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REVISITING E-GROCERY

The heady honeymoon of Web-based food retailing is over, but supermarkets are clinging to their for-better-or-for-worse marriage to online shopping.While they hope that someday Web-based grocery ordering might blossom into the profitable niche it was once forecasted to become, food retailers have accepted the service as a means to provide an added convenience for a small but loyal cadre of e-commerce-compatible

The heady honeymoon of Web-based food retailing is over, but supermarkets are clinging to their for-better-or-for-worse marriage to online shopping.

While they hope that someday Web-based grocery ordering might blossom into the profitable niche it was once forecasted to become, food retailers have accepted the service as a means to provide an added convenience for a small but loyal cadre of e-commerce-compatible customers.

It is estimated to be less than a $1 billion business in the United States, but some analysts project that its volume will double each year for the next few years as traditional supermarket companies refine their Web-based offerings.

Still, e-grocery's current outlook has dimmed significantly since the late 1990s, when venture capitalists poured money into pure-play start-ups like Webvan to build massive warehouses and conduct outrageous marketing campaigns.

"I don't hear a lot of conversation about people doing much with it," said Ron Pearson, chairman and chief executive officer, Hy-Vee Supermarkets, Des Moines, Iowa, and chairman of the Food Marketing Institute, Washington. "The volume and momentum is not as strong as everybody predicted it would be."

He said the service is still not profitable at his company, where it is offered at 105 stores. Hy-Vee launched online grocery ordering four years ago in Rochester, Minn.

"We happen to believe some electronic commerce is going to be a part of consumers' lifestyles," Pearson said. "If that's the direction the consumer wants to go, then that's the way we want to go."

Although he declined to reveal specific sales volumes at Hy-Vee, he did say that sales are up "slightly" from a year ago. He also said the company has 20,000 registered users in one of its markets.

"The users are loyal, and they use it all the time, and they keep using it, the more you market it to them," he said.

Others in the industry are more bullish on the prospects for online shopping, including Marc van Gelder, president and CEO, Peapod, Chicago, the online ordering and delivery service operated by Netherlands-based Ahold.

"Business has been very good in the last year," van Gelder told SN. "We've grown the business 35%, and achieved a positive cash-flow contribution."

Analysts estimate that Peapod, acquired by Ahold in 2000, generated between $130 million and $175 million in revenues last year. It operates -- primarily in partnership with Ahold's Stop & Shop and Giant Food chains -- in five markets in the United States: Chicago; Boston; southern Connecticut/Westchester County, N.Y.; Washington; and Long Island, N.Y.

Peapod's growth plans primarily involve expanding in Ahold's existing markets on the East Coast, van Gelder said.

"Areas like New Jersey and Philadelphia are on our radar," he said.

The company operates multiple models, serving customers from a warehouse in Chicago but using existing stores or combinations of stores and distribution centers in other markets. Store employees pick orders, while Peapod trains and employs the drivers. Online orders average 55 items and total $135.

Although the company currently uses a next-day-delivery model rather than a store-pickup model, van Gelder said he's not convinced that delivery will be appropriate for every market.

At Harris Teeter, Britt Hothersall, online shopping coordinator, said his company has been sticking with the online ordering and store-pickup model at the 10 stores where the chain offers the service. Harris Teeter launched online ordering about two years ago.

"We're pleased with the growth," he said, although he declined to provide specific sales figures. He added that the Charlotte, N.C.-based chain plans to continue trying to grow the business, although he declined to comment on industry speculation that the chain is preparing to offer delivery.

Customers currently place orders online and pick them up in specially designated areas at the front of the stores after allowing at least four hours to fulfill the order.

Hothersall said the store pickers use handheld technology from Symbol Technologies, Holtsville, N.Y.

"We think it eliminates mis-picks," he said. "It helps us do a better job in the crucial area of fulfillment."

E-commerce analysts said they think supermarkets are on the right track in offering delivery or pickup directly from their stores.

"The reason they are being successful now is that they are leveraging their assets -- their stores. That was the big mistake of Webvan, HomeRuns and those types," said Pete Abell, director of research, AMR Research, Boston. "When you are trying to make this a separate system, separate from the existing stores, and build your own warehouses, as well as having your own delivery vehicles, that became a huge capital asset that you had to build, and then you had to get customers to adopt."

Eventually, he said, if Internet-based grocery services continue to grow, retailers will need to think about expanding their sourcing to include dedicated warehouses.

Right now, successful e-grocery retailers are capturing about 1% of their grocery sales online in the first year and some are doubling that share to 2% in the second year, according to Abell. If supermarkets are able to get that share up to 5%, "then we'll start to see a lot of changes in the industry dynamics," he said.

Abell calculates that it costs supermarkets about $8 to fill an order for customer pickup at the store, a service for which supermarkets typically charge from $4 to $7. Delivery costs the supermarket about $15 to $16 per order, he estimated, and supermarkets charge about $10 to $12 for that service.

In London, Tesco charges 5 pounds, or about $7.50, for delivery. However, Abell pointed out, London is an especially densely populated market, which facilitates multi-order deliveries and helps keep costs down.

