Deals Wed Online Grocers to Brick-and-Mortars

SAN MATEO (04/24/2000) - Brick-and-mortar companies struggling to build a viable Internet presence are capitalizing on a soft stock market to jump-start their e-business strategies with partnerships and acquisitions.

Two major deals last week between established supermarkets and their online counterparts demonstrates the importance of online shopping to grocery stores and other well-established retailers.

Safeway Inc. inked a far-reaching strategic alliance with Dallas-based while Dutch conglomerate Royal Ahold rescued PeaPod Inc. from the edge of oblivion by purchasing 51 percent of the online grocer's sagging stock. The deals have renewed the debate over whether brick-and-mortar retailers should build their e-commerce strategies from within or turn to outside help.

"[The Internet] is a different channel, and it is not easy to make money in it.

We didn't necessarily want to be the first ones in it, and until we saw GroceryWorks, we had not seen a viable model for it," said Debra Lambert, a spokeswoman for Pleasanton, California-based Safeway.

Safeway conducted tests to determine whether it should develop a solution internally, and ultimately decided against in-house development. Instead, the supermarket giant, which owns brands such as Vons, Dominick's, Carrs, Randall's, and Tom Thumb, invested $30 million in GroceryWorks, and will endeavor to build out the online start-up's inventory, fulfillment capabilities, and customer base.

"[Safeway] brings a tremendous amount of buying power, which, in turn, makes our business model viable," said Kelby Hagar, president of GroceryWorks. Hagar said that all brick-and-mortar stores face the decision of either having to do online shopping themselves or to partner with an Internet expert. "We don't see the first choice as [being] much of a choice at all."

Other stores would disagree with Hagar's assessment. Boise, Idaho-based Albertson's Inc. has decided to go ahead with building out its capabilities internally. And, although the company declined to comment on the progress, analysts are saying that more deals similar to the ones last week are likely.

"We have been saying that the established retailers would end up buying these [Internet retailers], and now we are seeing it happen," said Charles Cerankosky, director at McDonald Investments, in Cleveland. "Nobody has figured out how to make this [hybrid model] work yet, but [Safeway and Royal Ahold] have a pretty good shot with what they're doing now."

Meanwhile, the deals of last week raise questions as to whether retail stores need to have both online and brick-and-mortar channels.

Online grocer pioneer WebVan Group Inc. believes that it can succeed as an online-only channel and sees storefronts as unnecessary.

"What you are talking about here is the re-engineering of a very mature industry," said Bud Grebey, spokesman for Foster City, California-based WebVan.

"These partnerships are just validating the assertion that customers will shop for items like groceries online."

Gartner Group analyst Geri Spieler said that not all retailers need an Internet channel, but grocery stores need both an online and a retail presence.

"A tomato isn't a sweater or a book," Spieler said. "A grocery is only going to survive with a strong brick-and-mortar model, because it's local. It is very difficult to fulfill an order with a robot when you are talking about a tomato."

White knights

Some reasons why online grocers have needed to lean on deep-pocketed, well-established brick-and-mortar shops include the following.

* Cost of delivery is high

* The start-up costs in each new metropolitan market are high* As local markets grow, the cost of serving each new customer increases* High service costs per customer force the business to focus on specific customer and geographic segments, limiting market size* A small market size in a mass-market business squeezes margins, creating a price disadvantage vs. other grocery sellersSource: Gartner Group

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