Perishability of Online Grocers*, The

Decision Sciences, May 2007 by Cattani, Kyle, Perdikaki, Olga, Marucheck, Ann

Third, our models distinguish the problems of competitive pricing of perishable products in a grocery setting from the management of perishable assets in revenue management, as used by the airlines, hotels, and a number of other service industries (Talluri & van Ryzin, 2004). One important difference is that the physical quality (or freshness) of the perishable food product continuously deteriorates over time while the physical quality of the perishable asset does not deteriorate. However, in both cases, the perceived economic value of the perishable asset may change as the expiration date approaches or as the available inventory decreases (Chun, 2003). A second difference is that revenue management involves dynamic adjustment of prices over the sales period, while grocery industry practices dictate that a stable selling price is determined for the product offered for sale. The selling price is advertised at the time of the customer's purchasing decision and may not be negotiated.

This article will proceed as follows. In the next section, we discuss existing literature related to the online grocery industry. In subsequent sections, we present a model that determines prices to optimize the profitability of an online grocer under a duopolistic setting. We show how optimal pricing decisions are related to the ratio of the supply chain lengths of the two competitors. We then consider extensions that account for capacity constraints and that consider the supply chain length as a decision variable (i.e., determined endogenously). We discuss how relative cost structures determine the optimal supply chain length, pricing, and profitability for different levels of perishability. Finally, we present limitations and directions for future research and provide some concluding insights.

LITERATURE REVIEW

Although a number of papers addressing e-commerce and electronic businessto-consumer businesses have been published in recent years (Johnson & Whang, 2002; Thirumalai & Sinha, 2005; Randall, Netessine, & Rudi, 2006), we focus our review on articles directly related to the online grocery industry. As the distinctive challenges of online grocers have emerged only recently as a field of research, much of the existing work is empirical. Boyer, Frohlich, and Huit (2005) synthesized much of the early descriptive work with a set of case studies that identified the linkages among retail channel choice, supply chain structure, and perceived customer satisfaction as key elements of the different business models found in the online grocery industry. Their work serves as a basis for our study by illustrating the range of strategic choices available to online grocers. Our model advances these works from the descriptive to the analytical by representing different strategic choices through a range of parametric settings, thus broadening the scope of business models, which can be analyzed beyond real-life examples.

This early work also set the stage for additional empirical work that has attempted to link strategic choices with performance. Heim and Sinha (2001, 2005) were among the first to recognize the inherent trade-offs in online business models and statistically link them with performance variables associated with both customer satisfaction and loyalty, measured as the likelihood of a repeat purchase. Boyer and Huit (2005a) conducted survey-based work in the online grocery industry and found support for positive statistical relationships between intention to repurchase and customer perceptions of product quality, product freshness, ease of interaction with the Web site, and time savings associated with the online transaction. Further work by Boyer and Huit (2005b) showed that these results varied across four different online grocery firms that differed with respect to their distribution strategies and delivery services. These empirical results provide support for our analytical research by establishing that product quality and freshness is an important concern for the online customer and may impact profitability.