Online Grocers: Finally Delivering the Lettuce

Brick-and-mortar chains are finding profits in cyberspace

Michele Vossoughi, 33, recalls the flameout in mid-2001 of online grocer Webvan Group Inc. as more than just a minor inconvenience. The San Jose (Calif.) mother of two was hooked on ordering everything from diapers to produce online and having it delivered to her doorstep. "When Webvan went under, I was stuck," Vossoughi laments.

Hang in there -- help is on the way. Two years after the demise of Webvan,,, and others of their ilk, the online grocery industry is rising again, thanks mainly to old-line brick-and-mortar chains. They view it as a way to court their affluent customers and as a rare advantage over discounter Wal-Mart Stores Inc. (WMT ), which is rapidly expanding its grocery business but does not sell food online.

Eager to avoid the fate of the dot-com pioneers, today's online grocers are playing it safe. Instead of headlong expansion, they're introducing the service one city at a time. While Webvan ran through $1 billion before shutting down two years ago, the new players are making do without expensive, high-tech warehouses. PublixDirect, for instance, run by privately held Publix Super Markets Inc., has just a single facility to serve South Florida. Safeway Inc. (SWY ) and Albertson's Inc. (ABS ) fill orders right out of their stores.

The biggest difference? Some of the online operations today are actually in the black. Royal Ahold (AHO ), which bought fallen online star Peapod Inc., in 2001, says it's generating cash in four out of five markets. Online is still a niche within the $400 billion U.S. grocery business -- none of the chains expects it to account for more than 5% of total sales over the long haul. But online sales should grow 46% this year, to $3.5 billion, projects Forrester Research Inc.

Online shopping's appeal is simple: For some customers, the convenience is worth the extra cost. Shopping is a cinch. Customers just click through various departments -- from dairy to health and beauty -- adding items to a virtual shopping cart. Some services allow customers to call up old shopping lists and click on items they want to buy again. Repeat buyers may even get pitched specials based on their buying habits. Most orders are delivered the next day within a two-hour window. The cost? Usually about $10 per order.

In contrast to the extravagant marketing ploys used by failed startups like Webvan, the new players stick to what they know best: splashy ceiling banners, shopping bags, local-TV ads, and weekly flyers. "The incremental ad spending is minimal," says Pam Powell, Albertson's vice-president for e-commerce. So even though the service fees barely cover the cost of delivery, Forrester analyst Kate Delhagen says the best of the online services can match or beat the 5% to 7% operating margins of stores.

The real payoff will come if online orders lock in shopper loyalty. Because shoppers are passing the schlepping on to the deliveryman, they tend to order more than they would buy in person. At Safeway, the average online order size is $120, twice that of the average in-store ticket.

There are a few independents trying to make a go of it in online groceries., which serves tony Manhattan neighborhoods, raised more than $100 million from investors. But for now, it's mainly bricks-and-mortar grocers, which aren't aiming to build giant businesses. Rather, they just want to keep their best shoppers coming back for rich second helpings.

By Louise Lee in San Mateo, Calif.

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