CLICK AND MORTAR

ELLIOT ZWIEBACH

BELLEVUE, Wash. -- Albertson's e-commerce test here appears to be an early hit with consumers and the chain.

The test location for Albertson's.com in this Seattle suburb links a conventional brick-and-mortar store with an on-line fulfillment center under one roof and gives consumers the option of home delivery or self-pickup.

It has done well enough in its first four months that the Boise, Idaho-based chain is contemplating expanding to additional store locations in the Seattle area later this year and eventually expanding to other cities.

In an interview here with SN, Charlie Cook, director of the dot-com store, said the combination of retail store and fulfillment center works, "because we're bringing 60 years of retail experience into e-commerce through a vehicle that's already working. So we don't have to sell a whole new idea in grocery shopping -- we only have to sell the way we're doing it."

His words were echoed by Jenny Enochson, corporate manager of community relations for Albertson's. "Linking an on-line fulfillment site with a retail store is a true marriage of what we do as a traditional brick-and-mortar company joined with a new service -- on-line shopping," she said. "It combines the best of both worlds."

Given the home delivery base established in Seattle by locally based HomeGrocer.com, consumers here understand and accept the concept of on-line ordering for home delivery, Cook noted.

The difference in the Albertson's approach is using a portion of a 30-year-old conventional store to fill orders.

The 31,000-square-foot store, which was shut down last September, reopened six weeks later with its sales area scaled back to 14,000 square feet and the other 17,000 square feet devoted to a warehouse for filling on-line orders.

At the same time the store's sales area was reduced, its merchandise mix was cut back severely, from 30,000 stock-keeping units to about 4,500, Cook said. However, consumers ordering on-line have about 16,000 SKU's available to them, he noted, "and we're working to increase the on-line selection. But store space is a limitation right now."

The on-line venture here is Albertson's second. The first was established two years ago in Fort Worth, Texas, when the company opened a dedicated fulfillment center in a newly built 108,000-square-foot warehouse. Unlike the Seattle-area program, the Texas operation uses an outside service (United Parcel) for home deliveries, does not offer a customer pickup site and has only about 5,500 SKU's of non-perishables -- although Albertson's expects to add perishables sometime this year, Enochson said.

While she said the company is happy with the results in Texas, it intends to expand its on-line involvement through additional dot-com stores like the one here.

According to Enochson, Albertson's contemplates establishing additional pickup sites for on-line orders and opening additional dot-com stores in the Seattle area; it will also consider moving beyond the Pacific Northwest "depending on how well we're doing there," she said. "We hope the [Bellevue] store is the first of many."

However, she said the company is uncertain when it might open the next dot-com facility. "That will be based on consumer demand," she said.

Although Albertson's officials were unwilling to discuss specific on-line sales numbers, Cook said results are exceeding the company's expectations, with the warehouse operation "growing by leaps and bounds.

"In the first four months the growth of on-line customers has been above and beyond our expectations," he told SN, "and as our customer base requires it, we intend to grow to satisfy their needs. But at the rate on-line sales are growing here, space constraints will be a major concern in less than a year."

The fulfillment center here offers dry groceries and perishables, including meat, produce and service delicatessen items, with home delivery by a fleet of 30 trucks throughout the day. Orders over $60 have free delivery; orders under $60 cost $5.95 for delivery.

Albertson's installed the fulfillment center in an existing store to keep costs down, Cook said. "It seemed a natural way to expand into e-commerce because we have strategic locations all over that can serve a wide geographic area," he explained. "We put the fulfillment center within the four walls of a regular retail store because we felt using the economies of an existing building gives us an advantage."

He said Albertson's selected the store here "because it's central to the east side of Seattle, and with two lakes and Puget Sound dividing the city, we had to be central."

Albertson's opted to fill on-line orders from a fulfillment center in the back of a store, rather than using the store itself, "because it's more efficient that way," Cook said. "Picking orders in a store would create problems for regular shoppers, and as on-line business continues to grow, doing volume from a store like this would make it less consumer-friendly because of the amount of traffic."

Besides, the fulfillment center is laid out for efficiency of picking, not for the convenience of customer shopping patterns, Cook pointed out.

The fulfillment center consists of 10 aisles of 64 running feet each, including two and a half aisles of frozen food items and seven and a half aisles of dry groceries and health and beauty care items (including two flow racks for high-velocity items like Best Foods mayonnaise, Campbell soups and paper goods), plus one wall of refrigerated foods and one wall of additional dry grocery items.

All equipment in the fulfillment center was in the existing store before it was remodeled and downsized, Cook said.

The fulfillment center has 23 employees, including stockers, pickers, validators and inventory control clerks.

Securities analysts contacted by SN said the tests here and in Texas give Albertson's a leg up on home delivery systems, although some expressed skepticism about the concept of home delivery.

