The Grocery Club, a business model

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THE GROCERY CLUBEconomics and Design | Barnes Godrej Massing Rice Smith | Spring 2012



From Fast Food to Good FoodWe can start to see a shift in consumer preference fromfast and cheap food to wholesome, quality whole foods.Customers are looking for more ways to incorporate

healthy living, including cooking and preparing meals athome.

Shifts in Consumer Preferences

2 | The Grocery Club | May 3 2012



Cooking and Preparing Mealsat Home is Difficult

The Problem

Takes time Requiresplanning

Requiresknowledge and

skill

Involvesmultiple steps,

includingclean up




For grocery customers who are dissatisfied withthe inconvenience of shopping, scheduling, andpreparing of meals...

...our solution is a weekly subscription based online

meal planning service that delivers pre-measured,ready-to-cook meal ingredients right to their door.

Unlike current grocery order services, our servicelets customers focus on cooking and feasting,

not on the planning and ingredient preparation.

Value Proposition




Main Components

The Offering


Subscription

based pricing ofgroceries

Online meal

planning

Delivery of raw

ingredients

Post shopping

support



How it Works

1.) Establish your subscription service

Number of people in household Number of meals desired per week Preferences

Preferred meals

Dietary Restrictions

Dietary GoalsLikes/Dislikes

Delivery Date




How it Works

1.) Establish your subscription service

1 2 3 4+

78 156 234 312$

12meals per week




How it Works

2.) Plan your meals for the week


Grocery Club sendsyou an email 3days prior to yourdelivery

Suggested Meals and Meal Plan for Week

Make edits to meals, ingredients, prepchoices

Add additional groceries and dry goodsoutside of subscription



How it Works

3.) Review, check out, and print


Print Meal Plan for the Week Order locked in at noon day prior



How it Works

4.) Groceries are hand-selected & picked first




How it Works

5.) Groceries are delivered to TGC Member




How it Works

6.) TGC Member is ready to prepare a meal


Ingredients prepped, sorted, andlabeled by meal and day

Grocery Club Chef Apprentice Appwith cooking demos and tutorials



How it Works

7.) Clean up is a breeze


Recyclable containers Less prep equals less clean-up



How it Works

8.) Premium services create additional value


Monthly visit from personalchef or nutritionist

Additional revenue from addon-services and groceries



The Grocery Club

Business Model Canvas

PARTNERS

Food Wholesalers andDistributors

Other cooking relatedpartners (chefs, cookbookpublishers, etc)

Content creation vendors

for web platform (cloud-based)

Content provider for aRecipe Catalog

KEY RESOURCES

Delivery & Logistics

Ingredient Preparation

Grocery Services

Scheduling and PlanningWeb-based Software

VALUE PROPOSITION

Grocery delivery service

Automatic weeklyreplenishment ofgroceries based onsubscription service

Portion control, dietaryrestrictions and foodsubstitutions for morehealthful meals

Weekly meal scheduling

Track family preferencesfor meals over time

Hand-selected producefor Grocery ClubMembers and producesatisfaction guarantee

CUSTOMER SEGMENTS

Grocery shoppingcustomers who...

care about eatinghealthy

want to minimize theamount of time spentpreparing a meal

often eat out

don’t have the skills andknowledge required toprepare healthy meals athome

KEY ACTIVITES


Delivery Drivers

Food Preparation

Web-based applicationrelated activities

COSTS

Labor for food preparation and delivery

Rent for Preparation space

Fleet Leasing for Delivery

Media Content development costs

Software development and IT support

CUSTOMERRELATIONSHIPS

Self-service via onlineportal

Personal service viahome delivery and freshcheck guarantee

CHANNELS

Online portal

Third party partner sitereferrals

Delivery/distributionsystem

REVENUE STREAMS

Subscription Fees

Additional Grocery Sales

Advertising

Delivery Fees

Partner revenue for associated services




KEY RESOURCES



Grocery Services

Scheduling andPlanning Web-

based Software

VALUE PROPOSITION



Portion control, dietary

restrictions and foodsubstitutions for morehealthful meals




CUSTOMER SEGMENTS



want to minimize theamount of time spent

preparing a meal

often eat out


KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS

Online portal



REVENUE STREAMS

Subscription Fees


Advertising

Delivery Fees


The online portal supports GC customer experience

Relationships between Variables

PARTNERS



Content creationvendors for webplatform (cloud-based)

