A new chief has big plans for Safeway’s dot-coms
By Paul Demery
Safeway Inc.’s online grocery business is at a turning point: The company says it’s got an effective infrastructure and a proven business model. All it needs is a big marketing push to expand its reach and hit its goal of $1 billion or more in annual sales. “That’s ambitious but not impossible,” says David Kathman, an analyst who follows Safeway with investment research firm Morningstar Inc.
That’s doable, says Mitchell Rhodes, new president of GroceryWorks, the subsidiary that runs the online business of the $32 billion-a-year Safeway. In fact, $1 billion is at the low end of his expectations. “Over the long haul, I think we can be 3-6% of Safeway’s business,” he says.
While that number does strike some as ambitious, given that Safeway’s online expansion is less than a year old, it’s in only five metropolitan areas and Rhodes is GroceryWorks’ third president in less than a year, Rhodes points out he’s been there before. Rhodes, who took over GroceryWorks in January, launched OldNavy.com and BananaRepublic.com while serving as general manager and vice president of marketing for Gap Inc.’s online division. In those spots, he rode out wild swings a few years ago between having the right mixture of customer demand and a ready infrastructure.
“We experienced both having not enough customers, and having too many,” he recalls. “In the early days, Gap’s challenge was to generate order volume, because we felt we offered great service and just wanted customers to come. But by the fourth quarter of 2000—when we did 40% of our annual business in December—we couldn’t satisfy customer demand and had to shut down portions of our sites.”
Gap moved onto smoother operations, Rhodes adds, because it was able to devise a formula that balanced infrastructure investments with growth in customer activity. “Gap was shrewd—and lucky—that it was not caught up in big e-commerce costs,” he says. Ditto for Safeway: It is addressing the balance issue through controlled geographic expansion and marketing and by leveraging its store infrastructure for order fulfillment and delivery, he says.
But while it makes sense to use stores to fulfill orders, Safeway still has to get those orders to customers and that’s where real challenges could lie, Kathman says. Unlike other online retailers who rely on UPS, FedEx and the Post Office to be their delivery arms, online grocers must manage their own delivery fleets. And the problem then becomes compounded by the multiple markets that Safeway is in. Kathman notes that e-grocer Webvan Group Inc. failed partly because it was unable to match its sales with its number of delivery drivers. “So they had drivers sitting around and getting paid for it,” he says.
Kathman notes that Safeway and its partners have invested at least $65 million in GroceryWorks since June 2000, with about half of that from Safeway itself. Interestingly, in 2001, as the online grocery business began to falter, Safeway posted a $30 million impairment charge for the value it calculated it had lost in GroceryWorks. “At that time, everyone thought the online grocery business was dying,” Kathman says. “But now presumably the value is back up.”
So far, while not revealing details about online sales, GroceryWorks reports remarkable success as it has entered new markets. Safeway last year expanded into Portland, Ore., San Francisco, Sacramento, San Diego and Las Vegas with Safeway.com and Vons.com. It says customers in new markets are signing up faster than expected. It now serves 330 communities.
Rhodes is the first GroceryWorks chief hired from outside Safeway and the first with direct e-commerce experience. The former McKinsey & Co. consultant says he’s excited about taking his marketing and online experience from the trendy apparel world to the meat-and-potatoes realm of Safeway. But don’t try to tell Rhodes that selling food isn’t as cool as selling fashion. “Online grocery can be a lot bigger in the long run than online apparel,” he says. “People spend a lot more on groceries and buy from grocers a lot more frequently.”
Having fun
Rhodes should know because before directing online operations for Gap he served in executive positions at major grocery suppliers Kraft Foods and Procter & Gamble Co. “This is my new challenge and I’m expecting it to be a lot fun,” he says. “I have no problem seeing this as a $1 billion business.”
At Safeway, he expects to build on a strategy that has already produced online growth on top of Safeway’s existing supermarket infrastructure and the proven online selling techniques it learned from Tesco plc, its U.K.-based associate, which owns 35% of GroceryWorks. Safeway owns 50% and the remaining 15% is owned by investment groups, including The Sprout Group of New York, Accel-KKR of Palo Alto, Calif., and Enterprise Partners Venture Capital of La Jolla, Calif. “Now that we’re more than a year old, we’re ready to go out and promote our service aggressively,” Rhodes says.
The key to success in selling online, he says, is finding a business’s critical touch points with customers and perfecting them. At Gap, that meant excelling primarily in three areas: ease of site navigation, reliable service through fulfillment and call centers and quality of products.
Rhodes says his experience with site navigation, making online shopping as easy as possible, directly applies to the online grocery world. But online grocery’s version of fulfillment and product quality offers new challenges—and opportunities, he says.
For instance, he says, Safeway has implemented a fulfillment policy called “Would You Buy It?” The professional store shoppers who fulfill customer orders from within Safeway and Vons supermarkets are instructed not to pick anything that is not in good condition. “We want to make sure our pickers choose the best quality,” Rhodes says. Safeway’s online customers are able to customize their orders with special requests, such as asking for ripe tomatoes or firm avocados.
