NETGROCER CENTERS ITSELF

JON SPRINGER

NORTH BRUNSWICK, N.J. -- NetGrocer.com here is positioning itself as the great compromise of Internet food retailing.

Its strategy assumes that while shoppers want to take advantage of the Internet to simplify their lives, they won't necessarily abandon the grocery store altogether, Jim Chambers, NetGrocer's chief executive officer, said. NetGrocer is also betting that running a successful Internet food store does not necessarily require dozens of warehouses, thousands of employees and hundreds of delivery trucks.

"It's not going to be on-line vs. off-line, one or the other," Chambers told SN in a recent interview. "We essentially have a bricks-and-clicks strategy. We're not trying to keep customers out of grocery stores; we just want to provide a solution for the center store."

NetGrocer's focus on center-store replenishment via FedEx delivery -- as opposed to replacement of the supermarket via fleets of delivery trucks -- offers several advantages over its competitors, Chambers said.

NetGrocer can partner with consumer product companies without having them undermine their traditional sales channels. Outsourcing fulfillment extends delivery areas nationwide and saves millions on infrastructure and labor.

Chambers said NetGrocer intends to take the "boring" aspect out of shopping while leaving supermarkets to sell perishables and prepared foods.

"That's where supermarkets are going today," Chambers said. "People are shopping more on the departments on the edges of the store. It's not a complete change, but an augmentation."

Founded by Fred Horowitz, currently the NetGrocer president, in 1995, and debuting on the Internet in 1997, NetGrocer offers around 7,000 stockkeeping units, including nonperishable foods, drugs and general merchandise. The goods are shipped nationwide via FedEx from a single warehouse in North Brunswick. Customers pay a shipping charge starting at $5.99 per order for orders of less than $60 and increasing to $8.99 on orders of $100-$200.

According to Chambers, NetGrocer is in the final stages of deciding on a West Coast location for a second warehouse, which would cut down its shipping costs and speed delivery to the Western states. Eventually, the company plans for four to six locations nationwide.

The advantage of lower labor and infrastructure costs far outweigh the increased shipping costs, Chambers insisted. NetGrocer currently serves the entire country with 90 employees. By contrast, HomeGrocer.com, Kirkland, Wash., expects to hire 4,000 workers this year just to serve five markets.

"Most of them [van delivery Internet food retailers] are bogged down trying to reinvent FedEx, while we don't have to," Horowitz told SN earlier this year. "That allows us to have the highest margins and stay focused on building our core business and profitability."

One way NetGrocer can overcome its shipping costs is to integrate higher-margin, lower weight items, Chambers explained. "We don't want to get away from being a broad, center-of-the-store supplier, but there are items we can be more aggressive on pricing," Chambers said. "The important thing is our understanding the right balance of product mix."

Like a number of its on-line competitors, NetGrocer is also partnering with consumer product companies, interested in the kind of consumer behavior and spending patterns an on-line grocer can capture. NetGrocer has relationships with a number of companies including Quaker Oats, Parmalat, Mead Johnson, M&M Mars and Gerber.

Its relationship with Parmalat, the international food retailer with U.S. headquarters in Wallington, N.J., blossomed into a $30 million investment this year. Interested in sparking product recognition and an alternate channel for sales, Parmalat bought a 22.3% stake in NetGrocer.

Parmalat brings "a sense of reality" to the Internet grocery business, Parmalat USA president and chief executive officer Aldo Uva told SN. "We have roots in the food industry," he said. 'We bring something real to the space."

"We believe NetGrocer is the right partner for us because it is not working as an alternative to brick-and-mortar stores, which are our biggest customers," Uva said. "We think the awareness we can generate through them will improve our sales in all channels."

NetGrocer had around $7 million in sales in 1999, but sales have been growing at a rate of 10% a month since January, Chambers said. The company spent $2 million on marketing in 1999. For the future, Chambers said NetGrocer's major challenge is "marketing excellence." The ultimate winners in the Internet shopping will be those who develop the deepest relationships with their customers and partners, Chambers said -- not necessarily the fastest deliverymen.

"We've gotten very good at order fulfillment, but whether we hit a home run or just a single isn't fulfillment for us -- it's how well we continue to understand the consumer," Chambers said.

NetGrocer.com

Web address: www.netgrocer.com

Headquarters: North Brunswick, N.J.

Areas served: Continental United States.

Delivery options: FedEx delivery in 1-4 business days, most orders delivered within 48 hours.

Volume: $7 million (1999).

Expansion plans: West Coast warehouse (expected this summer); 4-6 nationwide warehouses by 2002.

Stock: Privately traded

Major investors: Parmalat; Cendant Internet Group.

Key executives: Jim Chambers, chief executive officer; Fred Horowitz, founder and president.