Content providerfor a RecipeCatalog

Provides content for




KEY RESOURCES



Grocery Services

Scheduling andPlanning Web-

based Software

VALUE PROPOSITION





Weekly mealscheduling

Track familypreferences formeals over time


CUSTOMER SEGMENTS




preparing a meal

often eat out


KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS

Online portal



REVENUE STREAMS

Subscription Fees


Advertising

Delivery Fees




PARTNERS






Which supports




KEY RESOURCES



Grocery Services


VALUE PROPOSITION





Weekly mealscheduling

Track familypreferences formeals over time


CUSTOMER SEGMENTS




preparing a meal

often eat out


KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS

Online portalThird party partner sitereferrals


REVENUE STREAMS

Subscription Fees


Advertising

Delivery Fees




PARTNERS






which customers interact through




KEY RESOURCES



Grocery Services


VALUE PROPOSITION








CUSTOMER SEGMENTS




preparing a meal

often eat out


KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS



REVENUE STREAMS

Subscription Fees


AdvertisingDelivery Fees



PARTNERS






which is supported through




KEY RESOURCES



Grocery Services


VALUE PROPOSITION








CUSTOMER SEGMENTS




preparing a meal

often eat out


KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS

Online portal



REVENUE STREAMS

Subscription Fees


AdvertisingDelivery Fees




PARTNERS






pays for



KEY RESOURCES



Grocery Services


VALUE PROPOSITION


Automatic weeklyreplenishment ofgroceries basedon subscriptionservice

Portioncontrol, dietaryrestrictions andfood substitutionsfor more healthfulmeals

Weekly meal schedulingTrack family preferencesfor meals over time


CUSTOMER SEGMENTS




preparing a meal

often eat out


KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS



REVENUE STREAMS

Subscription Fees


Advertising

Delivery Fees





PARTNERS






drives



KEY RESOURCES

Delivery &Logistics

IngredientPreparation

Grocery Services

VALUE PROPOSITION



Portion control,dietary restrictionsand foodsubstitutions formore healthfulmealsWeekly meal scheduling



CUSTOMER SEGMENTS




preparing a meal

often eat out


KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS

Online portal



REVENUE STREAMS

Subscription Fees


Advertising

Delivery Fees





PARTNERS

Food Wholesalersand DistributorsOther cooking relatedpartners (chefs, cookbookpublishers, etc)

Content creation vendorsfor web platform (cloud-based)


delivers

&



KEY RESOURCES



Grocery Services


VALUE PROPOSITION



Portion control,dietary restrictionsand foodsubstitutions formore healthfulmealsWeekly meal scheduling



