Tesco Buys 35% Stake in Safeway’s GroceryWorks

Britain’s biggest grocer, Tesco, said Monday that it will pay $22 million for a stake in Safeway Inc.’s online outlet, GroceryWorks.com, to get a toehold in the world’s largest home-shopping market.

In return, Safeway’s GroceryWorks would benefit from the know-how that has made Tesco.com the world’s biggest and only profitable online grocer, the two firms said in a statement.

Tesco claims its online shopping service, supplied from its supermarkets, has a two-to-three-year lead over other Internet retailers such as Webvan Group that have burned through cash building a network of expensive warehouses.

Under the deal, Tesco has taken a 35% stake in GroceryWorks for $22 million in cash, intellectual property and technical resources. Pleasanton, Calif.-based Safeway holds 50% of the business and the rest is held by other shareholders.

A round of financing had raised a total $35 million in cash, including Tesco’s contribution.

“This is a very good combination of Safeway’s very strong business in the United States and our expertise as the clear leader in online shopping,” Tesco Chief Executive Terry Leahy said. “We expect GroceryWorks will be operating profitably by the end of next year.”

In Britain, Tesco.com says it will generate online sales of about $423 million this year and has access to a potential 50 million customers, compared with 150 million in the U.S. About 60% of U.S. households have Internet access, compared with 30% in Britain.

Vasant Prabhu, Safeway’s chief financial officer and president of e-commerce, said the aim was to turn GroceryWorks into the biggest online grocer in the United States.

Safeway invested $30 million in Dallas-based GroceryWorks.com in April 2000 to test the online retailing market. Under the deal, the supermarket operator supplied GroceryWorks with groceries, advertising and the use of its store names, including Safeway, Vons and Dominick’s. GroceryWorks primarily operated in Texas, with plans to expand to California in late 2001.

GroceryWorks will shut down temporarily today and reopen under the Safeway banner, with future deliveries coming from Safeway stores, the two firms’ statement said. They said they expect to start deliveries later this year.

Before Monday’s announcement, Tesco had spent $56.5 million developing its online business. Tesco has no stores in the United States.

“This is very much seed corn, but for the long term the potential is huge if GroceryWorks grows to be a major business,” said analyst David McCarthy at Schroder Salomon Smith Barney.

Skokie, Ill.-based Peapod Inc., owned by Dutch group Royal Ahold, is the next biggest online grocer, but it has had to raise more cash to sustain losses.

Foster City, Calif.-based Webvan Group, a onetime darling of the dot-com boom, has seen its stock price collapse and has slashed its work force as it scales back its business to preserve cash.

Leahy said the single most important decision behind Tesco.com’s success was to pick from stores rather than build expensive warehouses, as Webvan has done.

Tesco.com gets about 70,000 orders a week from 300 British stores, the company said. Worldwide, Tesco has 900 stores and 240,000 staff.

Safeway operates 1,747 stores in North America and employs about 200,000 people. In New York Stock Exchange trading, Safeway shares fell 95 cents to close at $46.30.

The supermarket operator said it will take a $30-million charge in the second quarter against its GroceryWorks investment.