Online Extra: Down Under's Online Tucker Box

That's Australian for ordering groceries via the Web -- a trend that, unlike the ill-fated Webvan in U.S., seems to be catching on

The neighborhood grapevine might seem like an old-fashioned way to spread the word -- especially for a Web-based company -- but that's how one of Australia's leading online grocery retailers pumped up business through its first three years. Last month, when finally started advertising, it already had 100,000 customers.

That's roughly one-third of Australian grocery shoppers who use the Internet to buy food, according to research outfit www.consult. ShopFast also followed up with people who had registered but not yet used the service, guiding them through the system. Boasts ShopFast's Managing Director Stephen Shedden: "We've more than doubled sales since January."

SMALL BUT GROWING. Australia is fertile ground for virtual grocers, with several saying their operations are either turning a profit or close to it. More than 70% of Australian households have Internet access, according to Nielsen/NetRatings. Of the Aussies who regularly surf the Internet, 54% use the Web to shop, with 1 in 7 buying food, according to a www.consult survey. The smallest continent and the largest island, Australia has roughly the same land area as the U.S. mainland, with most of its 20 million people concentrated in large cities scattered around the fertile fringe of the eastern and southern coasts.

To online grocers, those choice delivery areas are packed with current and potential customers. Plus, many Aussie shops keep skimpier hours than stores in Asia or the U.S., which makes grabbing groceries online that much more convenient. "It's huge," www.consult's Ramin Marzbani says of the Australian market. And startups aren't the only ones in the virtual-grocery game. Coles Myer and Woolworth's -- generations-old retail giants that command 60% of the traditional grocery market -- also sell online.

Expansion has been methodical, not hysterical. Coles and Woolworth's, for example, don't serve some inner-city sections of Sydney and Melbourne. The companies rely on plucking goods from the shelves of stores close to customers, but some of the compact city stores aren't stocked densely enough to consistently fill larger orders received via the Web.

ANTIPODEAN ALTERNATIVE. The startups resisted rolling out the kind of cross-country service that led to the demise of Webvan in the U.S. ShopFast offers 13,500 products but serves only Sydney. Rival, which has been in business for four years, delivers in both Sydney and Melbourne -- the nation's two largest cities -- but it carries a much smaller selection of fresh foods and gourmet grocery items. The startups haven't rushed to go public, either (although Woolworth's took a 38% stake in GreenGrocer this year). The theme here has been "go slow, but do well," says Jason Murray, who leads the retail practice at McKinsey.

The surprise is that, to date, the virtual grocers flourishing Down Under aren't the old guard, but the pure plays. Like the last-minute deliveries of auto parts that are now staple features of carmakers' operations, ShopFast and GreenGrocer shaped their operations around just-in-time deliveries of fresh goods.

GreenGrocer was the first online grocer in the world to truck produce directly from the market to the customer, according to CEO Douglas Carlson. The company requires advance payment, so it never owns the goods and bears little risk. Meanwhile, orders that flow into ShopFast's computer system zoom straight to various suppliers, where they are filled before dawn, then delivered to a central loading dock for immediate shipment. Food tends to be fresher when it reaches consumers. It's like having a broker for broccoli. Notes Shedden: "The last thing you want is inventory."

SMALL BUT GROWING. Innovative, sure. But grocery e-tailers' overall market share is puny. Revenue is in the tens of millions, and online grocery sales in Australia aren't generally expected to top 5% of the total market. Why? With its small population and large area, it's difficult to achieve economies of scale. "It will never be offered in Perth and Darwin, put it that way," says Martin Yule, an analyst at Morgan Stanley. In heavily urban and suburban Sydney and Melbourne, the essential customer base is only now being achieved.

Still, with Web-based orders typically four times larger than those taken to the checkouts at bricks-and-mortar stores, the first outfits that grab market share -- and make money -- will gain a jump on the pack. ShopFast has the most customers, according to analysts. "Our biggest single problem is our growth," says Shedden, whose operation delivers orders until almost midnight every day. To cope with demand, he has added 70 new staff and doubled the quality-assurance crew. But that hasn't fixed all of his problems. "I've got gray hair," sighs the 50-year-old, "which I've never had before."

By Becky Gaylord in Sydney

    Before it's here, it's on the Bloomberg Terminal.