DUTCH TREATMENT

Centralized distribution is at the heart of a turnaround strategy for Peapod Inc., a struggling Internet grocer that recently received an infusion of Dutch capital and supply-chain expertise. Royal Ahold, the $60 billion Netherlands-based grocery giant, has taken a 58take in Peapod and named Marc van Gelder president and chief executive. He was senior vice president of supply-chain management at Stop & Shop Supermarket Co., an Ahold subsidiary that is New England's largest supermarket chain.

The new CEO is turning things around with a centralized distribution strategy and new supply and service agreements with Ahold and its subsidiaries.The new approach is in place in all of Peapod's markets: Chicago; Washington, D.C.; Long Island, N.Y.; Southern Connecticut; and Boston. The heart of the strategy is to leverage the distribution and purchasing power of Ahold and its subsidiaries to help Peapod achieve its goal of reaching profitability by 2003. In keeping with the approach, Peapod has exited those markets where Ahold does not have a presence -- Texas; Columbus, Ohio; and San Francisco -- and has canceled a supply and sourcing relationship with food group Jewel-Osco in Chicago.

Instead of outside suppliers, Peapod purchases most of its goods from Ahold, which operates over 1,300 stores in the U.S. and has annual sales of around $22 billion. 'The cost of goods for Peapod are the same as Ahold's costs,' van Gelder said.

In the Chicago market, for example, Peapod gets dry goods and health and beauty aids from Tops Market, another Ahold subsidiary. In New York and New England, goods are purchased at cost from Stop & Shop. Peapod also has arrangements with local suppliers for baked goods and produce to ensure the freshest possible products.

When Peapod began operations in 1989, company employees picked goods directly from store shelves and sorted and packed them in separate areas of the supermarket. It was hardly a scalable model, and led to Peapod's departure from its Texas and Ohio markets, where the practice was still in place, according to Paula Wheeler, a company spokeswoman. 'We were still picking out of stores there,' she said. 'We exited those markets because we couldn't capitalize on Ahold's partnership.'

In the new centralized distribution system, Peapod operates 100,000-square-foot, free-standing warehouse fulfillment centers in Chicago and Gaithersburg, Md. In smaller markets, the company has established 'fast-pick' fulfillment centers of around 8,000 square feet that are adjacent to retail facilities of Ahold-owned grocery chains. At the fast-pick centers, dry goods are mingled with produce from the retail stores and then delivered. 'It is more efficient and scalable than picking in stores,' Wheeler said. 'We have more control over the product.'

Peapod's van Gelder said the new distribution model is powered by integrated warehouse management systems designed by McLane Group, a leading logistics services company for the food industry. The group's chairman, Drayton McLane Jr. -- who designed many of the systems used by Wal-Mart Stores Inc. -- is on Peapod's board.

The company has made other changes to increase efficiency, including a routing system that has increased the number of orders per trip in the Chicago area from 10 to 16. Drivers are equipped with cell phones, and will contact Peapod's customer care center if they face weather or traffic-related delays. The company then contacts the customer to make other arrangements.

Peapod implemented a tiered pricing structure de-signed to increase order sizes, van Gelder said. In Chicago, for example, orders over $100 are delivered free, while orders of $50 to $75 are assessed a $9.95 delivery charge. As a result, average order size is up to $125 in Chicago.

There are also incentives for customers to use less-popular delivery windows, such as during business hours on weekdays. For the first time, Peapod is offering an unattended delivery option, where goods packed in waterproof, insulated totes are left in a designated spot, van Gelder said. Peapod also is co-branding its delivery services with Stop & Shop in the New York and New England markets and with Giant Foods in the Washington area. That includes putting the names of the local chains on company delivery vans.

'The most effective way of marketing is through our stores,' van Gelder said. 'In Washington we market as Peapod by Giant, and in New England it is Peapod by Stop & Shop. The advantage is the trust in local brands.'

Ahold's purchasing power has already helped Peapod's margins. Van Gelder said gross margins for the first quarter of 2001 are expected to be in the 30% range, compared with 26 0.000000or the last quarter of 2000.

Van Gelder is bullish on Peapod's future. 'Look at the efficiency of our logistics models,' he said. 'We will be the winners in the industry shakeout.'

David A. Biederman covers logistics and regulatory aspects

of global trade that affect your bottom line. Please forward

questions, suggestions and concerns to the author at inexdb@crocker.com.

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