Gary Giblen, portfolio manager for First New York Securities, New York, noted Albertson's is one of only a small handful of major chains testing home delivery. "It's testing the waters to see what works," he said. "It's not redirecting its whole effort to Internet shopping, but if consumer-direct really takes off, Albertson's will have a working model and be in a position to participate."

According to Ed Comeau, an analyst with Donaldson Lufkin & Jenrette, New York, "It's just an experiment, but it allows Albertson's to see how consumers shop on-line while keeping all its options open."

However, he said he does not believe home delivery from a store location is the way for brick-and-mortar operators to go. "What most consumers will demand is central fulfillment from a highly efficient warehouse location with a broad selection of product and with the ability to pick up goods from central locations," Comeau said.

Another analyst, who asked that his name not be used, expressed similar opinions. "Delivery from a store is not a way to make money selling groceries," he told SN. "You need a system that includes customer pickups at designated distribution points because I don't think retailers can deliver groceries efficiently.

"Delivering groceries is an expensive proposition, and there's no way you can absorb those costs into the price of groceries. Consumers know how to shop efficiently in stores, and trying to compete with established distribution systems at the same or lower costs is not going to work because you can't do more than two or three deliveries an hour when customers are spread out."

According to Cook, Albertson's contemplates few changes in the operation here. "This store will remain pretty much as you see it for awhile," Cook explained.

He said approximately 95% of customers who order on-line opt for home delivery, while the other 5% come into the store to pick up their orders; those consumers go to the store's customer service desk, which notifies a dispatcher in the transportation department to bring the customer's order out to his car.

Orders for same-day pickup are available after 5 p.m.; orders placed one day before pickup are available by 7 a.m. the next morning.

Cook said the percentage of pickups could increase as Albertson's adds additional pickup sites for orders. Once additional sites are set up, orders would be dropped off at those sites by special delivery trucks, he noted.

When the dot-com store opened here last fall, Albertson's launched a major round of radio and print ads and distributed handouts in the area to publicize the on-line shopping program. "Since then we've moved toward more item-and-price advertising so consumers can relate to the fact we're providing more than a home delivery service -- that Albertsons.com sells groceries at competitive prices," Cook said.

The first ads broke between Thanksgiving and Christmas, "and the holidays were very successful for on-line shopping," Cook said. "Sales took a small drop in January, but they're now at or above holiday levels."

The tagline for Albertson's.com ads is, "Why isn't all shopping like this?" Ads promise consumers $15 off on their first on-line order over $60.

The store here operates as a corporate store in the chain's e-commerce division -- a division that so far includes only one other store, the one in Fort Worth -- not as part of Albertson's Seattle division, because of its more limited selection and the separate fulfillment staff, Cook said. However, the store honors the division's ad "if we carry an item," he noted.

Aside from the inclusion of the fulfillment center, the store here is unique in ways beyond its limited item selection, Cook said, including the following:

Its distinctive wall graphics, which feature pictures of computer keys and buttons for scrolling up or down and with a different color scheme that uses olive green, aqua, tan and orange.

More localized product selections, with more buying done from local suppliers.

JA's Kitchen, a service deli named for chain founder Joe Albertson, featuring a different product lineup -- complete meal selections rather than just entrees, 15-inch fresh pizzas (rather than 12-inch varieties) and a wide variety of Boar's Head meats, which are not carried elsewhere in the chain.

An extensive wine selection.

"Because the store is not a full Albertson's and because it's not as big as it used to be, we're going more upscale, albeit with our regular pricing," Cook explained.

Accordingly, ads feature such items as filet mignon, pre-frozen lobster tails, domestic brie cheese and a wide variety of wines.

"Most customers know about the changes in the size of the store and the merchandise selection," Cook said, "and those who like on-line shopping enjoy it, while those not quite ready to change miss the parts of the store that are missing.

"So we try to sell them on the idea of what we have rather than what we lost. We tell them, if they want the full Albertson's selection, we can't supply it and we recommend they shop at the nearest Albertson's, which is three or four miles away.

"Or we ask them what item they miss and tell them we can add it, because when we started merchandising this new concept, we missed a few sleeper items that we should be carrying."

For shoppers frustrated at not being able to find an item in the store or who have no other access to a computer, there are two tables set up in the store near the service deli with computers for placing on-line orders.

Cook defended the company's decision to reduce the merchandise selection at the store. "We as retailers have gotten customers used to a large selection, and now we're asking them to get used to something different.

"The challenge is getting them used to what we are to them now, not what we used to be. Those who want to physically shop know we're not the place to do it. But if they want great wine and cheese, then we are the place."

Cook said he sees e-commerce being offered in all major markets within three to five years. "E-commerce is here to stay -- the numbers show consumers like the concept."

Asked whether overall sales at the store here have increased since part of the selling area was converted to a fulfillment center, Cook replied "On-line shopping is growing at a terrific pace. But the store here is still only a small store, and it's obvious the success of this concept will show up more on the Internet side of the operation than on the retail side."