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Tesco aims where Webvan flamed

With a new online grocery service set for the Pacific Northwest, Britain's Tesco chain tests a U.S. market where a bushel of dot-com dreamers failed to deliver.

Most Internet-only grocers may have gone the way of last week's lettuce, but the online grocery market isn't yet ready for the compost heap of retail history.

Case in point: British supermarket chain Tesco is trying to sow the online soil in the United States, launching a new site for shoppers in Oregon and Washington.

Tesco teamed up with U.S. chain Safeway last summer, paying $35 million for a 35 percent stake in Safeway's Groceryworks.com. This week, the two companies are launching an online Safeway store that initially will deliver to customers in Portland, Ore., and in Vancouver, Wash., before starting a broader effort nationwide.

The new service comes at a crucial time for the grocery industry, which has been hit with concerns about an upcoming price war in brick-and-mortar stores. It also will be looking to take root in the scorched earth left behind by overambitious and notoriously failed undertakings such as Webvan.

Tesco has been relatively successful with its U.K.-based online grocery ventures. The company says its Internet operations turned a profit in 2001, earlier than expected.

"The collapse of Webvan and others has left a vacuum in some markets that a low-cost, well-known brand such as Safeway can quickly fill with minimal start-up costs and advertising," wrote Merrill Lynch analyst Mark Husson.

He estimates that Safeway could get more than half of its online sales from new customers. Executives from Safeway were not yet available for comment.

There's a lot of money at stake. Research firm Jupiter Media Metrix says that the online grocery market in the United States should grow from $600 million in 2001 to $4.9 billion in 2006.

A tough row to hoe
But online grocers have had a tough time of it in the United States. Where there were once at least six major players, Tesco now will face only one big competitor, Peapod--which itself was rescued from the edge of insolvency through a deal with multinational food products company Royal Ahold.

Other U.S. online grocery operations currently are small beans. Albertson's sells online in the Seattle area, and operates the Sav-on.com online drugstore. PublixDirect.com is available in Broward County, Fla., and the company says it plans to expand in the Southeast.

Perhaps the biggest flameout was Webvan, which went out of business last summer. One of the premier examples of dot-com hubris, the company burned through $1.2 billion in capital before filing for bankruptcy, letting go all of its workers, and auctioning off everything from warehouse equipment to software.

Webvan said Friday that a bankruptcy judge has confirmed its plan of liquidation. The sale of the company's assets is set to be completed officially on Tuesday. A bankruptcy administrator will begin the process of distributing about $25 million to creditors.

The early crop failure among online grocers left some people hungry for the convenience that the services briefly offered. Carol Gilbert, a computer consultant in Portland and a former user of HomeGrocer.com and Webvan, was pleased to hear about the new entry to the market.

"I'm glad Safeway is doing something. We miss HomeGrocer," she said. "It's really helpful for people who are busy to not have to actually physically go to the store."

But she did express some concerns about delivery fees. Tesco and Safeway haven't said what, if anything, they'll charge to bring groceries to consumers' doorsteps, but a Merrill Lynch report suggested in a note that the service would charge $9.95 per delivery.

"HomeGrocer used to give free delivery if (an order) was over $75 or if you shopped often enough. (A standard delivery fee) might affect how I buy. If you're spending $75, you're in effect spending $85," she said.

What sets Tesco and Safeway apart
There's a key difference between Tesco and Safeway's operation, on the one hand, and Webvan's model on the other: Their plan calls for food to be picked and delivered from existing stores, as opposed to Webvan's emphasis on central warehouses.

While the warehouse system can be cheaper in the long run, it requires a huge amount of initial capital and a well-developed infrastructure to get the goods from the warehouse to the shopper. Webvan spent ferociously to build a state-of-the-art facility in Atlanta, an ambition in keeping with founder Louis Borders' expectation of radical changes in the way people shop and the way grocers stock shelves.

"Store pick" systems such as Tesco's, by contrast, simply draw from the same goods that are on the store shelves; the delivery costs are tacked on to the cost of the groceries. For a system like that to succeed, of course, there does need to be a large enough group of consumers willing to pay extra to have their groceries delivered.

In a merciless irony, though, Webvan's failure may actually help Safeway and Tesco in that regard. While an independent chain such as Webvan depended entirely on online sales for success, Tesco and Safeway will combine online sales with offline sales, easing some of the pressure on the Web stores, Husson said.

Husson pointed out that more than 3 percent of Tesco's sales--roughly $450 million--comes from the Web. That same ratio would amount to around $1 billion in Safeway's case, although the analyst acknowledged that it would take some time to reach that level, especially because Tesco.com covers the entire United Kingdom.

"At the end of the day, if it breaks even but adds 1 percent to (comparable store sales), it will have done its job, in our view," he wrote.

Of course, the company will have some hurdles. Some aspects of the U.K. retail scene may be better suited to online grocery shopping than would a U.S. equivalent, said Jupiter analyst Ken Cassar.

"I've long believed that success in the U.K. is more a function of the U.K. market than anything they've done particularly well. So I'm watching with a bit of skepticism," he said.

To succeed, Cassar said, a grocer needs a market with a population that is relatively densely settled, so that delivery vans won't have far to go, and affluent, so that consumers are willing to pay for delivery.

The car factor
The American love of cars could also be a factor, he said.

"In the U.S., getting to the grocery store is fairly easy. The average household has one car per adult. And the store itself is large, well lit, not crowded. It's basically a pleasant experience," he said. "In the U.K., stores tend to be smaller, and they move more volume, so the Internet offers a palatable alternative."

"I'm not writing off the U.S., but I think it will take a long time to develop," he said.

For some shoppers in major cities, where cars can often be as much a hassle as a help, the delivery services still hold an appeal.

San Francisco resident Sergio Severo said that the loss of Webvan and his other favorite home-delivery company, Kozmo.com, left a void in his life. Kozmo, an online convenience store that carted ice cream, videos and CDs to customers' doors, drew a following in major metropolitan areas such as New York, Chicago and San Francisco, before it shut down last spring.

Grocery shopping in San Francisco is a burden that Webvan eliminated for a time, said Severo, who sells high-speed Internet access for SBC Communications.

"With the traffic here, just driving to the store and finding parking takes up a ton of time," Severo said. "Sure, I didn't mind paying service charges because the convenience they offered was worth it to me."

But although some customers raved about the convenience of having groceries, snack food and entertainment hand-delivered, both Webvan and Kozmo struggled to impress others. In their infancy, both companies sometimes missed deliveries, saw their Web sites crash, and often ran out of popular items.

"I thought they got a bad rap," Severo said. "They were new--you're going to go through growing pains. I would definitely order from a new home-delivery service if it came here."

News.com's Greg Sandoval contributed to this report from San Francisco, and Graeme Wearden contributed from London.