Peas fill up the pod

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Online grocers are providing Wall Street with anything but a super market.

But the industry is betting the store on a massive marketing blitz this year, significantly stepping up regional and national efforts.

"Nineteen ninety-nine was the year the category sorted itself out," said one executive. "This year, everybody's going national. Two thousand is all about going head-to-head."

But even as a growing band of loyal shoppers enthuse about e-grocers, there are serious questions whether the e-plays can make a buck in groceries, a category notorious for low margins and intense competition. Pure-play e-grocers are coming onto the scene even as supermarkets come out of a period of massive consolidation. The stage is set for a marketing battle -- in stores and online -- of national retail and e-tail brands.


Albertson's next week launches a TV campaign in Seattle and Portland, Ore., for a Web site it's testing in those markets that gives online shoppers the option of retail pickups or home deliveries. With almost 2,500 stores in 37 states, Albertson's is going it alone in the Pacific Northwest, although the company -- through recently acquired American Stores -- works with online grocery pioneer Peapod in other markets, including Chicago and San Francisco.

"For Albertson's, it's a line extension," said Jim Copacino, co-founder, Copacino Creative, the Seattle agency that created the estimated $3 million TV effort. "Albertson's is betting people will use their stores different ways at different times."

One of two TV spots shows an exhausted father trudging through a desolate supermarket frozen food section. "Too busy to shop during the day? With Albertson' you can have your order delivered or choose to pick it up from a nearby Albertson's, whenever it's convenient for you," a voice-over says. The TV spots supplement print and radio ads that began last year.

Other online grocers are tapping mainstream media as well., which lets consumers set the prices they're willing to pay for groceries at traditional supermarkets, is running a print campaign with ads in The Washington Post and other newspapers touting the ability to cut their grocery bills nearly in half. also is duking it out in Seattle and Portland as well as southern California, with plans for a national rollout. Wieden & Kennedy, Portland, handles ads that feature friendly delivery men. owns 22% of HomeGrocer, which has agreed to pay $10 million to Amazon over two years to advertise the e-grocer. HomeGrocer also is paying America Online $60 million over five years to promote the e-tailer on AOL.

In the year ended Jan. 1, HomeGrocer spent $7.7 million on ads and promotion and generated $21.6 million in sales to some 55,000 households.


Webvan Group earlier this year began a branding campaign via Publicis & Hal Riney, San Francisco, in the San Francisco area and plans to expand to Atlanta and other markets later this year.

Webvan, founded by bookselling tycoon and Chairman Louis Borders, lost $60.4 million on sales of $3.8 million in the quarter ended Sept. 30, the first quarter it delivered groceries. It aims to generate 8,000 orders a day from each warehouse at an average $103 an order, yielding a profit margin of 12% -- three times the grocery industry's typical margin. Average orders early on were $71 -- with relatively few customers. Its first warehouse was designed to do the volume of about 18 supermarkets, but it early on was operating at just 20% of capacity.

Webvan expects its ad spending to go up significantly; it will piggyback on media supplied by two investors, Knight Ridder and CBS Corp.

Webvan and HomeGrocer face skepticism about whether e-grocers can make money to overcome the cost of warehouses, trucks and customer service: Webvan's stock, as high as $34 in `99, last week traded below $9. Newly public HomeGrocer has been trading below its $12 IPO price.

The costly marketing push, however, is necessary if online grocers expect to enable a significant shift in shopping habits.

"We are asking people to change the way they shop and to forgo a very human experience," said one e-grocer marketing executive. Female consumers -- about 80% to 90% of grocery shoppers are female, though most e-grocer ads are gender unbiased -- told researchers the moment of delivery of groceries causes great discomfort. Stay-at-home mothers are concerned neighbors will say, "She doesn't work and doesn't even go to the store." For working women, the perceived criticism is: "She can't even do one womanly thing."

At stake is a potentially significant chunk of the nation's $468 billion annual grocery basket. Although online grocers now have less than 1%, some venture capitalists and market analysts are bullish on the category's potential.


PriceWaterhouseCoopers expects online's share of the grocery basket to grow to as much as 10% during the next five to 10 years, said Mary Brett Whitfield, director, E-retail Intelligence System, PriceWaterhouseCoopers.

Much of Wall Street is not intrigued with the existing online grocery models. Peapod teamed up with established retailers in 1989 and sent people into stores to pick customers' online grocery orders. Peapod began adapting a centralized distribution model in 1998 when it determined warehouses would be more scalable and efficient.

Before the project could be fully funded, Peapod's CEO resigned last month due to poor health and $120 million in committed funding fell through. Peapod's stock collapsed, plunging below $4. Webvan and HomeGrocer were pulled in for the ride as investors crossed e-grocers off their shopping lists.

Peapod's market worth now is below $60 million and it's looking for a buyer. Fusion DM, San Francisco, handles Peapod's marketing, creating print, radio and direct mail.

The market values Webvan at about $3 billion and HomeGrocer at $1.2 billion -- for companies that to date have had negligible sales. By comparison, giant Kroger Co., with sales last year of $45.3 billion, is valued at about $23 billion.

Other e-grocery models are experimenting with delivery methods -- and going beyond that to position themselves as the "last mile" for e-commerce in new ways.

Companies, such as Streamline in Boston, Chicago and northern New Jersey areas, install refrigerators and other containers in customers' garages for a $30 a month fee. Another model is the "convenience store on wheels," such as, a fast-growing and newly public delivery service; and Pink Dot in Los Angeles, promising delivery in an hour or less. Even traditional delivery players, such as United Parcel Service of America and FedEx Corp., are beefing up their infrastructure to compete.

Burt Flickinger III, managing director of consultancy Reach Marketing, contends most pure play e-grocers will be bought or fail. The e-grocery market will consolidate among two to three traditional retailers, with Wal-Mart Stores leading the way, he predicts.


Ironically, many of the online grocers' money-losing practices already have won marketing's highest prize -- solid word-of-mouth endorsements.

"They're doing all the right things," said Cara Schlanger, VP-marketing for Tavolo, an online seller of gourmet non-perishable and cooking products. Ms. Schlanger is a loyal Webvan customer who received free strawberry yogurt when the requested raspberry was unavailable. Webvan also sent her a free pint of carrot soup to promote a new prepared meals option.

E-grocers are paying what it costs to delight the customer. A Peapod shopper in Chicago ordered one pound of Brussels sprouts, but literally received only one sprout. Peapod sent a $5 gift certificate for the inconvenience.

"When there's a problem, there's no problem getting it corrected," said the customer who places a weekly Peapod order. "I hope I never have to step foot into a grocery store again."

Contributing: Patricia Riedman, Kate MacArthur

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