In 1997, while working for a Toronto-based digital marketing agency, Stephen Tallevi met a local entrepreneur keen to launch an e-commerce site on the new-fangled internet. One meeting led to many, and Grocery Gateway delivery service was born.

“Back then it was easy,” says Tallevi, now general manager. “You built something, and before you knew it you had a live demo and interest from investors. In the first round, we got just under $35 million in venture capital and went for the big model: the thoroughly automated fulfillment center, lots of vehicles and strong branding,” he says.

That is, until the dot-com bubble burst in 2000, and investors’ patience began wearing thin. Grocery Gateway was saved by its partner, family-run Longo’s supermarkets, which bought the online service in 2004 and immediately sold off the trucks and fulfillment center. Yet it remains the largest online grocery in Canada, posting double-digit growth most years, Tallevi says.

Delivery's modern makeoverMany have tried and failed — California’s Webvan remains the most spectacular flame-out — to bring a welcome service to time-starved consumers and capture an online slice of the U.S. grocery market, worth $589 billion in 2010. Of $8 billion spent on online shopping in the U.S. that year, groceries represented just 1.4%, compared to 3.4% in the United Kingdom, the largest market for online delivery.

“Grocery delivery is tough,” says William Orkin, founder and president of Minneapolis-based Gopher Grocery, which launched in 2006 in the Twin Cities and has seen revenues rise from $64,000 to about $1.5 million in 2012.

“You’re taking a normal supermarket business with low-margin groceries, and you’re adding a service to it,” Orkin says. “Finding the scale and a model that allow you to keep costs down for the consumer while making a profit has been a struggle for everybody, yet everyone wants to crack the code for it.”

The key to Gopher Grocery’s success has been not carrying inventory. Instead, Orkin’s company relies on ultra-efficient distributors and wholesalers who take just-in-time inventory management to the extreme.

“By leveraging infrastructure that’s already in place, we’re able to be profitable with a much smaller customer base than a giant wholesaler or retailer,” he says. “It also allows us to carry a huge product assortment, including exotic fruits and vegetables, for about the same price as shopping in a store.”

Gopher Grocery’s energy-efficient yellow vans, which advertise the company’s astonishingly low $2 delivery fee — free for orders greater than $100 — have been the company’s main advertising to encourage people to ditch traditional shopping trips in favor of ordering groceries in their pajamas for home delivery.

“Nobody likes paying for delivery,” Orkin says. “If we lowered prices 30% and charged $30 for delivery, people wouldn’t want it, even if the math comes out the same.”

Grocery Gateway, which charges $11.95 on a minimum $45 order, has used two different business models since the Longo’s acquisition. Until recently, it “picked” orders directly from Longo’s supermarkets.

“It’s a very profitable model because essentially the store now works 24/7,” Tallevi says. “Consumers shop until it closes at 9 p.m., then our team would come in to fill a day of orders. We were out by 6 a.m., and the store reopened to walk-in customers.”

Business has been so good, Grocery Gateway opened a new 50,000-square-foot dedicated pick store in Toronto in September. “There were no economies of scale left in-store, and we needed to take the next step to service the volume we’ve reached,” Tallevi says.

The dedicated store isn’t as highly automated or as expensive to run as the company’s original center, he says. “Shelving is laid out so you can pick efficiently and go in and start shopping. It’s far more productive and we have much better control of inventory without the expense of automation and conveyor belts.”

Fresh produce comes straight from Longo’s own suppliers. “Our shoppers don’t have to worry about produce that’s been handled by consumers,” he says, “and we maintain the proper temperature from the moment it’s picked until it’s loaded into our refrigerated trucks.”

Gopher Grocery is also proud of its produce. “We’re judged on how fresh and beautiful it is when it’s delivered to your door,” Orkin says. “If we do a good job driving great produce, the assumption is the rest of the ‘store’ is beautifully fresh and just as wonderful.”

He does admit to getting a little cranky when customers insist they’d rather pick their own produce than trust his trained professionals, who buy produce daily and inspect it twice before packing it in special containers designed to withstand Minnesota’s wide fluctuation in temperature throughout the year.

Skokie, Ill.-based Peapod, which delivered to more than 375,000 customers in 2011, according to a company news release, grabbed national attention in October by turning commuter train platforms in seven states into virtual grocery aisles. Commuters who download the company’s mobile app can scan barcodes of national-brand staples and arrange home delivery all while waiting for a train. Within the app, consumers can choose from 11,000 different products, including fresh produce, picked from Peapod’s supermarket partners Stop & Shop and Giant.

Tallevi and Orkin, who both expect to find major competitors on their doorstep one day, applaud Peapod’s brilliant marketing strategy, though Orkin says he doesn’t see it as a big revenue driver.

Grocery Gateway launched its own app in October. Almost 30% of new customers now register through a mobile device. “They’ve actually become customers because of the app,” Tallevi says.

The trend is bound to continue, he says, as the online customer base shifts from families to career-driven young people living in downtown condominium towers who’d prefer to spend their free time going out instead of wandering supermarket aisles.

Tallevi’s advises potential online grocers to check out how it’s being done somewhere else. “You can have the marketing dollars to bring people in and get publicity,” he says, “but at the end of the day, what keeps them there is your operational excellence. You have to deliver against the promise. The promise is: I get the product when I want it, I pay the price you told me and it’s in top notch condition.”

National retailers test delivery

Seattle-based Amazon.com Inc. has the world of brick and mortar stores scrambling to catch up, and many retail watchers predict the company will expand its Amazon Fresh grocery delivery concept in the near future.

Tom Furphy, chief executive officer of Seattle-based Consumer Equity Partners and former vice president of Amazon Fresh, said at an E-Commerce session at the Produce Marketing Association Fresh Summit in Anaheim he thinks Amazon Fresh is gearing up toward expansion.

“We hear in the marketplace that they are laying out expansion plans to trading partners,” Furphy said during the session.

Furphy predicts the expansion to a few cities on the West Coast. The company first introduce grocery delivery to the Seattle area in 2007.

Bentonville, Ark.-based Wal-Mart Stores Inc. also may be dipping into grocery delivery. The company’s new Walmart To Go is available in test markets, offering same day delivery. The initial test markets reportedly included Northern Virginia, Philadelphia, Minneapolis and San Jose, Calif.

So far, selection includes Dairy & Deli, Electronics & Office, Frozen and Sports & Fitness, according to the company’s website, delivery.walmart.com.

—Editor Pamela Riemenschneider contributed to this article.