September 10, 2008, 12:00 AM

E-commerce remains food for thought for big chain grocers

Big chain grocers ignore e-commerce at their own risk. Food retailers in the Top 500 Guide’s food and drug segment increased their accumulated sales by 12% to $2.37 billion in 2007, but big chains such as The Kroger Co. are conspicuous by their absence.

If there’s a last bastion of merchants that have yet to embrace e-commerce, it’s the big chain grocers.

While all merchants ranked in the 2008 edition of the Internet Retailer Top 500 Guide grew their combined sales by 21.6% in 2007 to $101.7 billion, retailers ranked in the Guide’s food and drug segment only increased their accumulated sales by 12% to $2.37 billion.

Among many of the big national grocery chains it’s still stores that prevail – and not the web. National grocery store chains are among the industry’s biggest retailers. The Kroger Co., with annual revenue of $70.2 billion, and SUPERVALU Inc., with yearly sales of $44 billion, each operate thousands of stores nationwide. But Kroger and SUPERVALU aren’t embracing e-commerce. Other e-commerce holdouts include Publix Super Markets Inc., with $23 billion in annual sales, and Delhaize America Inc. and H.E. Butt Grocery Co., with annual sales of $18.2 billion and $13.4 billion, respectively.

Of the big national grocery chains only two – Royal Ahold NV, which owns and operates, No. 41 in the Internet Retailer Top 500 Guide, and Safeway Inc. (No. 84) – have a substantial presence online. With 2007 web sales of $339 million, Peapod is the second largest retailer ranked in the food and drug section of the Top 500 Guide. Safeway, which posted online sales of $163 million in 2007 and acquired the remaining shares of GroceryWorks from Tesco PLC in October 2006 and made the e-commerce unit a wholly owned subsidiary, ranked as the sixth largest.

“Many of the big national grocery chains still don’t see the value proposition in making a big Internet push when their customers prefer to shop for their meat and produce in a store,” says Jim Hertel, managing director with food retailing consulting firm Willard Bishop. “Several big chains use their web sites very well to market and merchandise their brands, but there’s not a big push to go 100% e-commerce.”

Today the online merchants that rank highest in the Top 500 Guide’s food and drug segment are direct marketers with a long history of selling specialized food items or web-only grocers with a national marketing base, but local and refrigerated supply chains. Following Peapod in The Top 500 food segment rankings are FreshDirect LLC (No. 58) at $240 million; Harry and David Holdings Co. (No. 80) at $176 million; Market Day Corp. (No. 92) at $145.9 million; Omaha Steaks (No. 106) at $126.2 million; (No. 168 and now at $60 million; Green Mountain Coffee Roasters (No. 172) at $59.8 million and Inc. (No. 207) at $43 million.

To succeed in the online grocery business, national retailers need to build successful supply chain and delivery models – such as FreshDirect is doing in New York, says Hertel. In the high-density area of New York’s Manhattan, the difficulty of getting to the grocery store and hauling groceries home is already enough to have helped gain FreshDirect home delivery service a loyal following in the city and surrounding areas. But in May FreshDirect developed a program to further encourage loyalty that targets a key barrier keeping more consumers from buying groceries online-the cost of delivery.

Under FreshDirect’s Unlimited Delivery Pass program, customers can buy a pass for six months for $59, or for a year for $99. The pass covers delivery charges for as many online orders as the customer places during that period. The usual delivery charge per order starts at $4.99 for most of FreshDirect’s service area and ranges up to $6.99.The Unlimited Delivery Pass, about a year old at FreshDirect, was accompanied by a decrease in minimum required order size for delivery, to $30 from the original $50. “FreshDirect has taken advantage of its local and regional supply chain, its efficient delivery system and its competitive pricing to make its business model work in a market that’s willing to pay for convenience,” says Hertel. “The model works for them in New York, but at this point many of the big chain retailers are still choosing to invest in stores.”

Establishing a sustainable online grocery business hasn’t always worked on a national or even a regional basis. One of the most high profile meltdowns in the run-up to the dot-com crash was the collapse of Webvan in 2001. More recently, in July, after almost a decade in business, closed its doors after succumbing to cost pressure and waning customer interest. The assets of SimonDelivers in August were acquired by Coborn’s Inc., which operates in the upper Midwest under brands such as Coborn`s, Cash Wise, Holiday Stationstore, Little Duke`s and Save-A-Lot Food stores. Going forward, will be known as and will begin operations in October in Minneapolis and St. Paul.

Even though there are success stories such as FreshDirect and Peapod, many of the big chain grocery retailers will continue to take a wait-and-see attitude toward e-commerce, says Hertel.

But if the big food chains don’t see an opportunity, other niche retailers do. The fastest growing cataloger in the Top 500 in 2007 was Green Mountain Coffee Roasters (No. 172), which grew its web sales by 249.8% to $59.8 million. Other smaller merchants such as igourmet (No. 395) grew 2007 e-commerce sales by 22.8% to around $13.8 million by sticking to its niche of selling food gift baskets.

Big food retailers may also start to reconsider their plans if (No. 1) continues to ramp up its national online grocer plans. In June 2006 Amazon launched a grocery section that includes 12 categories of nonperishable goods such as cereal, pasta and canned soup. The category also includes merchandise from a variety of well known consumer brand manufacturers such as Kraft, Kellogg and Betty Crocker. In August 2007, expanded its online grocery business to include fresh meat, produce and other perishables, though grocery delivery is still limited to Seattle and the surrounding area.

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