CUSTOMER SEGMENTS



want to minimize the

amount of time spentpreparing a meal

often eat out

don’t have the skillsand knowledgerequired to preparehealthy meals athome

KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS

Online portal



REVENUE STREAMS

Subscription Fees


Advertising

Delivery Fees





PARTNERS






meets the unmet needs of



KEY RESOURCES



Grocery Services


VALUE PROPOSITION








CUSTOMER SEGMENTS



want to minimize the

amount of time spentpreparing a meal

often eat out

don’t have the skillsand knowledgerequired to preparehealthy meals athome

KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS









CHANNELS

Online portal



REVENUE STREAMS

Subscription FeesAdditional Grocery Sales

Advertising

Delivery Fees





PARTNERS






generate revenue by



KEY RESOURCES



Grocery Services


VALUE PROPOSITION








CUSTOMER SEGMENTS




preparing a meal

often eat out


KEY ACTIVITES


Delivery Drivers

Food Preparation


COSTS



Fleet Leasing for DeliveryMedia Content development costs





CHANNELS

Online portal



REVENUE STREAMS

Subscription FeesAdditional Grocery Sales

Advertising

Delivery Fees





PARTNERS






which pays for



There are many types ofcustomers who value cookinghealthy meals at home

Customer Segmentations

M o s t P r i c e S e n s i t i v e

L e a s t P r i c e S e n s i t i v

e

Willing to Spend Most Time Preparing and CookingWilling to Spend Least Time Preparing and Cooking

$

Head of Household

Hybrid Shopper

Non-Grocery Shopper

Occasion Cooker

Weekend Cooker

Curious Cooker

True Foodies

Integrated World

Food Embracer

On a Budget

Recent Grad

Student

Reformed Traditionals

Extreme Couponers

EZ DOES IT

NEWBIES

MY FOOD IS LOVE

COOKING FOR SPORT




The Grocery Club will appealto customers who valueconvenience above all

Targeted Customer Segmentation

M o s t P r i c e S e n s i t i v e

L e a s t P r i c e S e n s i t i v

e

Willing to Spend Most Time Preparing and CookingWilling to Spend Least Time Preparing and Cooking

$

Head of Household

Hybrid Shopper

Non-Grocery Shopper

Occasion CookerCurious Cooker

True Foodies

Integrated World

Food Embracer

On a Budget

Recent Grad

Student

Reformed Traditionals

Extreme Couponers

EZ DOES IT

Non-Grocery ShopperPrice insensitive, willing to spendmore for convenience, no time forcooking, frequently orders out

Head of HouseholdManages families diet, pre-plansshopping trips, relatively priceinsensitive, has less time for mealprep/cook

Occasion CookerMay not have extensive knowledge

about cooking, doesn’t cook onregularly but will for special occasions

Hybrid ShopperShops at multiple grocery and homegood retailers for specific purposes,has relatively more knowledge aboutpricing & ingredients, brand conscious

Curious CookerWants to cook but doesn’t have theknowledge or training to be confidentin cooking, interested in cooking avariety of food, willing to try exoticrecipes, willing to spend more on food

if they know it will be “worth it,” likesdining out




Online grocery sales projected to increase

Market Share

$589 BUS Grocery Sales 2010

1.4%Online Grocery Sales

98.6%Brick & MortarGrocery Sales

50%PeaPod

Market

Share


$451,000,000PeaPod Revenue 2010

375,000Customers



The Grocery Club positions itspricing strategy between retailgrocery shopping and preparedmeals from restaurants

Profit Model


REVENUE MODEL

Weekly Subscription pricing of6-21 meals/week.

RESOURCE VELOCITY

High inventory turns possiblesince stock is limited basedon limited number of meals.

Menu suggestions based onseasonal special pricing.

TARGET UNIT MARGIN

Conservative pricing strategypositions unit margins at 30%

COST STRUCTURE

High fixed costs->Subscription pricing supportspushing volume

ProfitModel




Conservative Pricing Strategy

Costs

YEAR 1

Development

YEAR 2

Rollout

YEAR 3

Growth




Conservative Pricing Strategy

Assumptions

INITIAL ASSUMPTIONS

Conservative pricing considering WTP in this space

Meal costs are an average, so we have margin to play with incase they are higher than estimates once we rollout

Rollout in 2 sites in Y2, then expand to 4 in Y3 (Peapod has 24total sites)

IMPLEMENTATION

Y1 // Develop infrastructure for service (staffing, IT, WMS,website integration, sculling line build outAdoption rate at 0% due to development

Y2 // Rollout into 2 marketsAdoption rate estimated at 1.5%

Y3 // Rollout into additional 2 marketsAdoption rate estimated at 2.0%

KEY PERFORMANCE INDICATORS

Number of subscribers

Customer retention for subscription service - projectionsassume that subscribers will have paid for the whole year