Rhodes also says he’ll capitalize on the closer customer relationships that stem from frequent purchases and personalized delivery service. Although online shoppers don’t get the personal contact with store employees, including cashiers who often tell shoppers how much they’ve saved with their Safeway loyalty cards, the online experience offers other advantages, Rhodes says. For example, it’s easier online to display information on the loyalty card savings as well as the nutritional value related to each product, he adds. “We flag every item for Club Card savings, and let them know how much they’ve saved at checkout,” he says.
And while operating a delivery fleet may be one of the challenges that Safeway faces, Rhodes says it’s also a major opportunity to promote personalized service. He notes that drivers are trained to handle customer concerns on the spot, such as if a wrong type of product is delivered.
Focused campaign
His overall objective now is to let a broader customer base know how well Safeway is meeting those challenges and opportunities. In the first quarter, Rhodes kicked off a multi-media advertising campaign in the San Francisco area, including TV, radio, direct-mail and e-mail promotions. “We’re communicating that Safeway.com exists and offers great service that’s easy to use and reliable,” Rhodes says. The campaign offers promotions such as $5 off an order for trying the online service. “We’ve never had advertising that was this focused before,” he says.
Key to the campaign’s success, he adds, will be convincing more consumers of the convenience of online grocery shopping. Rhodes notes that of the 20,000 to 30,000 SKUs in a supermarket, the average customer shops for only 200 to 300. But GroceryWorks has designed its web site to make it easy for shoppers to organize and find the products they typically buy, providing for a fast online shopping trip. “We’ve heard from many moms who said they spent hours in a store and now spend 20 minutes shopping online—tops,” he says.
Safeway’s advertising will get that message across, but also will include targeted messages that promote particular products known to drive sales. “Wine, gourmet cheese or baby products—they can all be very salient e-mail messages to customers,” Rhodes says.
Automated maps
As one who worked through the early euphoria of the dot-com world in the mid- to late ‘90s, Rhodes says he’s confident that Safeway has its priorities in order. Unlike early online grocers and other dot-coms that over-invested in infrastructure before securing a customer base, and then overspent on marketing in desperate attempts to attract customers in order to pay already huge operating expenses, Safeway has taken more than a year to build its online presence along the West Coast, leveraging much of the existing infrastructure of its Safeway and Vons supermarkets.
It also took time to learn, implement and modify some of the best online selling and fulfillment techniques of Tesco. For instance, Safeway is employing an in-store product picking system that Tesco developed. The system, designed with wireless computer devices attached to shopping carts, provides professional shoppers with the most efficient in-store route for finding all the products in customers’ orders.
Jason Whitmer, a retail industry stock analyst with Cleveland-based Midwest Research, says he figures Safeway’s online operations will primarily complement the shopping experience in the company’s western supermarkets. “Their West Coast online operations will be incremental in customer service,” he says.
But how far Rhodes will be able to extend Safeway’s online presence, he says, may hinge on corporate matters beyond his control. Whitmer notes that, although Safeway operates chains across the U.S., it recently decided to sell its financially troubled Dominick’s unit in Chicago and is struggling with its Dallas-based Tom Thumb chain.
At this point, Rhodes doesn’t seem fazed by expansion difficulties, even as he sets his online sights high. “We’ll march this out and grow as fast it makes sense for our business,” he says.
Besides, of Safeway’s 1,500 U.S. stores, about 1,200 are on the West Coast and in other parts of the western U.S., giving its online business ample room to grow without expanding to the country’s eastern half. Safeway also operates 200 stores in western Canada. “The easiest thing for them would be to stick to the West Coast, so different regions of the country don’t have to buy their own infrastructure,” says Kathman of Chicago-based Morningstar.
Still, Kathman figures that concentrating on the West Coast while expanding to relatively nearby areas such as Phoenix and Denver could give Safeway the base it needs to at least hit the low range of Rhodes’s projected 3-6% of sales—assuming Rhodes can stick to a steady growth plan.
Whether this all works to Safeway’s and the customer’s advantage will be demonstrated through how willing shoppers will be to pay a delivery fee. Rhodes says he is determined to maintain a fee to offset distribution costs. The fees—$4.95 for orders of $150 or more, $9.95 for orders under $150—will only be temporarily discounted in promotions. So far, Rhodes says customers appear to be accepting the fees for the benefit of home delivery.
Education
Moreover, he expects his new marketing push to help educate consumers on the convenience and other benefits of online shopping, including what he says is an easier way to organize loyalty card discounts. “When they figure out how much they save with the Club Card, it will be more than enough to make up for the delivery charge,” Rhodes says.
Although the company doesn’t break out financial numbers for its online business, Rhodes says the web sites are expected to eventually operate financially on par with stores. “We have to be able to scale and be efficient in how we do things,” he says. “Our long-term goal is to have a dollar spent online be as profitable as a dollar spent in a store.” l
paul@verticalwebmedia.com
