09/06/2014 11:41 BST | Updated 08/08/2014 06:59 BST

Online Groceries in America : Second Time Lucky?

In the Valley they still take online grocer Webvan's name in a hushed tone--a dramatic story of a Dotcom dream gone bust, typifying the mistakes and missteps, that characterized the dotcom downfall at the turn of the century.

Yet, online groceries are back with a bang, riding the wave of an advanced internet ecosystem and the cumulative wisdom from billions of e-commerce transactions successfully conducted by not just online mega retailers like Amazon, but also traditional players like Walmart and Tesco.

Will customers give online groceries a second chance?

At least in the UK online retailers are optimistic.

Grocery 2.0

Though online grocery purchases are just 5 percent of the total, conservative grocery chains like Morrisons have announced that they want a byte of this action as well, having lagged behind click and mortar players like Tesco and online pure plays like Ocado.

Boston Consulting Group (BCG) predicts a 15 percent annual growth for Britain's online grocery business, part of a larger global wave that as per their predictions could see the market grow from $36 billion currently to $100 billion by 2018.

This new avatar of online groceries will still require some of the old obstacles to be overcome though, both in Britain and America. Danny Silverman, VP of eCommerce Strategy and Sales Support for Westport, CT-based ETailing Solutions, says, "Our research indicates that delivery fees--not product prices--are the number one barrier to adoption." Making a home delivery in densely packed regions could cost a grocer $6-15 but customers would be willing to only pay a third as a delivery charge.

One solution to this challenge is the increasing popularity of "click and collect.". Consumers select their groceries online, then pick up the merchandising at the store or facility. Stores like it because they are looking to leverage their physical presence as a means to compete with online grocers. For the shopper, it means more flexibility versus waiting for a delivery and the opportunity to run into the store for forgotten items.

There are other challenges as well. No matter what benefits online groceries trot out, a high percentage of customers will want to visit a physical store to pick out "fresh produce." The trick for the online grocers is to conserve effort and not try and convert everyone out there, but focus on the folks who rank convenience as a higher priority.

Therefore it becomes even more important that the delivery to a customer's home be handled with great competence. Silverman narrates an amusing vignette about American grocer Peapod's Skokie, IL distribution center, "Out there, they have a poster that says --Pack this order like it's for your mother."

Segment for Success

In line with their new found wisdom online grocers are also being far more selective in the customer segments that they are targeting, and not going for world domination from day one. The value proposition of online grocery tends to resonate most with the households who have the discretionary income to pay to have groceries delivered.

Logistics also forces smarter segmentation. Because of the logistical challenges associated with grocery delivery, it tends to be concentrated in urban areas--areas with high population density,. As a result New York City, Philadelphia, and San Francisco rank as some of the top markets for such companies.

Amazon--with its AmazonFresh brand that offers same or next day delivery -- has been expanding with deliberate care. It took six years to build up a solid service in Seattle before venturing into LA, and has now ventured into San Francisco as well. Players like Amazon will force a growing number of traditional supermarket operators to compete online as well and according to Silvermann, "This could become one of the driving forces behind the click & collect model."

Contrast this with Webvan's strategy when they wanted to do it all--provide a range and selection of a Whole Foods, the price of a Safeway, and the convenience of a Domino's.

Enabling Innovation

Helping innovation along are certain positive developments in the supporting ecosystem. Delivering groceries is a big cost and pain point so startups like Instacart are disrupting the traditional model. "Rather than create a delivery network of your own like Amazon you can leverage an existing courier network or crowdsourced shoppers who pick orders from local grocery stores," says Silverman.

On the customer side, the proliferation of high speed mobile internet and smartphones is making shopping for online groceries easier and efficient. Gregory Grudzinski, Director of Research and Analytics of ETailing Solutions illustrates this, " As a consumer I can continuously build a basket over time and request delivery only after their order size qualifies for free or discounted shipping. I can also track orders once placed and do a pick up en-route from work or elsewhere."

Over time, all these players have to be able to scale to achieve profitability and provide the venture capital firms that are backing many of the startups in this space with the 10x exits they crave.

As online grocer FreshDirect which serves mainly the New York area has shown by winning the taxpayers help, even politicians understand which side of the bread is buttered in the days to come.