Number of meals served

BREAKEVEN POINT

Total meals served at 259,487 to breakeven at low estimate (416subscribers @ 12 meals/week for 52 weeks)

ESTIMATED MEAL COST

$5 Average meal cost (per person)2 Number of people (per meal)

12 Number of meals per week$120 Total avg food cost per week

PRICE

1S Subscription Number 30% Markup percentage$36 Margin

$156 Price per week

YEAR 1

0 Estimated number of adopters$0 Estimated revenue per week52 number of weeks

YEAR 2

469 Estimated number of adopters$73,125.00 Estimated revenue per week

52 number of weeks

$877,500 Profit

YEAR 3

1,250 Estimated number of adopters$195,000 Estimated revenue per week

num er o wee s



THE GROCERY CLUB will realize profits

within 3 years of start

Cash Curve*


YEAR 1 YEAR 2 YEAR 3

IDEA

GENERATION

COMMERCIAL-

IZATION

REALIZATION

Speed tomarket

Time tovolume

Supportcosts

Start-up costs

-1,323,000

6,720,000

LAUNCH

*For a household of 2 people at $156 weekly subscription for 12 meals per week





IDEA

GENERATION

COMMERCIAL-

IZATION

REALIZATION

Speed tomarket

Time tovolume

Supportcosts

Start-up costs

-1,323,000

6,720,000

LAUNCH


YEAR 1

Market study inWashington DCand Chicago



Cash Curve*





IDEA

GENERATION

COMMERCIAL-

IZATION

REALIZATION

Speed tomarket

Time tovolume

Supportcosts

Start-up costs

-1,323,000

6,720,000

LAUNCH


YEAR 2

Pilot in twocities with onewarehouse in each



Cash Curve*





IDEA

GENERATION

COMMERCIAL-

IZATION

REALIZATION

Speed tomarket

Time tovolume

Supportcosts

Start-up costs

-1,323,000

6,720,000

LAUNCH


YEAR 3

With successfulpilot, roll out twomore cities

Would not see anyequipment costs

and would be mostprofitable



Cash Curve*




How might we...

Maximizing Efficiency

INCREASE SPEED TO MARKET

Identify which cities to do the pilot, develop webplatform and train employees within first year

12 month market study in Chicago and DC

Strategic partnerships and marketing campaignsto increase adoption rates

REDUCE START UP COSTS

Use existing vans and warehouse space toleverage synergies with Peapod’s existing

infrastructureEasily replicated and scaled warehouses

New web platform utilizing current IT infrastructure

REDUCE TIME TO VOLUME

Scale-up to 2 additional cities across the UnitedStates in Year 2

Standardization and delivery of consistently high-quality service and goods

REDUCE SUPPORT COSTS

IT and Website integration

Sculling line build out (existing warehousesChicago and DC)

Easily-maintained, smaller warehouses



THANKS,

Questions?



APPENDIX

APPENDIX



Comparative Costs for other Meals - Willingness to Pay

Meal Type Cost per Person # in Family Total Cost Cost for 12

MealsFrozen $4 2 $8 $96

Fast Food $5.51 2 $11.02 $132.24

Take-Out Food (ex. Chinese food) $8 2 $16.00 $192

Grocery Club $10.41 2 $20.82 $249.84

Fast Casual (ex. Corner Bakery) $11.5 2 $23.00 $276

Casual Dining $15 2 $30.00 $360

Sources:

http://www.kellogg.northwestern.edu/faculty/matsa/htm/Reynolds-2009.pdf

http://en.wikipedia.org/wiki/Fast_casual_restaurant

http://voices.yahoo.com/best-frozen-entrees-best-tasting-best-prices-3836352.html

Typical Weekly Grocery Bills by Generation

Millenials $69.40Generation X $107.10Boomers $106.40Matures $89.60

Source:

