TESCO STORE-BASED INTERNET MODEL URGED FOR U.S.

JON SPRINGER

NEW YORK -- Supermarkets looking to offer on-line shopping in the United States could learn much from the example of Tesco, the London-based chain that is proving a store-based fulfillment model can work, according to Marcus Bokkerink, vice president for Boston Consulting Group, London.

Speaking at the Private Label Manufacturers Association Consumerama conference here, Bokkerink said Tesco's TescoDirect on-line grocery-shopping business is the largest -- and only profitable -- Internet grocery business in the world. TescoDirect serves more than 300,000 customers and makes more than 4,000 deliveries per day. Sales are projected to approach $500 million by year-end, he said.

"Half a billion dollars," Bokkerink said. "That's a real business."

Though Bokkerink insisted there was "no silver bullet to be discovered," the key to Tesco's success is its store-based fulfillment strategy, which it gradually developed from a phone/fax ordering and delivery system it started in 1996. Under the system, orders are received, picked and delivered from the local store closest to the customer. The arrangement allows Tesco to offer its full range of in-store goods on-line, while saving costs on delivery, Bokkerink said.

In-store fulfillment is also faster to roll out than the dedicated-warehouse models currently favored by U.S.-based "pure-play" Internet grocers such as Webvan, Foster City, Calif., and by Tesco's U.K. competitors, Asda and J. Sainsbury, Bokkerink said. Tesco has a considerable lead on Asda and Sainsbury, which are in the process of setting up warehouses, Bokkerink said.

Tesco could build dedicated warehouses at a later date if necessary, Bokkerink said. "There comes a time when the Webvan model makes sense, but the reason Webvan is doing it is because they have no choice -- they have no stores."

Shoppers spend more per visit on-line than on visits to the store, Bokkerink said, and 90% of TescoDirect users are repeat customers. "The philosophy is to follow the customer," he said. "Retailers must be where the customers are."

Dutch retailer Ahold runs a store-based Internet fulfillment strategy at its Albert Heijn chain in The Netherlands that is similar to TescoDirect. Ahold recently began rolling out a store-based model at its Stop & Shop stores in New England in partnership with Peapod, Chicago.

But most U.S. stores have not done enough, Bokkerink said, allowing pure-plays such as Webvan to get an early jump.

"One of the reasons Webvan's market capitalization is so high is because the retailers are letting them get away with it," Bokkerink said. "It's probably not too late for U.S. stores to take on Webvan. But it is too late for Webvan to come to the U.K. and take on Tesco."