Tech
An Online Grocer For Web 2.0. Just Don’t Call It Webvan 2.0.
Relay Foods: Tempting isn't it?
Of Web 1.0’s most memorable implosions, Webvan still takes the cake. The online grocer raised $375 million in an IPO, descended upon eight major U.S. cities, peddled a 26-city expansion plan and somehow warranted a $1.2 billion market cap—all with the burn rate of a ticking time bomb. Eighteen surreal months later, the company closed down shop, laid off 2,000 and had nothing to show for itself except 30,000 Webvan-branded cup holders at San Francisco’s Giant’s ballpark.
The key takeaway—for venture capitalists, grocery chains and well, everyone else—was that carting small-ticket, low-margin items to people’s front doors from billion dollar warehouses did not a sound business model make. Electrical-engineer-turned-entrepreneur Zach Buckner figured there had to be a better way.
“You could say I’m attracted to big problems with big payouts,” Buckner admits.
While working as a vice president of technology at Elder Research, an engineering consultancy, Buckner began methodically studying the meteoric rise and fantastic fall of Web 1.0 online grocers. He spent a year almost entirely on planes and in meetings with first generation online grocery veterans—Webvan, FreshDirect, Kozmo, HomeRuns.com—trying to understand how things got so rotten (sorry, couldn’t resist), so fast.
Of the players he encountered, two stood out. The first was Tim Laseter, a Booz Allen consultant who, in 2000, perfectly predicted Webvan and its ilk would fail miserably. The second was a deep-pocketed investor who profited handsomely by shortselling Webvan in its heyday. Buckner signed the former on as mentor and the latter as angel investor in his new startup.
In June 2007, Buckner founded Relay Foods. Where Webvan and others spent millions on sophisticated software, Buckner designed Relay’s logistical software himself. Determined to avoid the costly fulfillment centers and fuel costs of his predecessors, his startup sources its groceries from a select group of local mom-and-pop outfits—think artisan bread and cheese makers, family farms, organic butchers— and delivers their products to a few strategically placed drive-thru pick up locations like health clubs, hospitals, corporate parking lots and commuter-friendly stops where customers can easily drive through and pick up their groceries in 30 seconds. Besides the obvious overhead costs—employees, delivery trucks, fuel—the model is cheap. Relay makes a profit by purchasing suppliers’ goods at wholesale prices and selling them at retail. In return, its grocers gain another distribution channel, a bigger geographic footprint and greater visibility than they would, say, at the farmer’s market.
“Ninety nine percent of the business we bring in is new,” says Buckner. “We’ve never gone after a vendor that has turned us down.”
Buckner thinks Relay can capitalize on two megatrends. The first is the growing “locavore” movement, whose adherents insist on eating food grown close to home. Buckner purposely launched Relay in the locavore capital of the world: Charlottesville, Virginia, where the philosopher king and queen of the movement, Michael Pollan and Barbara Kingsolver, have devoted much time. Pollan, author of the locavore’s bible, The Omnivore’s Dilemma, dedicated much of his book to Polyface Farm, a small, organic farm just outside Charlottesville, Virginia. Kingsolver’s best-selling memoir Animal, Vegetable, Miracle detailed her family’s yearlong quest to eat only locally produced food from rural Virginia. In other words, Relay picked a market where customers were bound to root for its success.
The startup also plans to profit off that larger trend: e-commerce spending. U.S. e-commerce spending reached $38 billion in the last quarter, a 12% jump from a year ago, making for the sixth consecutive quarter of positive year-over-year growth, according to ComScore. But less than 1% of total U.S. groceries sales happen online, despite the fact groceries accounts for one of the largest retail categories offline.
“It’s the promise land,” says Relay Foods advisor Tim Laseter. “That’s why Webvan and others pursued it. In that sense, they were ahead of the curve. But they failed when they tried to rapidly expand a flawed business model.”
The first generation online grocery business became a land grab. Inexperienced management teams were soon overseeing complex delivery operations in dozens of major U.S. cities. So determined were they to build market share, they ignored basics. They refused to require a delivery charge or set a minimum purchase amount even when those policies began bleeding profits.
By delivering to convenient drop off locations and focusing on local, Relay believes it can avoid the mistakes of first generation online grocers and carve out its own niche in e-commerce.
“Amazon is doing a remarkable job at selling the long tail of retail, but that model doesn’t make sense for a lot of the stuff we buy,” says Buckner. “You can’t afford to ship soup or asparagus on a 757 airplane. So that is where we’re focused.”
Amazon actually experimented with its own online delivery service in Seattle last year, made plans for a national roll-out, and then promptly shut the whole operation down last March.
Relay has been operating for four years—twice as long as Webvan—and largely spent that time trying to perfect its operation in two markets: Charlottesville and more recently, in Richmond, Virginia. Its expansion plans are relatively modest. Buckner says Relay plans to move slowly into nearby mid-Atlantic states. He won’t disclose details of the startup’s financial performance but says Relay has grown an average of 20% each month for the past 33 months.
“We set out with a very different mission constrained on the idea that this has to make money,” says Buckner. “If you can imagine a convenience scale of zero being plowing the wheat yourself and ten being the Webvan model of driving groceries to your door and putting them in your refrigerator. We decided we weren’t going to be a ten. We were going to be an eight— but a profitable eight.”
Buckner readily admits there are scary logistics problems in the internet delivery business: “I don’t want people thinking that by following this recipe, they can do this themselves. We’ve built out specialized systems for everything—how to keep cold things cold, how to alert vendors to packing lists in the middle of the night– the backend is literally my life’s technical investment.”
