Internet grocers get it right on 2nd try

By Jason Straziuso
Associated Press

Jami Reichardt, right, an e-commerce shopper for the Acme store in Mount Holly, N.J., and Nicole Fusco, the store's co-manager, finish up a customer's order. By 2008, online grocers could be worth $6.5 billion. Associated Press

But with intentionally meager fanfare, grocers have made Internet shopping available to tens of millions of consumers nationwide, and upcoming expansions will expand it to millions more.

Industry watchers say it's no longer a question of whether Internet grocery can be successful, but rather how big it will become.

"Our business has doubled the last two years and we expect it to double again this year," said Safeway.com head Mitch Rhodes, who labeled the growth "relatively explosive" for an industry with notoriously low profit margins.

Peapod LLC says it has 150,000 active customers in its delivery range, which includes Chicago and the East Coast, where it handles Internet shopping for such chains as Giant and Stop & Shop. By 2006, Peapod expects to nearly double its reach, to areas serving 14 million potential households.

New York-based Freshdirect.com, which opened in fall 2002, now has about 100,000 active customers, a fourfold increase from a year ago.

"For the most part the demand has been greater than our ability to supply," Freshdirect co-founder Jason Ackerman said, noting the company once had to refuse about 1,000 orders because it was overwhelmed. "When you deliver great food, people love the convenience of it. If we delivered crappy food people wouldn't be as excited."

Online grocers are also delivering nifty perks, including shopping lists that can be stored online for easy purchasing next time. Delivery can generally be arranged within a two-hour window to keep people from having to wait at home all day.

The key struggle for grocers is to make their service convenient enough and the cost low enough — most charge less than $10 for delivery — to change decades of shopping habits. Online grocers also need to operate in cities with high population densities and heavy Internet use.

Wary of past failures, Safeway Inc., Albertsons Inc. and Peapod have slowly but methodically expanded in major East and West Coast cities, Dallas, Minneapolis and Chicago the past several years. Last month Albertsons expanded operations to its Philadelphia-area Acme stores. Peapod will soon add operations in Baltimore and Westchester County outside New York City.

Internet grocery was delivered its largest setback when Webvan Group Inc. declared bankruptcy in 2001. It had burned through $830 million after making grandiose predictions of success.

The measured success of online grocery today is a reminder that Webvan tried to grow too fast — and before people gained the comfort they now have with Internet shopping. The typical Internet order of $130 is larger than the average in-store sale.

Online groceries will see sales of $2.4 billion in 2004, 0.4 percent of the total grocery market of $570 billion, Jupiter Research analyst Patti Freeman Evans said. By 2008, online groceries are expected to be worth $6.5 billion. That's just 1 percent of the estimated total market of $641 billion, but it amounts to an annual growth rate of 42 percent.

Individual retailers don't disclose how much they sell online, but Rhodes said he believes Internet sales could be up to 5 percent — around $1 billion — of Safeway's sales in a couple years.

But online grocery likely won't take much more of the overall market. Not only is it likely to appeal only to shoppers in big population centers, many customers aren't excited about having other people pick their produce.

"People who go in and feel fruit have no idea what they're doing, but it's still so important for them," said eMarketer analyst David Berkowitz.