The End of E-Grocers? Not at All
By Gerry Khermouch
Suwanee, Ga., will be the place to be on Aug. 6 if you're in the market for cheap warehouse carousel systems, miles of conveyors, or perhaps a couple of hundred refrigerated diesel trucks equipped with global positioning systems. That's the detritus from the demise of online grocer Webvan, which filed for bankruptcy on July 9 and closed up shop. The auction will be another painful reminder of the failure of a grandiose vision that led retailers such as Webvan Group, HomeGrocer.com, Kozmo.com, and Peapod to build state-of-the-art warehouses to fill what was expected to be an avalanche of orders from time-pressed consumers looking to save a trek to the supermarket.
So is this the beginning of the end of the online-grocery business? More likely it's the end of the beginning. Online-grocery sales certainly will continue, but minus the hype -- and the GPS trucks. Under the new model, online orders are filled not from the sort of huge, often-remote warehouses on which Webvan lavished so much money, but mainly from neighborhood stores themselves.
Call it the revenge of the supermarkets. The established chains were dumbfounded in the late '90s as investors poured millions into creating elaborate online grocery stores amid predictions that everyone would be shopping on the Net. Now, old-line chains such as Albertson's, Lowe's, and Safeway are having their turn, quietly using the Internet to make incremental improvements in their business, rather than pursue the radical leap made by Webvan et al that never was viable.
As in so many other Web-related businesses, operators are learning that, far from being a disadvantage, having an offline operation -- and a familiar brand -- can trump the capital-intensive, caffeine-fueled dreams of startups. In fact, the rout of first-generation online grocers is opening up opportunities for a range of other players, from supermarket chains to small independents with names such as MyCornerDeli.com, which is trying to carve out a niche as an online portal for New York City's independent Korean greengrocers.
The bricks-and-clicks strategy received its strongest endorsement in late June when Britain's Tesco agreed to pay $22 million to pick up a 35% stake in GroceryWorks, Safeway Inc.'s U.S. Internet operation. GroceryWorks had recently suspended deliveries in its Texas markets while it closed distribution centers in favor of filling orders from Safeway's Randall's Food Markets and Tom Thumb grocery chains. The Tesco deal will provide Safeway with the software and logistical expertise that pushed the British retailer's online operation into the black.
Just a couple of years ago, filling online orders from the physical stores was considered naive. After all, the coming deluge would wreak havoc in stores that still would have to serve those backwards offline customers. Thanks to all that IPO cash, there was no barrier to creating networks of massive warehouses, then spending heavily on advertising and promotion to build awareness of new brand names.
That deluge never spouted. The estimated $1 billion in online grocery sales last year is a drop in the bucket for the $475 billion supermarket industry. Further, segregating the online from the offline operations required duplicating inventories -- or simply not offering online shoppers slower-moving items, undermining the Internet's implicit promise of vast selection. And of course, there was the lost opportunity of using online deliveries as another means to forge loyalty among customers who already shop the stores and perhaps phone or fax in orders.
"We've found that brand counts, and consumers like the comfort of the store brand," says Alan Alper, analyst at Gómez Inc., a market researcher in Waltham, Mass.
In their domestic operations, Tesco and the Dutch company Royal Ahold seem to have made the in-store model work. Ahold now is moving to put such U.S. operations as Stop & Shop and Giant Food Stores online via its controlling stake in once-high-flying Peapod, while exiting Peapod markets such as San Francisco where Ahold doesn't have an offline presence.
Opportunities still exist for others. MyCornerDeli is serving both as a buying cooperative and an online delivery platform for Korean grocers. It's also in the process signing promotional deals with marketers such as H.J. Heinz that view a unified network of local grocers as a way to get the word out about new offerings like, say, StarKist Tuna in a pouch. "It's companies like ours, using physical stores, that are going to make it [online]," vows MyCornerDeli Chief Executive Michael Cohen.
He's probably right. But this time, success will be measured not according to the overblown ambitions of just a few years ago but by more practical, meat-and-potato terms.
Khermouch is Marketing editor for BusinessWeek in New
Edited by Douglas Harbrecht