WEB SELLING FOR SMALL GUYS

Amy Sung

Large retailers like Safeway, Albertsons and Peapod-Ahold run their own substantial online shopping programs. Web-only operations like FreshDirect and SimonDelivers.com are Internet specialists that do their own thing. Yet, where does that leave the rest of the supermarket world -- small and midsize retailers?

Smaller retailers may possess neither the resources nor the expertise to take on an online shopping enterprise -- but some third-party services have emerged to help these retailers sell their products online.

Third-party services can turn what might seem to be an overly daunting project into a feasible one for the small retailer. "The investment and the risk factor for an independent local store almost went away [with a third-party partner]," said Tim Metcalfe, president and co-owner of a three-store Sentry Foods operation in southern Wisconsin. "You could get into this for very little cost and share the risk."

In an arena -- online grocery shopping -- that has had more than its share of ups and downs, some third-party services are experiencing surprising growth. Two of the bigger third-party players -- MyWebGrocer.com, New York, and HometownGrocers.com, Northfield, Minn. -- are cases in point.

In the first half of this year, MyWebGrocer.com has signed on 34% more stores than its final figure in December 2004, according to Michael Spindler, president. Its clients include Lowes Foods, D&W Foods, Paw Paw Shopping Center, Dorothy Lane Markets and Sentry Foods.

Judd Kirklin, president and chief executive officer, HometownGrocers.com, told SN his company has experienced close to 40% growth in the past year, buttressed by the announcement in February that Supervalu had selected HometownGrocers.com as its "best practices partner" nationally. The company services more than 100 Hy-Vee stores, as well as single-store operations like MacKenthun's County Market, Waconia, Minn.

To be sure, overall sales via online channels, and interest in online retailing, remain modest. In SN's 2005 Supermarket Technology Report, published in January, just 6% of survey respondents said they would test or launch an online sales program this year.

On the other hand, there are promising signs. Forty percent of SN survey respondents said online sales would represent between 6% and 10% of total sales within five years, a sizable chunk by today's standards. Moreover, a recent Forrester Research study found that customers who shop in retailers' stores and either shop online or prepare to shop in stores using online tools, spend two to three times as much as customers who only shop in-store.

MyWebGrocer.com and HometownGrocers.com provide the online platform for their supermarket clients, hosting the service, processing orders and sending them to stores. That still leaves stores responsible for picking online orders and delivering them to shoppers, or arranging for shoppers to pick up their orders at stores (see "The Curbside Option," this page). MyWebGrocer charges supermarkets by the order, while HometownGrocers.com charges a flat rate. Neither service would provide further details.

'WE COULD DO THIS'

Sentry Foods, part of the Sentry group of independents supported by Supervalu, has succeeded in offering online shopping (including call-in orders) to customers of its Madison, Wis., store for about four years, using MyWebGrocer as its online host. Call-in orders are put into the online system by store employees.

"When [MyWebGrocer] presented it to us, it intuitively made sense that we could do this, knowing that the customer had an interest in this, knowing that we wanted to be a little innovative and try to have it in front of the market," said president and co-owner Metcalfe.

Metcalfe has observed growth in his online operation (accessed through www.sentryonthego.com). After a year, online sales contributed one extra week's worth of store sales to the retailer. Today, that figure has grown to two weeks.

Currently, around 200 orders are placed per week, with an average value of up to $90 for called-in orders, and $150 and up for orders placed online, Metcalfe said. Picked products are scanned to ensure they match the products ordered.

Metcalfe attributed the growth in part to consumers' readiness to accept online shopping, reflecting a new generation of shoppers that demands efficiency through technology. "It's very evident that the consumers are becoming very Internet-savvy. They're becoming much more comfortable with [credit card] security and making purchases on the Internet," he said. "My point would be that today, not only is the Internet ready for online grocery shopping, [but] our customers are too."

However, Metcalfe cautioned that a retailer entering the online grocery world is no longer just in the grocery business, but has entered into the logistics arena -- picking and delivery. "It's not for everybody. It can dull your apple as much as it can shine it, depending on how you work it."

Asked if he is able to run the online service profitably, Metcalfe answered yes, assuming that incremental sales generated by the site are included in the calculation. "The way we look at it is, more than 70% of our customers that use online [shopping] tell us they shop at other stores," Metcalfe explained. "So when we add the profit from those extra sales -- that we would not have if we were not delivering -- to the fees we generate from the delivery fee [$10.95], and throw that against our cost to serve (labor and overhead), we generate a profit."

However, without the incremental sales, he noted, "the delivery fee alone does not cover the cost of operations."

PICKUP OR DELIVERY

MacKenthun's County Market, supplied by Supervalu, has also had a long-running online shopping operation (at www.mackenthuns.com), using HometownGrocers.com as the host for approximately five years.

Online customers can specify when they want to pick up orders or have them delivered. Customers can also call a toll-free number hosted by HometownGrocers.com to order their groceries, sign up for the online service, or inquire about their order. MacKenthun's offers a product catalog for phone-in customers.

The store recouped its investment in the hosting service within roughly a year. Currently, the store is probably breaking even for the service overall, said Jessa Theis, controller as well as the daughter of MacKenthun's owner, Kim MacKenthun.

Theis told SN the store decided to implement the home shopping service because it wanted to stay on top of technology and meet customers' needs. "Obviously, technology is always moving and we just want to keep on top of that and make it easy for our customers," she said. She said the store is looking forward to more advancement from HometownGrocers.com.

Challenges associated with offering online grocery shopping for these retailers tend to center on the upkeep of the system. New products and prices must be fed into the system fairly frequently. Another challenge, according to Metcalfe of Sentry Foods, is maintaining a high quality of service. In order to have a successful online grocery service, he said, retailers must serve the customer with accuracy and attention to detail.