There is also that nagging question of whether suburbanites with easy access to cars will really forego their local super market to shop their cheese gourmand and local baker online.
“We’re finding this works anywhere where customers are tired of driving to the Orwellian big box stores only to depart 45 minutes later. Or for anybody who wants to buy bread baked by a local baker, instead of frozen at a factory in South Bend Indiana and heated up later.”
Relay has already managed one feat: to make believers out of recalcitrant angel investors and VCs who for years treated the online grocery business as radioactive. Buckner won’t disclose how much Relay has raised, but SEC filings show the startup has raised nearly $3 million from Battery Ventures and angel investors—including the mysterious Webvan shortseller whose name Buckner would not disclose. He would only characterize him as a “super angel” investor with “close ties to a major grocery chain.” Ron Burkle? Show thyself!
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What an intriguing article. As a suburbanite with easy access to my car, I would *certainly* forego my local super market & big box store (!) for my local cheese gourmand and baker! Anything to avoid a trip into the grocery store! For our family of 5 it takes way longer than 45 minutes to shop… try 2 hours!
Thanks for the comment clflynn. I hope Relay comes to your neighborhood soon!
In response to another comment. See in context »I’m a Charlottesville resident, and we’ve been using Relay Foods to get our groceries for a while now. In addition to the convenience of not having to go to the actual grocery store very often, it also gives us access to all of the tiny local shops we love – bakery, chocolatier, homemade pasta shop, numerous farms – without having to drive our car to 5 or 6 different stores to get it all. The convenience factor – and the support for local business and local food – more than makes up for the fact that it’s a little bit more expensive. The items aren’t marked up – they’re at solid retail price – but you can’t use coupons or get store reward card discounts or items on sale (plus local or organic items are sometimes a wee bit more expensive anyway). The convenience of grocery shopping in my pajamas and picking up my order in 30 seconds, right by my house, on my way home from work makes up for the price difference, though.
@jenalluisi So great to hear from a Relay enthusiast. Part of the business proposition is obviously to support local business and foods, so it’s especially valuable to hear from a local. You definitely make it sound convenient!
In response to another comment. See in context »I’m also a Charlottesvillian who jumped on the Relay van (metaphorically)a while back. How amazing to plan a dinner (Relay even offers recipes with ingredients listed for ordering), then stop in the parking lot next to my office on my way home! …and, if you forget something, no need to run back to the store, simply sign on and add it to your order. Relay, we love you!
We are in Richmond and have been using Relay Foods for a while. Excellent service and very accomodating in case of problems with the products.
Good access to fresh, local fare picked up at one location!
I honestly cannot say enough what a game-changer Relay Foods has been for my husband and I. As relatively new Charlottesville residents, we desired to support the local farms and other suppliers – something that was hard to do in our previous location of Atlanta. However, eating locally can unfortunately require a lot of time and research. Relay has taken care of all of that for us. We’re now able to be consistent and intentional about eating locally without the inconvenience that was previously associated. Also, we haven’t found our grocery bill to be that much higher. We are spending more money on certain items, but because of the variety of vendors, we’re able to choose versions of some items that are less expensive than we could find in our grocery store. Seriously – it’s one of our favorite things about this city, and have been telling as many people as we can to jump on the bandwagon.
Among Relay Foods many strengths, its website makes shopping – the act of selecting what you want – so easy. The site remembers your previous purchases and you can bookmark favorite items. Not only do you not have to walk through an entire store to find the milk hidden in the back corner, Relay helps you shop quickly even by e-commerce standards. I particularly like that Relay offers a weekly email with recipes to help explore local, in-season produce. Eating truly fresh food is really luxurious compared to making do with supermarkets’ long-haul offerings. I feel extremely lucky to have access to Relay, and I love driving right past supermarkets’ snarled parking lots.
I am a customer of Relay, and it’s not only convenient for all the aforementioned reasons, but also, it’s like having access to many farmers markets throughout the region! Most people frequent only one FM, so this really opens up your available resources. Another great aspect is that they have puveyors that are international mom & pop type markets, and it’s so much easier to use Relay than to drive all over the place getting your few items at these places. Thanks Relay!
Thank you so much for the feedback everyone. It’s so wonderful to hear each of your personal experiences with the business model. Now, @Zach Buckner, when does Relay plan to expand to San Francisco?
In response to another comment. See in context »I just got my first Relay order on Tuesday. It was amazing. I’ve just had foot surgery and can’t drive yet, so they delivered my groceries to my door. They were so nice, and it was so simple, and everything was delivered just perfectly. The pick up locations are so convenient throughout the city, that I will definitely be ordering from them again once I can drive. A great concept that is so well run, thank you!!! And great story about them!
I live in Richmond, VA and Relay Foods was also a “game changer” for our family. I’m a busy working mother of two and it saves me several hours per week…that alone is priceless. Not to mention, the great local options and friendly staff. I can’t say enough good things.
I’m also impressed with their business model and enjoyed the article. Thanks!
Another Retail Relay user here – just picked up my order today. They are great! It was tough initially to give up the store sales, coupons & member benefits. But with a 2 year old, it’s usually worth it to order online and just pick up on the way home from daycare. They have been continually expanding the offerings, so I enjoy seeing what’s new. And as folks mentioned, not having to drive to several different stores for specific items is a huge timesaver.