Internet grocery business in Japan: current business models and future trends

The launch of a wave of Internet grocery retailers over the last six years presents a serious challenge to the traditional supermarket business model. The Internet grocery landscape changed radically in July 2001 when the top Internet grocer, Webvan, filed for bankruptcy. With the bankruptcy of Webvan, almost all the major stand-alone online grocers in the USA have disappeared. Indeed, traditional supermarkets such as Albertsons and Safeway have recently been expanding into the online arena. In Japan, major traditional supermarkets have been seriously working on establishing online services in the metropolitan area with a `̀ brick-and-click’’ model. Examines strategic reasons for today’s Japanese supermarkets to try establishing online grocery businesses. Also addresses critical success factors and current limitations based on socioeconomic conditions, Japanese culture, and expected future trends. Operations/service concepts for Internet-grocery companies Most of the strategic efforts in the Internet-grocery business today focus on improving the purchasing transaction and physical distribution of goods. Unfortunately, without offering their customers more value, simply improving ordering and fulfillment does not make Internet-grocery shopping a viable competitor to the current supermarket business model. Some of the potential new `̀ values’’ include operating concepts (SmaÊros et al., 2000), with different service levels (Punakivi and Saranen, 2001; Punakivi et al., 2001). Operational alternatives Operational alternatives include intermediary and direct. From a consumer’s point of view, the business model Internet grocers use is the same old thing; the only difference is that ordering takes place using the Internet and the items are delivered to the customer’s home. Upon closer examination though, there are actually two different business models (KaÈmaÈraÈinen et al., 2001a, b). In the first model, Internet-grocers serve as an intermediary in the supply chain by picking groceries from a supermarket or `̀ cash and carry’’ and delivering these to the households . This Intermediary model is based on an assumption of occasional deliveries and small sales volumes ± but requires quick home delivery. When sales volumes are sufficiently large, it will need a totally new direct channel between the producers and the consumers  In this business model, Internet-grocers purchase items straight from producers or importers, stock products in local distribution centers and deliver directly to consumers. Streamline and Webvan in the USA, and Matomera in Sweden operate on this model. When the number of customers increases, order packing must take place in the distribution centers rather than in supermarkets to achieve better services and lower costs. To further decrease delivery costs, flexible method of receiving must be devised for customers. These service level alternatives will be described below. Service level alternatives Attended reception is when goods are delivered with customers receiving them in person. On the other hand, if the goods are dropped off at the location without requiring customer presence, it is called unattended reception. In the latter, some kind of boxes must be in place for the delivery. Since unattended reception incurs the installation cost of boxes for new customers, this model slows down the company growth. For a company that looks for fast growth, perhaps attended reception is necessary. However, once the repetitive purchasing and stable demand of goods begin to take place, unattended reception proves to be more convenient to customers and more cost effective to companies. According to Punakivi and Saranen (2001), the unattended reception reduces home delivery costs by up to 60 per cent. However, due to its high cost and requiring customer commitment, unattended delivery has not been widely used. Two types of boxes may be used in unattended deliveries: reception box and the delivery box. The reception box is simply a refrigerated, customer-specific reception box installed at customer’s garage or home yard. The delivery box is an insulated secured box equipped with a docking mechanism that deliverers can drop off and secure at the customer site. The reception box is a more effective mechanism for home deliveries since it requires less space on the truck. On the other hand, delivery box requires a smaller cost to achieve the unattended reception that potentially enables a faster growth rate and higher flexibility in the future. The drawback is the additional cost of collecting the empty boxes later.  