Tech Industry

Whole Foods bites into Web commerce

The upscale natural-foods store enters the uncertain world of selling groceries online.

Whole Foods' new e-commerce subsidiary will launch an e-commerce site with more than 6,000 products for sale next month, as the grocer takes a plunge most other chain stores have shied away from.

The upscale natural-foods retailer says the move is inevitable as e-commerce grows and also hopes it will expand Whole Foods' customer base beyond the 88 stores in 21 states it operates now. But Internet grocery shopping--unlike book buying--has yet to take off, leaving the handful of ventures attacking the space searching for a successful business model.

Supermarket chains have done little on the Web beyond creating corporate identity sites and have watched as Internet startups like NetGrocer, Peapod, and HomeGrocer have struggled to bring grocery shoppers online. The challenge? Perishable items require a sophisticated delivery infrastructure and consumers are reluctant to buy other goods on the Web if they have to go to a physical store for perishables, according to Nicole Vanderbilt, e-commerce analyst at Jupiter Communications.

Whole Foods.com isn't going to sell perishable goods, at least not in the beginning, although it is considering a plan to ship seafood directly to customers from its Massachusetts processing plant. E-commerce success, the company's executives say, lies in Whole Foods' "very unique" product mix and product information that can't be found at the local Safeway or Albertson's. "Whole Foods is not a normal grocery store," said Carl Morris, president of Wholefoods.com, a subsidiary of the parent company.

But Whole Foods' competitors extend beyond the chain supermarkets. Vitamins and supplements, a $17 billion market, represent a "big part" of store sales, according to John Fischer, Whole Foods' marketing director. That market has attracted dozens of vitamin purveyors who are already operating on the Internet, from GreenTree Nutrition to brick-and-mortar chain General Nutrition Companies, not to mention online pharmacies.

Whole Foods has another weapon in its e-commerce arsenal: lower prices. The goods it sells online will be cheaper than those in stores, as the company passes savings from the business model on to customers, said Fischer. In the physical world, real estate and labor represent high fixed costs for the company, which emphasizes customer service and whose stores are usually located in high-rent areas. The company is also saving money because it's already got a shipping infrastructure in place, Fischer added.

Creating that infrastructure is what has hobbled Peapod, the only online grocer to go public. Over the past year, Peapod has switched from simply partnering with local grocery chains to a direct-fulfillment model. It now has a centralized distribution warehouse in Chicago, as well as "warerooms" in Long Island and Boston, where it stocks thousands of perishable and non-perishable items that are in high demand.

But Wall Street hasn't bought into Peapod's new model. In a market bullish on e-commerce, the stock has been swimming between a 52-week low of just over 2 and a high of 13.50, and recently it hasn't been able to top 10. The company is set to report fourth-quarter earnings after market close tomorrow.

Whole Foods' stock has also been on a downward trend of late, and the company may be hoping to get a boost from its e-commerce plans. Company executives claim not to be concerned about losing store sales to the online subsidiary, at least for the next few years.

To allay concerns about falling sales among its 14,000 store employees, Whole Foods is offering monetary bonuses to workers who refer customers to the Web site. All employees now have cards with ID numbers to give out to customers. When those customers register at the site, they can include the ID number of the worker who referred them. But customers won't need the ID cards to register, and Jupiter's Vanderbilt is skeptical they'll be used at all.

"That's a lot to ask of consumers," she said. "You don't want to provide any roadblocks to them purchasing online."

Whole Foods says it is setting reasonable goals in the short term, and that if it can just get 1.5 percent of its total customer base--the company's stores average 1.5 million transactions a week--to spend $100 per year, it will reach its revenue goal for the first year.

The site will go live on March 22, with more than 6,000 products available at launch. The company said it will eventually offer more than 10,000 items.