Do ethnic Net grocers have recipe for success?

MexGrocer.com, which launched Friday, is the latest in a string of specialty grocers that are spicing up the online grocery business by offering to feed the country's growing appetite for international foods.

"We want to cater to those second-generation Mexicans that were educated in the United States but who learned the culture of Mexican food from their parents," said MexGrocer chief executive Ignacio Hernandez. "They don't know how to get the food or make the recipes."

But the appeal is wider than that. Americans spend more than $60 billion on ethnic foods and products every year, analysts say. And about $800 million is spent on groceries online.

Major online grocers, such as Webvan and Peapod, have launched international food sections. But niche players such as EthnicGrocer.com, LatinGrocer and IndianGroceryNet.com say they are better positioned to serve specific ethnic communities.

Even if that is true, however, the demand could be too small to grow these companies beyond mom-and-pop operations, which most of them are, said Gomez analyst Matt Stamski.

"There are success stories out there, sure, but at the end of the day they're still niche players," Stamski said. "Very few of them are ever going to become large standalone businesses."

MexGrocer started with relatively modest funding for an Internet start-up. About $500,000 was kicked in by Royal Crown Foods and company members' family and friends. Hernandez said he started the company to tap into a market made up mostly of the 22 million Mexican-Americans living in the United States.

Webvan, the Internet's largest grocer, launched its World Foods section two weeks ago. The new addition features food items from Mexico, the Middle East and Greece, as well as from other regions and cultures. NetGrocer.com and Electricgrocer.com also have built extensive international food sections.

"We're listening to our customers, and what they told us is that they are interested in hard-to-find specialty items from a wide range of ethnic backgrounds," said Webvan spokeswoman Amy Nobile.

But many of these new specialty grocers say they can cover specific ethnic foods much more deeply. For instance, KosherSupermarket.com carries more than 10,000 items on its site, said Miriam Lenchitz, a company sales representative.

KosherSupermarket has carved a business by supplying services to customers who live in regions with few places to pick up kosher Kreplach or Jerusalem Kugel--states such as Texas, Washington and Alaska, Lenchitz said.

EthnicGrocer, one of the bigger players, runs four separate sites: Namaste.com (Asian-Indian), QueRico.com (Latin American), Gongshee.com (Chinese) and EthnicGrocer, which hosts an assortment of world foods.

To avoid the hassle and overhead of maintaining perishable items, most of the ethnic grocers limit their offerings to dry goods and use carriers such as United Parcel Service or Federal Express. But shipping their products quickly and cost effectively is a huge concern for most of these companies.

"For customers to want to pay extra for these products, they have to have a real problem finding them in their neighborhoods," Gomez's Stamski said. "Shipping costs have to be kept down for this reason as well. If they're not, the prices of these items will make buying them prohibitive."

San Diego-based MexGrocer said it anticipates keeping shipping costs down considering the large Mexican-American population that lives in California.

And customers of MexGrocer, which says it will see 26 percent profit margins on most of its goods, are willing to pay extra for the hard-to-get items, Hernandez said.

"To savor authentic dishes, people are prepared to pay a little extra for the right ingredients. Finding them is our business," he said.