Conumer Reports, “Best & worst supermarkets,” May 2012, pp16-23

Top Reasons why shoppers leave their grocery stores

43% ISO Lower prices25% Poor Selection, Long Lines, Poor Quality17% Employee Rudeness14% Crowds

Source:

Conumer Reports, “Best & worst supermarkets,” May 2012, pp16-23

APPENDIX



YEAR 1 - DEVELOPMENT Low Estimate ($156/week)

Mid-Range Estimate ($200/week)

High Estimate ($250/week)

Total Revenue $0 $0

Total Costs $1.3M $1.3M $1.3M

Net Proft -$1.3M -$1.3M -$1.3M

Cumulative Cash Flow -$1.3M -$1.3M -$1.3M

YEAR 2 - ROLLOUT1.5% adoption rate in 2 markets469 subscribers

Total Revenue $3.8M $4.875M $6.0M


Net Proft $1.7M $2.7M $3,8MCumulative Cash Flow $386K $1.3M $2.5M

YEAR 3 - RAMP-UP2.0% adoption rate in 4 markets1,250 subscribers

Total Revenue $10.1M $13M $16.3M


Net Proft $6.7M $9.3M $12.2M

Cumulative Cash Flow $7.1M $10.6M $14.7M

Finanical Projections for Multiple Pricing Scenarios2 people, 12 meals/week



MID-RANGE ESTIMATE - YEAR 1(based on higher subscription price)

375,000 current peapod annual customers

0.00% (typical early adopter rate)

0 adopters

0 meals per week

0 weeks per year

0 total meals per year$0 prepared meal revenue/yr

Equipment

$15,000cost est per piece equip, need peeler, scrubber,dishwasher,

7 pieces of equip on avg$105,000 total equip costs per processing site

2 sites$210,000 total equip costs across corporate

50,000 scullery sq ft est.$5 $/sq ft/yr

$483,000 total additional rentWebsite Dev2 developers at $150k for 6 months

$150,000 salary plus benefits1 years

$300,000 total dev costsLabor

$30,000.00 labor per year p/p

3. workers per site

$90,000.00 yearly labor costs per site

2 sites

$180,000 total labor costs across corporateMarketing10% percentage of sales (includes packaging)

$0 total marketing cost across corporateManagement & Customer Service

2 additional staff $75,000 yearly salary

$150,000 total additional labor costsTotal Costs

$1,323,000 fixed + variable across corporateNet Profit

-$1,323,000

Cumulative Cash Flow-$1,323,000

YEAR 1 -- DEVELOPMENTRevenue

Costs

EST MEAL COST



PRICE

2H Subscription Number 67% Markup percentage$80 Margin

$200 Price per week

YEAR 1

0 Estimated number of adopters

$0 Estimated revenue per week52 number of weeks

YEAR 2

469 Estimated number of adopters$93,750 Estimated revenue per week

52 number of weeks$1,950,000 Profit

YEAR 3

1,250 Estimated number of adopters

$250,000 Estimated revenue per week52 number of weeks



MID-RANGE ESTIMATE - YEAR 2Revenue

Costs


31,250 estimated market size in pilot (2 warehouses)


469 adopters

12 meals per week

52 weeks per year

292,500 total meals per year

$4,875,000 prepared meal revenue/yr

Equipment





$483,000 total additional rent

Website Dev1 developers at $150k for 6 months




7. workers per site


2 sites$420,000 total labor costs across corporate

Marketing10% percentage of sales (includes packaging)

