Safeway to Join Forces With Online Grocer
Safeway Inc. said Monday that it will form a partnership with a small online grocery company to sell food over the Internet in Southern California and around the country.
Safeway will invest $30 million to acquire half of the common shares of Dallas-based GroceryWorks.com and supply it with groceries, advertising and the use of its stores’ names, including Vons, Safeway and Dominick’s.
GroceryWorks, which will operate the stores’ Web sites and deliver the groceries to customers, expects to get an additional $20 million from another unspecified investor or investors.
By leveraging its bricks-and-mortar stores, Safeway officials say they will be able to offer things that its online rivals can’t, such as club card discounts, private-label products, and delivery to homes and local supermarkets.
The move, coupled with Royal Ahold’s agreement late last week to purchase a major stake in Peapod Inc. indicates, analysts say, that traditional retailers believe they have found a model that will make online grocery retailing profitable: partnering with an existing Internet retailer rather than building an online operation from scratch.
And that means stiffer competition for Internet retailers such as Webvan and HomeGrocer.com, which have grown rapidly in part because of the lack of serious rivals.
“The pure [Internet] players have their work cut out for them,” said Patrick Schumann, a food retailing analyst with St. Louis-based Edward D. Jones. “The traditional stronger chains like Safeway and Albertson’s, those will be the ultimate winners.’
Safeway Chief Executive Steve Burd says he favored a partnership rather than starting a separate online division because it will cost less and allow the chain to expand into new markets much more quickly. In addition, the arrangement allows Safeway to keep the partnership’s losses off its consolidated earnings statements.
Safeway will begin rolling out the online services in Houston and Forth Worth next month. By the end of 2001, Safeway expects to be delivering groceries in 16 markets around the country, including Southern California.
The investment in GroceryWorks isn’t large, at least in comparison to the hundreds of millions of dollars funneled into Webvan and HomeGrocer thus far. However, analysts say, it could provide a model for other supermarket chains searching for an Internet strategy. Most are merely dabbling with online food delivery in a couple of markets.
Online grocers and analysts say the company runs the risk of cannibalizing sales in its stores and many believe it may have underestimated the costs of rolling out these services around the country.
And Webvan officials argue that even if Safeway can undercut them on price, they can still compete by offering a much broader range of products and services. “Customers shopping online are motivated by a number of value propositions,” said Bud Grebey, Webvan spokesman. “Price is just one of them,”
