A Few Online Grocers Quietly Ringing Up Market Share

A few years ago, the U.S. online grocery business was all about buzz, with not much said about profits. Now, the buzz has all gone, and as far as profits, the few surviving online grocers are still not saying much.

After the demise of outfits such as Webvan, Priceline’s name-your-price WebHouse and city delivery firm Kozmo, skeptics were preparing to sound the refrain that selling groceries online was no way to make a buck.

But several other ventures have quietly tried to build market share by obtaining a foothold in major U.S. cities where busy, affluent consumers still are using the Web for convenience shopping.

According to Jupiter Research analyst Ken Cassar, online sales of groceries are estimated to reach $5.4 billion by 2007, up from $1 billion last year.

But frustration is creeping in among industry watchers because many remaining online grocers are not revealing as much as they did during the Internet boom.

Patrick Chalmers, an analyst at Nielsen/NetRatings, said it was not easy to gauge how the online grocery business is progressing, even though the industry appears to be rebounding from earlier blowouts.

“It’s hard for us to have a clearer view,” Chalmers said. “Online grocery shopping was a big concept but then kind of fell into obscurity.”

Among the prominent U.S. online supermarkets is Groceryworks.com, backed by No. 3 U.S. grocer Safeway Inc., based in Pleasanton, Calif., and British supermarket giant Tesco.

Groceryworks.com recently added a sixth market, Las Vegas, to its other markets -- the San Francisco Bay Area, Southern California, Sacramento, Portland, Ore., and Washington state’s Vancouver area.

No. 2 U.S. grocer Albertson’s Inc.’s e-commerce unit and Peapod, a subsidiary of Dutch grocer Royal Ahold, also are players in the U.S. online grocery market.

In its recently reported third-quarter results, Ahold said Peapod -- serving the metro areas of Boston, Chicago, southern Connecticut, Long Island and Washington -- cut operating losses to $7.4 million from $11.1 million a year ago.

Asked how it was doing financially, Groceryworks.com, (in which Tesco bought a 35% stake for $22 million), would say only that it “maintains a positive outlook” on its prospects and the potential for its business.

“We won’t discuss profitability,” said Mark Marymee, director of public relations at Groceryworks.com. “Sales are steady and we are pleased with results thus far,” he wrote in an e-mail to Reuters. “We are not releasing any figures.”

A spokesman for Albertson’s also said the Boise, Idaho-based retailer does not divulge particular details on its e-commerce venture as it is a small but strategic piece of the business.

Although bricks-and-mortar grocers are battling the challenge posed by an expanding Wal-Mart Stores Inc., Groceryworks.com and Albertson’s e-commerce units continue to enter new markets.

Marymee said Groceryworks.com’s turf now covers about 730 U.S. ZIP Codes, or nearly 330 cities. But he said he could not say how many registered users the service has versus Albertson’s 250,000 or Peapod’s more than 120,000.

Even so, Jason Whitmer, an analyst at Midwest Research, said Groceryworks.com could well be “on pace with where they want to be” because Tesco’s online business model has been successful.

John Browet, chief executive of Tesco.com, said the 1-year-old partnership with Safeway was “getting better at executing the model in America, the home of the Internet.”

“We cannot go into a market unless we can be the leader,” he said, adding that Groceryworks.com could provide its expertise to other U.S. grocers.

Analysts see the Safeway online partnership as a logical way for Tesco to expand into the world’s largest Internet market after scoring successes in Britain through a model that uses existing bricks-and-mortar stores as warehouses.

Kozmo and Webvan buckled under a costly push to build warehouses in a rush to expand into many areas in one sweep.