Safeway Enters Online Grocery Turnstile

The online grocery business has seen some tough times, with Webvan liquidating its assets and Peapod struggling to get back on its feet. Undaunted, Safeway (NYSE:SWY) just dove into the mix.

Portland, Oregon, and Vancouver, Washington, are the initial markets for Safeway.com, the new Web shopping service, officially launched Tuesday.

"The [Portland] area has become a high-tech hub with more than 1,200 technology companies, and approximately 67 percent of area households have Internet access," noted GroceryWorks president Steve Frisby.

Groceryworks is an Internet-based home shopping service that is 50 percent owned by Safeway and 35 percent owned by UK-based Tesco.

Safeway decided to debut its online service in Portland and Vancouver because customers in those cities already had experience with Webvan and HomeGrocer, Safeway spokesperson Debra Lambert told the E-Commerce Times.

Feeding the Rich

By targeting affluent, tech-savvy consumers, Safeway is following the lead of Tesco and Royal Ahold (NYSE: AHO), which now owns Peapod.

Ahold has linked Peapod with Stop-N-Shop, Ahold's local chain in such upscale areas as Connecticut's Fairfield County and New York's Westchester County.

Tesco also has successfully built its online business in the UK by moving into upscale markets.

Whether the Web grocer industry has suffered more from marketing or logistical problems is not yet clear, but in any case, at least one analyst firm still has faith in its long-term prospects.

Jupiter Media Metrix expects online grocery sales to grow from US$1 billion in 2001 to $11.3 billion in 2006. Deteriorating economic conditions influenced the firm to cuts its prediction for 2001 by half, from $2 billion to $1 billion.

Decentralizing Operations

But the economy cannot be blamed for all the online grocery industry's woes. Many firms got into financial trouble by investing in large automated warehouses that were costly to operate. Safeway plans to hold down costs while building its Web presence. Employees will fill and pack orders in Safeway stores.

"This way, without the limitations of a warehouse model, we can get into a market very quickly," Lambert pointed out. "All we need is a van and a few people to pick the items at the store."

"For pure-play retailers, fulfillment is too expensive and the marketing costs are too high, which is why it makes sense that brick-and-mortar grocers will succeed in online sales," Forrester analyst Robert Rubin told E-Commerce Times.

But in-store fulfillment runs some risk. By depending on store shelves rather than a large warehouse, there is a greater chance that items will be out of stock and that eager online customers will be disappointed rather than impressed.

Lambert countered this argument by noting that Safeway stores are well stocked. "In most cases, if we carry an item it is on the store shelf," she said.

Shopping Both Ways

In fact, another reason that Portland and Vancouver were selected for the Web shopping launch was because they have large, new Safeway stores. "While that may seem counter-intuitive -- why would you want to encourage online shopping when you have a large brick-and-mortar presence? -- we're hoping to encourage people to do some crossing over," Lambert said.

"Grocers are losing wallet share, and this can become a tool to capture wallet share back. When consumers buy online, they've shifted a behavior. By offering an automated online shopping list, consumers get in the habit of buying from a particular retailer.

As they get in the habit, they start to include more and more things because it is easier and more convenient."

Safeway is not imposing a minimum order size -- a restriction that that discouraged some singles and smaller households from experimenting with online grocery shopping in the past.