E-Grocers Check Out

By Chris Taylor/San Francisco With Reporting by Sarah Dale/Minneapolis

The awful moment of realization came last week for 1.3 million wired households. From Boston to the Bay, Web-savvy moms and dads discovered their salad days of food delivery on demand were over. There was no option other than that dreary old hunter-gatherer ritual--going to the grocery store.

In one week, two of America's largest online supermarkets--Webvan.com on the West Coast and HomeRuns.com on the East--abruptly shut down. They left behind at least 2,000 people without jobs, and irate customers wondering what happened to a service that of all things cyber, seemed like a sure bet.

"These guys swallowed the get-big-fast mantra hook, line and sinker," says Ken Cassar, a senior analyst for Jupiter Media Metrix, a research and ratings firm. "They were too ambitious, but they couldn't have grabbed so much venture capital if they weren't. Investors were eyeing IPO riches." Not that either company was particularly frugal with the wealth Wall Street brought. Their combined bonfire consumed more than $860 million, not counting the undisclosed seven-figure sum Webvan paid the San Francisco Giants to sponsor all the cupholders at Pacific Bell Park.

The largest online supermarket left standing--Peapod.com serving New England and Chicago--is now owned by the $65 billion Dutch mega-chain Royal Ahold. Having a Dutch uncle has won Peapod its first operating profit since the high-tech home-delivery service was founded in 1989. It expects to be fully profitable by 2003, partly because it curtailed its early ambitions. "We got too big," says Marc van Gelder, a former Ahold executive who is Peapod's ceo. "Now we're staying east of the Mississippi"--and binding the company tightly to Ahold-owned stores and distribution centers.

So online groceries do have a future. Jupiter Media Metrix still expects e-grocers to flourish into an $11 billion business, ringing up 2% of total grocery sales, by 2006. But the future is more likely to arrive at your local supermarket than Webvan-style 100,000-sq.-ft. distribution centers. Safeway and Albertsons are preparing to roll out what is known as the "store-pick" model--you order online, and a professional shopper (O.K., a teenager with a produce chart) picks out the goods at your nearest supermarket, as opposed to a dedicated warehouse. Then you either get same-day delivery for a fee (in urban areas, where it makes financial sense) or go fetch it (in rural areas, where it doesn't).

"The clock is ticking, and it may tick a little faster now," says Pat Steele, executive vice president in charge of Albertson's high-tech experiment in Seattle. His online sales have jumped 300% in the week since Webvan's demise. "The next three to six months will be the telling time."

That's when GroceryWorks.com half owned by Safeway, is set to reopen after a brief hiatus in Texas and roll out elsewhere in the West. The company won't say where, but the Bay Area seems a soft touch in the wake of Webvan. The British firm Tesco, whose two-year-old delivery website is already breaking even in Britain, just took a 35% stake in GroceryWorks. com and will supply the in-store technology.

Most stores will avoid the expense of delivery at first, but even pickup service has its advantages. "It addresses the most serious consumer pain point," says Evie Black Dykema, senior e-tail analyst at Forrester Research. "That is, picking out all the groceries while your four-year-old is trying to stuff HoHos in the cart."

Not every competitor in this space has to be a bricks-and-mortar, but pure-play dotcoms will probably be confined to the local level. In Minneapolis, SimonDelivers.com has garnered 43,000 customers who spend an average $4,200 a year. CEO Simon Foster follows the get-big-slow mantra. "We stuck to our knitting and stayed in one market rather than going for growth," he says.

The more consumers feel comfortable shopping online, the more supermarket chains ignore the Internet at their peril. Already, 65% of shoppers say they'd switch stores if a rival offered increased online service, according to a study by Netgrocer.com whose business model is FedExing nonperishable goods nationwide. "Hang on, because the curve is still going up," says Netgrocer CEO Lisa Kent. "The future is bright." Until then, we're stuck with squeaky carts and cranky kids searching for HoHos.

--With reporting by Sarah Dale/Minneapolis