The future of online grocers

A few remaining online grocers are ringing up big sales this week now that HomeRuns.com and Webvan have joined the list of failed home delivery ventures.

Who's minding the store?

A few remaining online grocers are ringing up big sales this week now that HomeRuns.com and Webvan have joined the list of failed home delivery ventures such as ShopLink.com, StreamLine.com, Kozmo and PDQuick.

This week's big winner appears to be Chicago-based Peapod. One of the Web's first supermarkets, Peapod started the week off competing for Web grocery shoppers in three of the five markets it operated: going head-to-head with HomeRuns--closed Thursday--in Boston and Washington, DC, and with Webvan--which shut down Monday--in Chicago.

Peapod now stands alone in those markets. The company, which Dutch grocery giant Royal Ahold took a controlling stake in last year, has never had competitors at its Long Island, New York, or Connecticut centers.

"We have already seen a 50 percent jump in the number of orders placed in our Chicago branch," said Paula K Wheeler, a Peapod spokeswoman.

Albertsons.com saw a 300 percent boost in its orders in the Seattle area, where it overlapped with Webvan, the company said. The sudden demise of such a large competitor even has Albertson's considering a stepped-up expansion plan to open in new markets ahead of schedule.

"We are seeing phenomenal growth this week in our online orders," Patrick Steele, executive vice president of information systems for Albertson's, said in a statement.

Two other online grocers, ShopLink and Streamline, which serviced the Northeastern United States, both closed last year.

But even in this seemingly depressed market, Jupiter Media Metrix analyst Ken Cassar predicted this week that there was hope for other companies to turn a buck, especially after the demise of Webvan, which he said accounted for 46 percent of the sector's sales.

"The online grocery industry will survive the failure of Webvan," Cassar said in a statement. "But growth will come quite a bit slower because of it."

Peapod isn't wasting time to fill the void of its fallen rivals. The company is trying to strike deals where HomeRuns would refer customers to Peapod, Wheeler said. Talks with Webvan over referring its Chicago customers to Peapod probably will not yield an agreement, she said.

But there are few signs that Wall Street is ready to buy into online supermarkets again, or give credit to the survivors for outliving competitors.

Shares of Peapod closed up 4 percent at US$1.25 on Friday, down from a 52-week high of US$3.50.

Despite less competition, Web grocers must now overcome the whiff of decay that has permeated the entire industry. Webvan, whose financial and operational struggles were well chronicled, is practically the poster child of dot-com failure.

In the end, demand for online groceries was never the worst problem; it was figuring out how to make money in a market with such thin margins, analysts and industry observers say.

The remaining competitors in the field have moved away from a Webvan-style model of building huge delivery warehouses. Most companies, including the large brick-and-mortar chains, are steering toward using their existing stores for warehouses or offering an in-store pickup service.

The latter method allows customers to order via the Net and then drive to a store and pick up their order, which store employees pack and have waiting for them.

Safeway's Internet play, GroceryWorks.com, is revamping itself so that it can deliver groceries using existing Safeway stores. Austin, Texas-based GroceryWorks got a boost last month when British grocery magnate Tesco invested US$22 million to take out a 35 percent stake.

Tesco is known for having earned profits with its Internet model in England.

Other companies such as NetGrocer, which ships non-perishable goods via FedEx, and MyWebGrocer, which builds and operates Internet sites for brick-and-mortar grocery stores, are all niche players that might continue keeping the Web grocer flame alive.

On Monday, Cassar eulogized Webvan but could have been talking about the entire online grocery sector.

"The moral of this story is that the ability to build a better mousetrap must be measured against consumers' willingness to buy it."

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