The pure online food and drug companies learned a valuable lesson in 2001: that you need a buddy to survive in the real world.
A perfect example is Peapod. The online food company was bought by Ahold, a U.K.-based conglomerate that ranks as the second largest retailer in the world.
As Ken Cassar, senior analyst at Jupiter Media Metrix pointed out, other than Peapod, there are few pure-play online grocer left.
The ones that are left will struggle, he said, and he doesnt see any improvement coming for the market any time soon.
"Its an open question whether these companies will be able to profitably delivery groceries," Cassar said. "The costs are just too much to swallow."
It costs approximately $30 per delivery of groceries, according to Cassar, and customers have been unwilling to subsidize that cost. Plus, in America, going to the grocery store is not a terribly difficult thing to do.
The only business models that seem to have any chance for success are cases in which the online grocer partners with an offline market, that lets customers order online and pick up their groceries themselves, such as the Peapod/Ahold arrangement.
Online drug and health sites have faced many similar obstacles, especially finding a way to develop a profitable business without being bought out or at least partnering with a "brick-and-mortar" pharmacy.
Online druggist Drugstore.com has benefited enormously from partnerships with offline brands such as RiteAid and General Nutrition Centers.
Kal Raman, president and CEO of Drugstore.com, said partnerships like that arent just helpful, theyre crucial for any online retailer. "I think it is very essential, especially in the category were in: online pharmacy," Raman said. "But I see that as a difference for any online retailer to survive."
More recently, Drugstore.com chose to focus on specialty items: pet foods, bath supplies and womens sexuality products, all higher margin items. Drugstore.com also has cost-reducing and revenue-inducing plans that Raman said will bring the company to profitability by 2004.