A Fresh Approach To Online Groceries

Despite all the hype, the online grocery business has turned sour faster than a jar of Hellman's left open in the summer sun. Soon-to-be-merged market leaders Webvan Group Inc. and HomeGrocer.com Inc. together have lost more than $230 million since January, while traditional grocers have been largely AWOL online. Across the Atlantic, though, $30 billion British supermarket giant Tesco PLC is combining the best of the Web with its own stores.

Think of it as a middle-of-the-aisle approach. Instead of investing in gargantuan warehouses as Webvan has done, Tesco picks and packs from its existing stores. That way, Tesco.com can serve 90% of the British population--and has grabbed 80% of Britain's online grocery market, says Matthew Nordan of Forrester Research Inc. Tesco, Nordan says, will be "the model for every single grocery store on the planet."

For many, it already is. Royal Ahold, the Dutch food retailer that recently took over U.S. online grocery delivery service Peapod Inc., is piloting a similar program at some of the 1,000 U.S. supermarkets it owns. In Britain, grocer J. Sainsbury PLC has similar plans.

Tesco's Web smarts are bringing home the bacon. Since 1996, Tesco has registered 500,000 Internet customers, who generate more than $6 million in weekly sales. And --get this--the grocery operation will be profitable this year, says Michael McNamara, chief technical officer for Tesco.com.

Don't write off Webvan's warehouse model entirely, though. Even McNamara says Tesco may eventually have to build its own distribution facilities. Just not soon. Tesco's in-store picking operations, he says, will work until sales hit $2.2 billion--still a long way from the $300 million or so expected this year. By the time sales reach that level, online grocers may be the ones who are AWOL, with the likes of Tesco winning the battle.