STORES MAY SUCCEED WHERE WEBVAN FAILED

DAN ALAIMO

NEW YORK -- Webvan's demise may be only the beginning for online grocery shopping.

Before going out of business, the Foster City, Calif., company spent $2 billion trying to recreate the supermarket industry's distribution system, said Mary Brett Whitfield, director of the e-retail intelligence system of Pricewaterhouse Coopers, here.

"But this is an industry that already has a pretty efficient distribution system. Grocery stores are literally at every major intersection in most metropolitan markets," she said.

Whitfield and other Pricewaterhouse Coopers executives spoke during a recent teleconference on lessons that can be learned from Internet retailing.

One key theme sounded several times was that retailers with an existing infrastructure have a big advantage over Internet-only players.

In the case of online grocery, this means delivering from stores, not the central warehouse model Webvan tried to create, Whitfield said.

The work of Albertson's, Boise, Idaho, and the recent alliance formed by Safeway, Pleasanton, Calif., and Tesco.com, Welwyn Garden City, England, are the highest profile examples of this trend to store-based delivery, the speakers said.

But other traditional supermarket retailers are either experimenting with online shopping now or about to get started with it.

"It took the failure of Webvan to make regional success in online groceries a legitimate business goal. Going forward, we will see many regional and local market tests with online grocery. And we'll see retailers begin to look at how they can leverage the stores," Whitfield said.

Retailing changes come very slowly if consumers are required to change their habits, which is what many online merchants sought, Whitfield said.

"We've seen very few e-commerce initiatives that offer a truly compelling reason to change shopping behavior," she said.

However, this may be different with Internet shopping that is integrated with brick-and-mortar stores.

"By leveraging their store base, retailers can get consumers to think about online grocery. It is potentially an activity that doesn't require them to totally modify their current shopping behavior. Online might become the order-entry mechanism, and then there is a pickup at the store. I think we'll see this happening more frequently," Whitfield said.

So far, Tesco.com has provided the best example of this, said Ira Kalish, director of the global retail intelligence system of Pricewaterhouse Coopers.

"Tesco used the existing distribution infrastructure and just incrementally added the capability to deliver to the home. Tesco didn't build any distribution centers. They fulfilled the customer demand right out of the stores, he said.

"They have built up a very large business. Although it hasn't been profitable yet, it is expected to be profitable next year, and it only had a small loss this year, Kalish said.

Tesco.com was so successful in the United Kingdom that it is now working with Safeway to use its proprietary software in the United States, where "it has a tremendous potential to be successful because the economics work reasonably well and I think there is a reasonable demand for that kind of shopping," he said.

Tesco's U.S. venture may just be an experiment that may lead to further investment in this country, Kalish added.

"I wouldn't be surprised to see them make an acquisition here and try to become a full multi-channel retailer in this country," he said.

But online grocery is a niche market that only attracts consumers with specific needs, noted Lois Huff, principal consultant with Pricewaterhouse Coopers.

This is even true for an online merchant as successful as Tesco.com's in the United Kingdom. "It's either a time-related need, it's a health or mobility-related need, or it is a specific dietary or lifestyle kind of need. You can be very successful with that niche type of market, but I still question the viability of an online grocery offer as a mass product," she said.

Technology alone is not a compelling enough reason for consumers to shop online, said Geoff Wissman, principal consultant, Pricewaterhouse Coopers.

"E-retailers need more than just technological bells and whistles to create a sustainable business model. The basic problem with technology is that it is often thought of as a strategy, not as a strategic tool. E-retailers need to think about customers, what they need, what they want and then think about which tool can best fulfill those needs. Sometimes the tools will be technological. Other times they won't," he said.