GROCERYWORKS CLOSES DCS, SHIFTS TO STORE FULFILLMENT

DAN ALAIMO

DALLAS -- Store-based fulfillment appears to be the next hope in the struggling-to-make-a-profit on-line grocery shopping arena.

Following reports that Albertsons.com, Boise, Idaho, will fulfill on-line orders in the Seattle area from stores, and that the store-based on-line shopping system of Tesco, Ches-hunt, England, is nearing profitability, GroceryWorks.com here said that it will close its distribution centers and fill orders from stores.

GroceryWorks, an on-line grocer that Safeway, Pleasanton, Calif., has a majority interest in, will close its distribution centers in Grapevine, Texas, and Houston, and deliver out of Randalls and Tom Thumb stores, said Gary Fernandes, chairman and chief executive officer.

"We have already begun," he said. "We have implemented the store-pick model in our Austin, Texas, market, and we will be implementing it in Houston on May 16, and then in Dallas-Fort Worth on June 13."

One analyst of on-line retailers applauded the GroceryWorks move.

"It makes more sense than perhaps what Webvan tried to build," said Alan Alper, an analyst with Gomez, Waltham, Mass.

"In this marketplace all of these companies have to be very proactive and focus on what they do best," he added.

Meanwhile, the affiliation with the bricks-and-mortar Safeway stores is a big plus for GroceryWorks. "Brand sells, on-line or off-line," he said.

The company will sublease the two warehouse facilities and sell off equipment, and "we will be out of the centralized distribution center business altogether by June 13," Fernandes said.

While GroceryWorks knew of Tesco's success in the U.K., Fernandes said that wasn't the key determinant in making the change.

"We have been experimenting with the in-store pick model for three or four months here in Dallas. The results we saw from that test encouraged us to do a further test in the Austin market. That test was successfully implemented, so we made the decision to change the whole business model," he said.

The on-line grocer's affiliation with Safeway allowed the company to consider store fulfillment as an option.

"It's cheaper. You don't have the capital costs of each of those fulfillment centers," he said.

Setting up a center in a new market costs $10 million to $12 million. "It takes a lot higher volume to be able to cover your operating costs from all those large fulfillment centers," Fernandes said.

In contrast, the store-pick model requires very little cost per store and, consequently, the break-even point is very low. "So you can go into a new market and you can open up five, 10, 15, 20 stores to cover the market and get to profitability much, much quicker and with a greater degree of certainty than you ever can with the large fulfillment center model," he said.

Delivery from neighborhood stores is more efficient, as they are closer to the customers' homes, he noted.

"The delivery productivity is much higher. You have much less unproductive time on the road before you reach the first customer for the delivery," he said.

There will be few additional expenses operating out of the stores.

For example, there is little change in the software, Fernandes said.

"You have to be able to direct a customer's order to a particular store near the neighborhood in which they live. You have to be able to then pick delivery routes by neighborhood rather than one centralized delivery routing system for the whole service area from a fulfillment center. And then you have the in-store picking technology. There is no off-the-shelf software that does that, but it is not a terribly complicated problem," he said.

Picking carts that handle six orders at a time cost $100 to $150 each, he added.

GroceryWorks employees will work in the stores picking orders and continue to operate the delivery vehicles, he said. The company will start offering store pick-up as an option to customers.

But GroceryWorks will depend on the Safeway stores to have the products ordered by its customers in stock.

"We hope the shelves will always be full with the items that we order and we believe that Safeway does a much better job of that than any other retailer," he said.

However, the on-line grocer will give customers more options as to setting substitution policies in the event that a particular item is not in stock.

"Some customers won't want any substitution at all, other customers are pleased to have a substitution that is the same brand but a larger size, and there will be other customers that will be willing to substitute a different brand for the same product," he said.

GroceryWorks will begin by picking a certain number of stores in locations that will enable it to cover its existing volume, Fernandes said.

"Then, as volume exceeds the capacity of those stores, or if we want to extend our service area, then we will bring new stores into it," he said.

Fernandes hesitated to discuss future expansion, though.

"People always ask about growth and I always focus on making what we've got work. The first order of business is making sure we can consistently execute operationally day-in and day-out, and that we can make money doing that. Assuming that we demonstrate that to our satisfaction, then we can start worrying about market expansion," he said.

Fernandes outlined several dimensions of market expansion for a company like GroceryWorks.

"One is growing in the market that we are in. It's very inexpensive to grow your service area and get deeper penetration by adding more stores. The second dimension of growth is to add to the assortment that you are offering. Right now in the warehouse model, we are offering about 11,000 items. The average Safeway store offers 30,000 to 35,000 items. So, potentially it would be relatively easy to add assortment with no inventory or logistics costs," he said.

"The third dimension, of course, is to expand in new markets, and we've always been expanding to the markets that make the most sense to us and go into the markets in which Safeway has the greatest store penetration first," he said.