RIVALS DRIVING HAGGEN TO ON-LINE SALES SERVICE

DAN ALAIMO

SAN DIEGO -- Internet grocery competition in the Pacific Northwest is driving Haggen Inc., Bellingham, Wash., to set up an on-line shopping service, said Jeff Haggen, vice president for e-commerce, speaking at the iGrocer conference here.

Albertson's, Boise, Idaho, last month added pick-up sites for its Seattle-area on-line shopping test. HomeGrocer.com, Kirkland, Wash., which is soon to merge with Webvan Group, Foster City, Calif., is based in Haggen's backyard. And Safeway, Pleasanton, Calif., has signed an agreement with GroceryWorks, Dallas, which is expected to eventually affect the Seattle market, where the Safeway division is a leading player.

"The No. 1 reason to offer that service to our customers is they are being confronted with other options out there," Haggen said at last month's conference. Haggen's brand recognition with its customers will be a significant advantage, he noted.

But Haggen also sees this as a way to acquire new customers. "While we don't see a lot of market share being built in some of our smaller, micromarkets, it will prevent us from losing market share. We see the biggest market-share increases in areas where we now have a smaller share and we are able to offer this as a new way of shopping," he said. The retailer plans to test the program in the early fall with about 400 to 500 employee households and four stores in the Bellingham area. After 45 to 60 days, it will be rolled out to one store every two weeks, Haggen said. The chain has a total of 26 stores, 15 called Top Food & Drug and 11 under the more upscale Haggen banner.

Unlike other on-line grocery operations, Haggen will only offer store-pickup, and no delivery service, he said. At the Haggen stores, it will be handled at existing drive-up lanes, while Top customers will go to the customer service center. Citing a study from the Standard and Odyssey, he said 39% of customers found it frustrating to have to be home to take a delivery.

Limiting the service to pickup only will result in a shorter lead time for customer orders, he said. "We don't see this as being a delivery business for us. Right now we are looking at a three-hour lead time for order pickup, which is convenient for our customers, who potentially could order at work on their lunch hour and pick it up on their way home," Haggen said. Also, deliveries are expensive and, by not offering them, the retailer adds only incremental costs, even in its stores in rural areas, he said.

Haggen is relying on ShopEaze.com, Santa Clara, Calif., to develop the software and run the Internet component of the Haggen on-line shopping program. "We felt strongly that we could partner with somebody like ShopEaze who could bring their technology strengths to us. They brought in people that could do those things."

By going with ShopEaze, Haggen saves the costs of developing and maintaining an on-line shopping site. He said it would cost between $300,000 and $1 million for Haggen "just to get on the map," $1 million to $2 million to "run with the pack," and $5 million to $20 million to "stand out from the pack. Meanwhile, the annual cost to maintain such an e-commerce Web site is about 15% to 20% of the initial start-up costs," he said. "For a company our size, with $650 million in sales a year, and with the slim grocery margins, ROI on that wouldn't exist," Haggen said.

In his presentation, Haggen cited extensive research showing the potential for on-line grocery shopping nationally and in the Seattle market. For example, Ernst & Young reports that in 2000 more than 30% of U.S. households are on-line and about 15% have shopped on-line. But Scarborough Research numbers show that 60% of adults in the Seattle area are on-line and 24% shop on-line. This percentage of on-line shoppers is the third highest in the country, Haggen said, topped by San Francisco and Washington.