SAFEWAY COMPLETES 50% STAKE IN GROCERYWORKS

JON SPRINGER

DALLAS -- GroceryWorks here said a subsidiary of Safeway, Pleasanton, Calif., this month contributed $20 million to complete Safeway's 50% investment in the fledgling on-line grocery company.

Safeway also recruited longtime financial partner Kohlberg Kravis Roberts to contribute an additional $20 million. The investment of $40 million between Safeway and KKR's Accel-KKR Internet fund will help finance GroceryWorks' expansion through the end of the year, Kelby Hagar, GroceryWorks' president and founder, told SN.

"I think this investment verifies the legitimacy of this business, and gives us another set of great financial brains to help us through," Hagar said in an interview. "We pride ourselves on having world-class financial backing."

Hagar said the backing positions GroceryWorks/Safeway as a leader among "bricks-and-clicks" Internet grocery services. The partnership will cut down the cost of goods and customer acquisition for GroceryWorks, giving it a clear advantage over "pure-plays," such as Webvan, Foster City, Calif., Hagar said. Webvan recently said it would buy Kirkland, Wash.-based rival HomeGrocer.com.

"Consolidation in this industry is happening faster than anyone thought it would," said Hagar. "Our viewpoint is that it's a good thing for GroceryWorks, because it eliminates the clutter and clearly illustrates the two strategies -- there are going to be pure-plays with Webvan on one side and there are going to be bricks-and-clicks with ourselves on the other. We're excited about our opportunity here."

Hagar said GroceryWorks was "in deep discussions with more than one brick-and-mortar partner" when it agreed to Safeway's $30 million offer in April. "We felt it was both necessary and crucial to get a strategic partner to boost our buying power and cut down on customer-acquisition costs. We think we already have the delivery and picking model right."

Safeway and GroceryWorks are in the process of developing a co-branded strategy to serve new markets, Hagar said.

"We have defined what the relationship will look like, but we're not far enough along to discuss it in detail now," he said. "It will be heavily focused on co-branding. We'll probably be able to talk about that more in late fall."

GroceryWorks, which takes orders and makes deliveries in Dallas-Forth Worth and Houston, will debut in Phoenix this fall and enter two additional markets by the end of the year, Hagar said.