December 26, 2000, 9:55 AM

After all that hard work, the online grocers are ready to transform the supermarket industry

By Alice M. Richter

Editor in Chief

After e-grocers have worked hard to build market share and increase brand awareness, the time is ripe for them to become more dominant players in the grocery industry.

For starters, Internet grocers are beginning to consolidate to strengthen their online presence, combine marketing efforts and become a larger industry players. The two largest pure-play grocers, HomeGrocer.com and Webvan are merging in a $1.2 billion stock deal. The combined company will gain economies of scale and grow revenues by rapidly increasing its customer base.

Traditional retailers are no longer sitting on the e-commerce sidelines. Several large grocery stores are investing in or aligning with Internet-only players as a quick and efficient way to digitally transform their operations. For example, Dutch company Royal Ahold, which operates chains such as Stop & Shop, Finast and Giant on the East Coast, paid $73 million for control of online grocer Peapod. Safeway Inc. is spending $30 million for a 50% stake in Dallas-based GroceryWorks, that will become Safeway’s Internet grocery arm. And Italian food group Parmalat SpA, one of the world’s largest dairy companies, paid $30 million for 22% of NetGrocer.com.

Merging and aligning with competitors and bricks-and-mortar companies helps e-grocers expand resources in product assortment, merchandising, marketing and supply chain management as well as drive down fixed costs. Building synergies with partners that have tried-and-true knowledge of the industry can also help e-grocers develop winning models.

Although the online grocery market accounts for only a tiny slice of the $400 billion to $650 billion in annual grocery spending, online grocery shopping will increase rapidly. Most likely to buy groceries via the Internet are affluent, well-educated, two-income families. To attract and retain this profitable demographic, e-grocers must make online shopping easy, as well as offer hassle-free delivery and returns. Increasing volume to reduce costs or raising prices to boost revenues is not likely to succeed in an industry that operates on thin margins. Building volume takes time, a scarce commodity in today’s fast-paced electronic environment.

It’s the quality

Another way e-grocers can attract customers is by offering services that go beyond delivering groceries, such as picking up and dropping off dry cleaning, film, flowers or videos. By adding to the types of items that they deliver, online grocers can increase the number of deliveries per hour or items per trip. Those with a niche in a specialized area, such as delivery of health foods, prescriptions or convenience-store items, are also likely to prosper.

Clearly, one of the biggest challenges is finding the right formula to warehouse and distribute products. SanDiegoGrocer.com, launched this spring by American Grocer Inc., closed after 60 days due to incompatibilities with warehouse management systems software. Which distribution and delivery strategies are the most effective may become more apparent as Webvan and HomeGrocer combine. Webvan uses sophisticated, fully automated, large-hub warehouses surrounded by regional delivery spokes, whereas HomeGrocer operates smaller warehouses in each market. Other dot-com grocers will be watching to see if one model works better or if the merged entity will sort out best practices from both and implement a new distribution model.

Aligning with traditional stores and food manufacturers can help e-grocers tap into established warehousing and distribution solutions. Doing so may also lead to more options for online shoppers that combine store pick-ups with home deliveries. For example, Albertsons.com lets shoppers order groceries online and pick them up at Albertsons’ stores in Bellevue, Wash. Customers can also shop online from in-store computers. This appeals to those who like ordering groceries online but also enjoy going into physical stores.

As technology matures and consumers gain comfort and confidence in shopping online, the e-grocer presence is bound to not only grow but also flourish, with the market likely sustaining four or five strong players that have developed winning strategies. But at this stage in their development, they have a lot of work yet to do.

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