After flashy failures, Internet groceries quietly growing

PHILADELPHIA -- After the spectacular crashes of big-name Internet grocers in the late 1990s, the dream of a grand new wave of online food stores appeared to fizzle.

But with intentionally meager fanfare, grocers have made Internet shopping available to tens of millions of consumers nationwide, and upcoming expansions will expand it to millions more.

Industry watchers say it's no longer a question of whether Internet grocery can be successful, but rather of how big it will become.

"Our business has doubled the last two years and we expect it to double again this year," said Safeway.com head Mitch Rhodes, who labeled the growth "relatively explosive" for an industry with notoriously low profit margins.

Peapod LLC says it has 150,000 active customers in its delivery range, which includes Chicago and the East Coast, where it handles Internet shopping for chains like Giant and Stop & Shop. By 2006, Peapod expects to nearly double its reach, to areas serving 14 million potential households.

New York-based Freshdirect.com, which opened in fall 2002, now has about 100,000 active customers, a fourfold increase from a year ago.

"For the most part the demand has been greater than our ability to supply," Freshdirect co-founder Jason Ackerman said, noting the company once had to refuse about 1,000 orders because it was overwhelmed. "When you deliver great food people love the convenience of it. If we delivered crappy food people wouldn't be as excited."

Online grocers are also delivering nifty perks, like shopping lists that can be stored online for easy purchasing next time. Delivery can generally be arranged within a two-hour window to keep people from having to wait at home all day.

The key struggle for grocers is to make their service convenient enough and the cost low enough -- most charge less than $10 for delivery -- to change decades of shopping habits. Online grocers also need to operate in cities with high population densities and heavy Internet use.

Wary of past failures, Safeway Inc., Albertsons Inc. and Peapod have slowly but methodically expanded in major East and West Coast cities, Dallas, Minneapolis and Chicago the last several years. Last month Albertsons expanded operations to its Philadelphia-area Acme stores. Peapod will soon add operations in Baltimore and Westchester County outside New York City.

Set back by bankruptcy

Internet grocery was delivered its largest setback when Webvan Group Inc. declared bankruptcy in 2001. It had burned through $830 million after making grandiose predictions of success.

The measured success of online grocery today is a reminder that Webvan tried to grow too fast -- and before people gained the comfort they now have with Internet shopping. The typical Internet order of $130 is larger than the average in-store sale.

Online groceries will see sales of $2.4 billion in 2004, 0.4 percent of the total grocery market of $570 billion, Jupiter Research analyst Patti Freeman Evans said. By 2008, online groceries are expected to be worth $6.5 billion. That's just 1 percent of the estimated total market of $641 billion, but it amounts to an annual growth rate of 42 percent.

Individual retailers don't disclose how much they sell online, but Rhodes said he believes Internet sales could be up to 5 percent -- around $1 billion -- of Safeway's sales in a couple years.

But online grocery likely won't take much more of the overall market. Not only is it likely to appeal only to shoppers in big population centers, many customers aren't excited about having other people pick their produce.

"People who go in and feel fruit have no idea what they're doing, but it's still so important for them," said eMarketer analyst David Berkowitz. "Online shopping changes that dramatically."

Online grocers, however, believe they can do a better job of selecting and transporting produce than customers can. Peapod's Chicago warehouse has eight climate zones for optimal storage, and while ice cream quickly melts in the back of a Las Vegas minivan, it stays ice-cold in a delivery truck.

Executives know that one bad apple in an Internet shopping bag equals a devastating word-of-mouth backlash, so company shoppers are trained to pick the best products.

On a recent weekday, "e-commerce" shopper Jami Reichardt raced her specially outfitted cart and handheld computer down the aisles of a Philadelphia Acme store, filling her Internet customer's order of red peppers and firm cucumbers.

"I wouldn't want to eat something bad, so why would I give someone else something bad?" Reichardt said.

Not everyone appears convinced Internet grocery will stick. Neither Kroger Co., with 2,500 supermarkets and multi-department stores, nor Wal-Mart Stores Inc., with 1,500 stores that sell groceries, have groceries online.

Last August, Publix Super Markets Inc. closed its online service in South Florida because of low volume. Experts said the failure was likely due to a poorly run operation and was not an industry bellwether.

A typical on-the-fence customer is Harriet Cohen, 39, who was shopping at a Philadelphia Acme recently while her 18-month daughter nibbled on a strawberry. Cohen said that if she were busier, Internet shopping would be more attractive.

"I think it's a great idea," Cohen said. "I like to pick the stuff out myself, but if the need was there, I'd let them do it."