"They gained market share and basket size from their own customers as well as other customers," Abell said of Tesco's operation, which is reported to be profitable despite the relatively low fee for the service. "We've seen as much as a 40% increase in basket size, so people aren't buying their dog food from a pet store any more. They will get everything from that one shopping trip because it makes it convenient."

The delivery surcharge will be a barrier to some customers in the United States, Abell said, although he speculated that there are enough consumers out there willing to pay for the added convenience of shopping online.

"This is truly real value that they are getting," he said. "They are trading off time for money, and that's a very attractive proposition."

Ken Cassar, analyst, Jupiter Research, New York, said he thinks different models of e-grocery fulfillment will evolve based on a variety of factors.

"I think at the end of the day we may find that there are 10 different types of markets, and the criteria that define those markets are income, population, housing properties, transportation properties, real estate costs and probably other things," he said. "Different combinations of those factors will determine which model makes the most sense."

He said delivery would probably only be viable in certain areas -- indeed, chains like Lowes in the Carolinas have clung successfully to store pickup rather than offering delivery.

"It's not clear to me that delivery is going to make sense in every market," Cassar said. "While someday we may reach a point where we can all order groceries online, we may never reach a point where we can all expect delivery of those groceries. There are a lot of markets in the U.S. -- and I wouldn't be surprised if it's more than 50% of the population -- where it doesn't make economic sense to do delivery."

He agreed that online sales would reach a threshold at which it will no longer be viable to use the store-pick model for order fulfillment at chains that do offer delivery.

"When a certain level of volume is reached, I'd argue that a warehouse makes sense," he said. "When retailers are doing enough volume through the Web, they are going to find that store pickers are competing with consumers for space and scarce product and things like that, which is going to undermine their bread and butter, which is their brick-and-mortar business."

He said he envisions the business growing to the point that supermarkets need warehouses of about 100,000 square feet for perishables, while continuing to use the stores for such slow-moving items as spices and other center store merchandise.

"I wouldn't be surprised if 10 or 20 years from now there's a grocer out there who's able to learn an awful lot from Webvan," he said, referring to that company's model of delivering from huge, highly automated warehouses.

Meanwhile, retailers are continuing to make improvements in their store-pick business models to make the operations viable.

"It's not an easy business to get into," said Tim Metcalf, president and co-owner, Metcalf Enterprises, Brookfield, Wis., which operates three Sentry supermarkets in the Madison area, two of which offer Web-based shopping. "If I were to give anybody advice out there, I would say that if you are going to get into it, you'd better be committed, because you can dull your apple pretty quick by not giving good service.

"What's interesting is that it's not like being in the grocery business," he added. "It's a different business. You are in the fulfillment business. That's what you do for a living."

One of the keys, he said, is to remember that online customers are not seeking to save money -- they are seeking to save time. Therefore, any incomplete or inaccurate orders could negate the advantages that consumers hope to gain by using the Internet if they have to spend time correcting or completing an order themselves.

Mark Marymee, spokesman, GroceryWorks, a joint venture between Tesco and Safeway, Pleasanton, Calif., said having well-trained delivery drivers is a key factor in driving customer satisfaction and overcoming delivery problems.

"Customers really react favorably to very polite, professional delivery people, and so we've got a very strong group of trainers who used to work for Webvan," he told SN. "That's one of the things that Webvan did right is train their drivers how to treat customers appropriately."

Safeway has about 40 supermarkets that are designated as "pick" stores, where specially trained employees dedicated to the online business fill orders using radio-transmitted technology called "team pads." These order-fulfillment tools, widely used by Tesco in London, where online grocery fulfillment has been profitable for some time, are mounted on special carts that allow "pickers" to fill multiple orders at once.

At Metcalf's Sentry stores in Wisconsin, the in-store pickers are given cell phones so they can call customers to obtain instructions for product substitutions.

"That's a huge issue, if you don't have that communication with the customer," he said.

In addition to using in-store technology and highly trained drivers, other keys to the success of the service include linking the Web site to frequent-shopper databases to reduce the time it takes to build the first online shopping list.

"Speed is important," said Mike Spindler, president, MyWebGrocer, New York, which provides an online shopping setup for hundreds of supermarkets around the country, including Metcalf's Sentry stores and Harris Teeter. "We had to build a site that was built for speed."

He said first-time shoppers generally spend about 40 minutes placing their first order, but after that they can reduce that to about five minutes by making modifications to previous lists.

Another important element on the Web site is product data. Analysts and retailers agreed that having a full listing of products, as well as product ingredient information, will be critical to e-grocery's success.

But execution is the most critical factor.

"As a customer, I am trusting you to do something very important for me, which is to pick up the products that my children are going to eat," said Spindler.

Pearson of Hy-Vee said in the end, customers' affinity for selecting their own products will be one of online shopping's limitations.

"I think customers like that kind of thing," he said. "They like going and picking out the right produce, and that's one of the reasons I think Internet grocery hasn't taken off."