan said, "if we capture 5 percent of that, it's a really big number."

Buckner of Relay Foods said he offers a choice of 30,000 grocery items, which presents it own logistical nightmare. To solve it, he has a cadre of engineers that pound away on the software in pursuit of flawless delivery at his 100 locations throughout Virginia and Washington.

"We have millions" in our research and development budget, Buckner said. He said that as the company scales its revenue, the research costs will drop as a percentage of that revenue, and profits will hopefully follow.

The goal is refining the automation so a cracked egg, bruised bell pepper or wrong order doesn't reach the consumer.

"This business requires automatic handling of a million possible failures," Buckner said. "Your order is a complicated orchestration of hundreds of moving parts."

Some efficiencies may be easier to accomplish. For example, as people become more comfortable with the Internet and mobile devices, they are ordering online while going about their everyday tasks.

"It turns downtime, whether you are on a train or waiting for a recital to begin, into productive time," Brennan said.

Combine lots of those little orders and an employee manning the central location for the deli can cut and package much greater amounts of, let's say, roast beef sandwich meat, without having to take each order individually.

That's how they still do it at the Chevy Chase Supermarket in Maryland -- a neighborhood grocery just down the street from Giant's new pickup spot.

You wonder for how long.

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