An Internet-grocery business model [ 728] Sachiko Ogawara, Jason C.H. Chen and Quan Zhang Internet grocery business in Japan: current business models and future trends Industrial Management & Data Systems 103/9 [2003] 727-735 E-shopping environment in Japan Internet growth According to InfoCom Research, 60 million people, or approximately 46 per cent of the Japanese population, use Internet. In terms of households, the penetration reached 49 per cent in 2001 (InfoCom Research, 2002a). In contrast, this figure was 19.2 per cent and 35.3 per cent in 1999 and 2000, respectively. Even though these figures are much lower than the 46.3 per cent and 51.3 per cent for the USA in the same periods, InfoCom predicts that Japan will exceed the USA in 2002 (InfoCom Research, 2001). This rapid increase in the Internet penetration rate is caused by the large-scaled diffusion of broadband that began in 2001. Until 2000, dial-up access accounted for more than 80 per cent of Internet connection (Society for the Study on Internet Business, 2001). Hindered by high monthly charges and non-flat rate schedules, it was difficult for the growth of Internet usage. With the reasonably priced flat-rate schedules, broadband not only converts many existing dial-user to switch, it attracts many more new home users. As of July 2002, 60 per cent of broadband users have constant access to the Internet. A total of 80 per cent of broadband users who switched from analog lines testify that they have increased their Internet usage (InfoCom Research, 2002b). It is predicted that the broadband penetration rate will reach 80 per cent by 2003. This will dramatically accelerate popularization of the Internet shopping. Internet user profile For most Japanese families, grocery shopping is the woman’s responsibility; therefore easy access and attractiveness of Internet for this population segment are essential to the success of Internet grocers. According to a study from Video Research NetCom (2001), the digital divide between male and female is disappearing. As of April 2001, the number of female Internet users has increased from 35.6 per cent in 1999 to 42.3 per cent of the total Internet users. However, a large digital divide still exist between urban and rural regions. A survey conducted by Japan Access Rating in May 2001 shows that while more than 30 per cent of people use Internet in metropolitan areas such as Tokyo, Kanagawa, Chiba, and Saitama prefectures; less than 10 per cent of people use Internet users in some rural areas (Japan Access Ratings, 2001). In terms of Internet infrastructure, it will take more time for B2C market to mature in rural areas. As of 2001, 17 per cent of Japanese Internet users have shopped online at least once. This figure is the eighth largest in the world (Taylor Nelson Sofres, 2001). According to Internet.Com, as of June 2002, 4 per cent of Japanese Internet users have shopped groceries online, and 36 per cent of them were interested in using online supermarkets (Japan.internet.com, 2002). Mobile commerce Cellular phones are quite popular in Japan. As of July 2002, 55 per cent of the population have cell phones (Telecommunications Carriers Association, 2002), among them 44 per cent own browser phones (Video Research, 2001). With this kind of connectivity, the stage is set for the development of mobile commerce. Unfortunately, unlike in the USA, where credit cards and debit cards methods have been well established as payment collection methods for B2C businesses (Wang, 2001), in Japan even the B2C companies today have struggled to find safe and convenient payment methods because checks and credit cards are not widely accepted as a mode of transaction settlement (Ogawara et al., forthcoming). When Japan’s largest cell phone service company, NTT Docomo, introduced i-mode (an Internet connecting service) cell phone in 1999; due to its convenient settlement system for e-shopping i-mode was expected to become one of the main infrastructures of B2C businesses (Diamond Publishing, 2001). In i-mode systems, charges on purchases are included in telephone bills. When using i-mode, e-retailers no longer have to worry about collections and customers gain the convenience of a one-step, centralized payment. Consequently, many e-shops have become official sites of i-mode, and some online supermarkets accept orders from i-mode. Unfortunately, with the exception of those e-retailers who provide digital contents, cellular phones have not yet become the main access method. The primary culprit is the cell phone’s small displays and the poor search interface. As a result, only 4 per cent of cellular phone owners have used their cellular phones to shop online (Nikkei Net Business, 2002). Consumers currently are using this wireless Internet access mainly for e-mail, ringer melody distribution, weather forecast, general news, music downloading, and traffic information. However, mobile PCs possibly will become part of main infrastructures in [ 729 ] Sachiko Ogawara, Jason C.H. Chen and Quan Zhang Internet grocery business in Japan: current business models and future trends Industrial Management & Data Systems 103/9 [2003] 727-735 mobile commerce in the near future. A recent survey shows that, while 46.5 per cent of current Internet users favor cellular phones as a future tool for mobile