FEARING FINANCIAL DIFFICULTIES, HARRIS TEETER SWITCHES TO MYWEBGROCER

DAN ALAIMO

CHARLOTTE, N.C. -- A spokeswoman for Harris Teeter here said it switched its online shopping provider to MyWebGrocers.com over fears that its former provider was having financial difficulties.

Last month, Harris Teeter switched from Independent Delivery Systems, Windsor, Conn., to MyWebGrocer, New York.

Harris Teeter spokeswoman Jessica M. Graham said the primary reason for the change was IDS' financial difficulties.

"MyWebGrocer was chosen because it is easier for the customers. They gave us some flexibility and allowed us to switch quickly without the customers seeing any kind of an interruption," she said.

Some industry experts are now debating whether the switch raises some questions about the continued viability of companies like IDS.

Harris Teeter had signed on with IDS to provide the online shopping software and support on what is known as an application service provider basis.

That is, the software resides on the servers of the ASP and is accessed by the retailer and its customers via the Internet. IDS provided this service, along with assistance in building the retailer's online business.

However, in June, IDS notified its retailer customers that it had lost its source of funding and was having difficulty obtaining alternate financing.

In an unusual move, three of IDS' customers -- Bashas', Chandler, Ariz.; Marsh Supermarkets, Indianapolis; and Roundy's, Pewaukee, Wis. -- decided to support IDS themselves.

IDS has restructured its fee structure and is back on sound financial ground, said Dawn Dawick, president and chief executive officer of IDS.

But Harris Teeter last month said it had switched to MyWebGrocer.com, which has added many new clients in recent months, including Unified Western Grocers, Commerce, Calif.; Norkus Foodtown, Point Pleasant Beach, N.J.; Dorothy Lane Markets, Dayton, Ohio; and Lowes Foods, Winston Salem, N.C.

Harris Teeter now has six store locations hooked up to the online service, offering online ordering and pick-up only, no phone or fax delivery.

"We have plans to expand to probably four additional sites within the next year, but we don't have exact dates or locations," Graham said.

Alfred A. Plamann, president and chief executive officer of Unified Western Grocers, said the wholesaler will begin a pilot program with MyWebGrocer this month.

"We're going to try it and see if it works for our retailers," he said.

There's a place for online shopping service, he said, but the test will help determine where that place is at Unified Western.

"In some circumstances it has worked very well, while in others it hasn't worked quite so well," he said.

Looking to the future, Plamann sees customers using more technology and "we are just on the threshold of seeing the impact of that. We are going to have to apply more and more creative solutions all through that channel, all the way back to the manufacturer-vendor," he said.

But three retailers still have confidence in the IDS business plan despite its recent financial struggles.

"We support IDS," said David Thompson, vice president and chief information officer at Bashas'.

"We believe their business model is compatible with the business we wish to support for our customers."

One important reason for Bashas' continuing with IDS is its support for the phone and fax order business that is still a big part of its Bashas' Groceries on the Go program.

Marsh has a similar program, but Roundy's intends to roll out an Internet-based ordering program, Dawick said.

"For us, this is a fairly routine part of what we do. We are committed to this business model and have been for quite a long time, and don't see any change to it," Thompson said.

Thompson would not say how much Bashas' or the other retailers are investing in IDS, or whether they are getting an equity stake in return. He would only say, "we are a committed customer."

Dawick said IDS either has or is now negotiating multiyear contracts with its key customers. She also said the company has switched from a per-order fee basis to one that charges retailers a monthly fee by store. She would not say what this is.

"These guys are really committed to us. They put their money on the table and went with the company that they felt would be around for a while," she said.

"We started being profitable as of July 1, and we will continue to be based on our existing contracts. So for us, it is all upside now," Dawick said.

She said the $4 per-order charge that is the only compensation for companies like MyWebGrocer and ShopEaze.com, Santa Clara, Calif., is not sufficient to offset the $250,000 to $300,000 a month she said is required to run such a business.

"It's a long way for anybody in that business model to be profitable. Now we have cash flow and we know exactly what it is every month," Dawick said.

Each of these online service providers would need to obtain 650 to 700 stores to attain profitability, said Peter Abell, director of research, retail services, AMR Research, Boston. "It's strictly a volume game." However, he also noted that MyWebGrocer and ShopEaze have a minimum number of transactions for stores that are on the system.

But at MyWebGrocer, Rich Tarrant, chief executive officer, disputed Dawick's estimate of operating costs.

"Our threshold of profitability is about 300 stores," Tarrant said.

He confirmed the $4 per-order charge, said there was no installation fee, and added that the minimum number of orders per store is 100 per month.

Abell said stores using these services average four or five orders a day.

"You can't live by $4 per order if you don't have some kind of minimum," he said.

"We fully expect to be profitable by the third quarter of next year," Tarrant said.

Others aren't so optimistic. "They are all kind of on the edge," said Bashas' Thompson. "It's not been an exceptionally lucrative business model."

But retailers are increasingly seeing it as the preferred business model for getting into online shopping, even for some of the larger players.

For example, Abell said some large retailers have spent between $10 million and $100 million building their own online shopping systems, and in some cases, such as H.E. Butt Grocery Co., San Antonio, and Giant Eagle, Pittsburgh, they have yet to be fully implemented.

"You can't possibly expect that you are going to have a return on investment on that in any kind of minimal time," he said.