Jupiter bags Web-only grocers

In a report expected to be released Monday, Jupiter predicts that the strategy of building $30 million warehouses and trucking groceries to customers' front doors has proven too costly and has lured too few consumers for Net-only grocers such as Webvan to survive.

According to the research firm, brick-and-mortar grocery chains that were slow to venture onto the Web will inherit the sector--should they want it--from Web-only grocers, whose ranks were whittled down the past year.

"Delivery costs are breaking the backs of online-only" grocers, Jupiter maintains. "Grocery delivery is economically unviable for the foreseeable future."

Despite the wreckage in the Web's grocery sector, Jupiter argues that the Internet can help boost sales for traditional grocers, provided they approach it as an extension of their bread-and-butter business and not as a stand-alone operation. Offline grocers could seize a sizable share of the $3.5 billion online grocery market that Jupiter expects next year.

A host of large offline grocery chains, including Albertson's, Safeway and Piggly Wiggly, have begun tweaking their Internet strategies to rid themselves of anything that resembles the online-only approach of spending huge sums on warehouses and expanding operations too quickly.

"Brick-and-mortar grocers are terrified of the online market now," Jupiter Research analyst Ken Cassar told CNET News.com last month. "They think you have to build out like Webvan and take on the huge costs."

The report by Jupiter, a division of New York-based Jupiter Media Metrix, may seem redundant to some as it comes well after Net grocers began folding last year. Among the shuttered supermarkets are regional grocers ShopLink.com and Streamline.com. Chicago-based Peapod almost flopped but was saved when Dutch grocer Royal Ahold acquired a majority stake.

Webvan, the largest and most ballyhooed online grocer, is without the support of a larger company and acknowledges it's in a fight for survival. In the past six months, the Foster City, Calif.-based company's chief executive resigned, and the company was forced to close three operations and lay off more than 1,000 workers to conserve cash. Its share price is worth pennies, and the company also could be delisted from the Nasdaq as soon as next month should it fail to win an appeal.

Despite everything, Webvan executives still believe that its strategy helps it operate more efficiently than offline grocers, who have to pay labor, building and real estate costs for dozens of stores. In each city it operates, Webvan ships and warehouses from a single large and highly automated facility.

But even Peapod, which like Webvan once operated large distribution centers, is now delivering from Ahold's smaller, less expensive and more numerous warehouses. This has helped slash Peapod's delivery costs, the company said.

Traditional grocers such as Albertson's and Safeway last month dropped their practice of picking, packing and shipping from large distribution centers and switched to delivering from their supermarkets.

Piggly Wiggly, a franchise supermarket chain that operates mostly in the southeastern United States, is advising storeowners to stay clear of home delivery, and instead recommends a "customer pick-up" system, said Piggly Wiggly President Jim Garrison. The plan calls for clerks to pick and pack groceries ordered over the Web and ready them for customers when they pick the orders up.

Asked when Memphis, Tennessee-based Piggly Wiggly might experiment with delivery, Garrison said: "By that time, we'll probably need spaceships?."

The margins in the grocery business are razor slim, and there isn't much to spend on home delivery, Garrison said. He notes that when he heard about Webvan spending $30 million on each of its warehouses, he thought it would take decades for the warehouses to pay for themselves.

"In this business, someone is going good if they're making 2.5 percent on their sales," Garrison said. "That doesn't leave a lot of room for mistakes. You can see the ones who've made mistakes. They're the ones with the lights out."

In its report, Jupiter said a customer pick-up model is the most cost-efficient strategy for Web grocers. Stores could cut back stocking shelves with goods customers commonly ordered off the Web. That would make space for products that offer higher profit margins. For customers, having their groceries bagged, rung up, and waiting for them at the store would mean no more long lines at checkouts, which is their No. 1 complaint about grocery shopping, according to Garrison.

But store pick-ups are not the final answer, Jupiter said. The practice has failed in the past because customers were often unhappy with some of the choices the stores made when the customers' preferred items were out of stock.

Regardless of how fast or slow online grocery sales are, the sector will endure, Jupiter said. The Web is becoming an important part of how Americans shop. In a consumer survey, Jupiter found 22 percent of consumers said they printed out and redeemed online coupons before shopping. About 18 percent said they had visited the Web sites of the makers of their favorite foods.

"Sometime in the future, online shopping will equal offline shopping," said Piggly Wiggly's Garrison. "But whether that's in five years or in fifty, no one really knows."