Whole Foods enters tough online grocery sales arena

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WholeFoods.com, a subsidiary of health-food grocer Whole Foods Market, Austin, Texas, has a sign posted in its marketing department reading: "No banner ads."

"That's our mantra here," boasts John Fischer, VP-marketing at WholeFoods.com, which opens its doors online today with 6,000 non-perishable products for sale. It has no immediate plans for online promotions or selling banner ads on its site.

A former media strategist and account exec at Chicago interactive agency Quantum Leap Communications, where he worked on accounts such as MSNBC and Tommy Hilfiger, Mr. Fischer said banner ads end up costing between $40 and $60 to acquire a customer.

"It's too expensive [a] way to build a business," he said. "I came to realize there's got to be a better way."

So Mr. Fischer is tapping the Whole Foods national chain of stores, leveraging employee incentive programs already in place, in-store promotions and print ads in niche health magazines.

"We have a million and a half customers coming through our stores," he said.

PROMOTIONS DRIVE TRAFFIC

As part of WholeFoods.com's grand opening promotion, which launches April 12, customers will be given checkout coupons for $5 off a first online purchase of $25 or more, and $10 off online purchases of $50 or more. "Even if we get 1% redemption rates," he said, "this is a winning formula."

It's also sponsoring a $5,000 sweepstakes trying to drive traffic to the site, and collect opt-in customer e-mail addresses for promotional e-mailings.

Forrester Research projects consumers will spend $10.8 billion shopping online for groceries by the year 2003. Yet, WholeFoods.com enters a difficult market where profits aren't bagged easily.

Peapod, an online-only grocer based in Skokie, Ill., is in eight metropolitan areas, including Chicago; Columbus, Ohio; Long Island, N.Y.; and San Francisco/San Jose. Compared to `97, its net losses increased 50% to $19.5 million in 1998. It sells perishable and non-perishable goods, and is moving to a more economical warehouse distribution center instead of partnering with local grocery chains.

NetGrocer, which had ambitious plans to sell non-perishable items nationally, signed numerous multimillion-dollar content and distribution deals with the likes of America Online and Lycos. Then after failing to gain support for an initial public offering, it reportedly laid off most of its staff late last year.

And Streamline, a Westwood, Mass.-based online grocer, also has yet to turn a profit. It's more concerned with growing its business right now, said Frank Britt, VP-marketing. Streamline, which plans to expand into the Washington area this year, late last year received a $22 million investment from retailer Nordstrom.

P&G TEST

Another potentially positive sign for the online grocery business: Package goods giant Procter & Gamble Co. said it's testing its products with Peapod, Streamline and Hannaford's HomeRuns, another online grocer based in Boston.

While Mr. Britt says he wouldn't discount WholeFoods.com, he said Streamline's customer surveys show they want both perishable and non-perishable items.

"They don't want a half solution--they want a full solution," Mr. Britt said. "I think NetGrocer's experience has helped us substantiate that."

Melissa Bane, program manager at the Yankee Group, said WholeFoods.com is smart to use an existing employee incentive program and its stores for promotions.

"It's an interesting model at a time when a lot of companies are trying to re-evaluate strategies" and ad-spending, Ms. Bane said. "The employees are very much a part of the Whole Foods marketing engine."

While Mr. Fischer says WholeFoods.com doesn't plan to sell banner ads on the site immediately, he's not ruling them out forever. He said it's open to vendor-supported promotions, similar to the type of discounts offered through in-store promotions. He also said the site is aggressively seeking Internet co-branding partners and might hire an interactive agency for project work to gear up for the holiday season.

"We're going to launch and grow organically," he said, adding that when it has profits to invest in advertising, WholeFoods.com will consider it then.

Copyright March 1999, Crain Communications Inc.

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