Safeway carefully ventures into old Webvan territory

By William McCall The Associated Press
Wednesday January 23, 2002

PORTLAND, Ore. — A city that marketing analysts say is loaded with Internet shoppers can now cruise Safeway aisles electronically in a test the grocery chain hopes will show it can succeed where online competitor Webvan failed. 

After burning through nearly a billion dollars in capital, Webvan declared bankruptcy last July and has been auctioning off assets to fetch just pennies on the dollar for creditors. 

Safeway managers watched Webvan carefully, all the way through its crash, and they believe they can avoid its mistakes. 

“We’ve been asked over and over why Webvan failed,” said Safeway spokeswoman Debra Lambert. “And this project has been different from the very beginning.” 

The key, Lambert says, is starting small and working out of existing stores that already have brand recognition with consumers. 

Instead of building a big, expensive central warehouse and distributing groceries across a wide area like Webvan, the Safeway stores will take orders from customers only in their neighborhoods. 

Safeway employees will use an electronic grocery list to fill special containers right from store shelves, then load them into vans divided into dry goods, refrigerated items and frozen foods. 

For a $9.95 charge, the vans will deliver in the area around the store, just hours after a customer has pointed and clicked a mouse on a home computer to order the groceries. 

“It’s much different than the Webvan model,” said Charles Lemos, an analyst with Deutsche Banc Alex. Brown in San Francisco. “The big warehouse model was just too expensive.” 

Webvan, based in Foster City, Calif., had attracted about 750,000 customers in several large cities — including San Francisco, Los Angeles, San Diego, Seattle, Chicago and Portland. 

“I think that Webvan proved successfully there was niche for it,” Lemos said. 

“Unfortunately, Webvan threw away billions in cash to pursue it on a grand scale,” he said. “Grocery stores like Safeway are doing it on a much smaller scale.” 

Lambert said the delivery time will be shorter and routes more efficient, shoppers are already familiar with the Safeway name and its products, and stores can manage inventory at the local level while taking advantage of the chain’s international purchasing power. 

“We’ve taken a conservative approach,” she said. “It’s an add-on to our business — it’s not our only business.” 

Safeway chose Portland and Vancouver, Wash., because market analysis shows about 70 percent of the households have Internet connections and consumers are Web savvy. 

The project, officially launched last week, is built on the highly successful model that the British grocery chain Tesco pioneered in the United Kingdom. 

The two companies are partners in the U.S. online venture, with Tesco providing much of the computer expertise to Safeway, based in Pleasanton, Calif., just across the San Francisco bay from Webvan. 

“The big question in my mind is to what degree the Tesco success in the United Kingdom is a function of the U.K. market, which is more favorable to online grocery shopping and delivery,” said Ken Cassar, an analyst with Jupiter Media Metrix in New York. 

“The population density is greater in Britain, the grocery stores are not as spacious and parking is more difficult. And it’s less likely that a British household will have two cars while it’s very likely in the U.S.,” Cassar said. “All this makes for more fertile ground in the U.K. than the U.S.” 

If the Safeway project proves wildly successful, store shoppers could find themselves competing with employees trying to fill orders off the shelves, he said. 

But Lemos said he doubts it would reach that point because grocery stores are typically busy only at peak evening hours and have plenty of idle time during the day, when orders would be filled. 

And the analysts agree the model is best suited to dense, urban areas, whether in the United States or Britain. 

“Is this going to work in rural Nebraska? No, but nobody’s expecting it to work there,” Lemos said. 


On the Net: 

Safeway stores: http://www.safeway.com