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Raine Tran, left, receives her order from Penguin Pick-Up’s David Coyle in Toronto.

J.P. MOCZULSKI/The Globe and Mail

A new premium online fresh-food business is quietly emerging from the unlikely location of a mall parking lot.

Penguin Fresh, which bills itself as selling farm-fresh food, is run not by a retailer but by mall developer Mitchell Goldhar, founder of SmartCentres and chairman of Smart Real Estate Investment Trust (REIT), which acquired SmartCentres this year. touts high-quality fresh fruits, vegetables and meats online and delivers them to a Penguin Pick-Up kiosk in a growing number of the REIT's 250 shopping centres, where customers fetch their order.

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It is now being tested at two malls in Toronto and launched recently at a site near a Wal-Mart store just outside the city, in Vaughan, Ont. Soon the service will be operating at five locations.

As such, it competes with some stores in the landlord's own malls. However, the company says it doesn't view the service as direct competition but rather an opportunity to lure more consumers to its shopping centres – counting on them doing more shopping while there.

"We don't believe it's competing with our tenants," said Egil Moller Nielsen, senior vice-president of e-commerce at SmartCentres. "It brings people to the shopping centres. We believe this is good for the retailers."

Merchants have found grocery e-commerce even more challenging than other digital shopping segments because of the need to get fresh food to customers in temperature-controlled containers well before the products' best-before date. As a result, grocery e-tailing has developed more slowly than other online shopping categories, although some operators, from Penguin Fresh to supermarket giant Loblaw Cos. Ltd., are now betting on new models to sell food online.

"The economics of pickup are obviously favourable [compared with] delivery, and using existing real estate will keep the footprint small without lots of additional capital investment," said Keith Anderson, vice-president of strategy and insight at e-commerce researcher Profitero.

Loblaw has rolled out drive-through pickup centres at about 25 stores for its fledgling online shopping operation, mostly in Ontario and, last week, in Alberta, while Wal-Mart Canada Corp. is running grocery pickup kiosks at 11 of its stores in the Ottawa area.

Overwaitea Food Group of Langley, B.C., has pickup centres as well as home-delivery options for its e-commerce offering at 10 Save-On stores; Longo Brothers Fruit Markets Inc., an upscale chain in Ontario, runs the Grocery Gateway home-delivery business, which now includes beer, wine and spirits.

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"You need to put a lot of effort and investment into it to do it right," said Wayne Currie, vice-president of supply chain and e-commerce at Overwaitea. "It's not a simple thing to do. It does have a lot of moving parts. … It's definitely going to make money if it's done the right way."

He said e-commerce customers use both the pickup and home-delivery alternatives, although he did not provide a breakdown. "There's demand in both," Mr. Currie said. "Obviously, making money on delivery is very difficult.… But any type of increase in sales as well as providing great service is of good value to us and our customers, long term."

Retailers' heavy investments in e-commerce are starting to pay off in the form of bigger orders from online customers than those at physical stores.

At Grocery Gateway, for instance, most e-commerce purchases are more than double those made in-store, said Anthony Longo, chief executive officer of privately held Longo's. It charges $9.99 for home delivery, compared with $7.95 at Overwaitea.

And sales of online groceries are growing at about 10 to 12 per cent a year, compared with 5 per cent in stores, Mr. Longo said. But e-commerce sales make up only about 5 per cent of the overall business, he said.

"Consumers are [becoming] more comfortable shopping online," Mr. Longo said. "As we've seen with books and shoes and other categories, they're now starting to put their attention to food."

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Loblaw has seen strong repeat e-commerce use and feedback about "the convenience factor," spokesman Kevin Groh said. He pointed to two trends in its Click & Collect program: larger-than-average purchases; and small, repeat mid-week orders of fresh foods, he said.

Over all, online grocery sales make up less than 1 per cent of Canada's more than $120-billion of annual sales in the sector, according to industry observers. But they're expected grow at three to four times the rate of sales in bricks-and-mortar stores, representing 3 per cent of total sales by 2018, according to Profitero.

Penguin Fresh is looking to cash in on that growth – and also lure customers to Smart REIT's physical stores even as they shop more online.

After less than a year in operation, Penguin Pick-Up is finding that 43 per cent of its customers are staying to shop in the malls' stores, Mr. Nielsen said.

Penguin Fresh sources its food from EverGreens Fine Fruit and Vegetables Inc., a wholesaler that supplies high-end restaurants such as those at the Trump Hotel and Oliver & Bonacini, as well as Sanagan's Meat Locker, he said. They ship the products to Penguin Pick-Up centres, which have refrigerators and freezers, the latter for frozen meats. The company plans to have a pickup kiosk at most of its malls within two years.

"It brings people to the shopping centres," Mr. Nielsen said. "That is our ambition."

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