$487,500 total marketing cost across corporateManagement & Customer Service




$2,674,500

Cumulative Cash Flow$1,351,500

YEAR 2 -- ROLLOUT & PILOT



MID-RANGE ESTIMATE - YEAR 3Revenue

Costs




1,250 adopters

12 meals per week

52 weeks per year

780,000 total meals per year

$13,000,000 prepared meal revenue/yr

Equipment

15000cost est per piece equip, need peeler, scrubber,dishwasher,

7 pieces of equip on avg105000 total equip costs per processing site

4 sites$0 total equip costs across corporate


$966,000 total additional rent

Website1 developers at $150k for 6 months




7. workers per site




$1,300,000 total marketing cost across corporateManagement & Customer Service



$3,706,000 fixed + varialbe across corporateNet Profit

$9,294,000


YEAR 3 -- CONTINUED ADOPTION



HIGH-RANGE ESTIMATE - YEAR 1(based on higher subscription price)



0 adopters

0 meals per week

0 weeks per year

0 total meals per year$0 prepared meal revenue/yr

Equipment





$483,000 total additional rentWebsite Dev2 developers at $150k




3. workers per site


2 sites

$180,000 total labor costs across corporateMarketing10% percentage of sales (includes packaging)

$0 total marketing cost across corporateManagement & Customer Service




-$1,323,000

Cumulative Cash Flow-$1,323,000

YEAR 1 -- DEVELOPMENTRevenue

Costs

EST MEAL COST



PRICE

2H Subscription Number 108% Markup percentage$130 Margin$250 Price per week

YEAR 1

0 Estimated number of adopters$0 Estimated revenue per week

52 number of weeks

YEAR 2

469 Estimated number of adopters$117,188 Estimated revenue per week

52 number of weeks$3,168,750 Profit

YEAR 3

1,250 Estimated number of adopters$312,500 Estimated revenue per week

52 number of weeks



HIGH-RANGE ESTIMATE - YEAR 2

Revenue

Costs




469 adopters

12 meals per week

52 weeks per year

292,500 total meals per year$6,093,750 prepared meal revenue/yr

Equipment





$483,000 total additional rentWebsite Dev

1 developers at $150k$150,000 salary plus benefits

1 years$150,000 total dev costs

Labor


7. workers per site




$609,375 total marketing cost across corporateManagement & Customer Service




$3,771,375


YEAR 2 -- ROLLOUT & PILOT



HIGH-RANGE ESTIMATE - YEAR 3

Revenue

Costs




1,250 adopters

12 meals per week

52 weeks per year

780,000 total meals per year$16,250,000 prepared meal revenue/yr

Equipment

15000cost est per piece equip, need peeler, scrubber,dishwasher,

7 pieces of equip on avg105000 total equip costs per processing site

4 sites$0 total equip costs across corporate


$966,000 total additional rentWebsite1 developers at $150k




7. workers per site




$1,625,000 total marketing cost across corporateManagement & Customer Service



$4,031,000 fixed + varialbe across corporateNet Profit

$12,219,000


YEAR 3 -- CONTINUED ADOPTION

P d I



BUSINESS MODEL CANVASPeapod Integrator

Local restaurants

Local Stores

Farmers markets andproduce hubs

Assembly and delivery

of products from multiplesuppliers.

Managing relationships withlocal stores, restaurants andmarkets.

Managing the web interfacefor suppliers as well ascustomers.

Delivery vans

On-the-ground sales force

Temporary storage warehouses

Online platform that integratesmultiple suppliers

Infrastructure of delivery vans and warehouses

Online store management

Maintainance of database of suppliers and customers

Advertising from restaurants, stores, markets

Usage fees

Product placement from restaurant recipes and other kitchenproduct suppliers.

Provides the experience of enjoying

meals at home, without beinglimited by any single serviceprovider. For the person who hasfavorite items at many differentstores, markets and restaurantsand wants to be able to assemblea customized shopping basket thatgets delivered to their doorstep.

Seamless integration

- convenience orientedcustomers.

Self service and automatedservice

Online platform

Delivery vans and agents

Convenience

obsessed “hybrid” eaters.

Has favorite items at manydifferent stores, markets andrestaurants and wants to beable to assemble her ownshopping basket.

Will create what works forthem from multiple vendors.Knows what they want fromwhere.



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The Grocery Club, a business model