Wednesday, December 22, 2010

Safeway Wants to Grow its Online-Home Delivery Grocery Business - And is 'Giving Away the Store' to Prove it

Can Safeway Stores, Inc. convince grocery shoppers to go online by making them an offer that's hard to refuse?

Pleasanton, California-based Safeway Stores, Inc. is aggressively courting new customers for its online food and grocery ordering-home delivery business by making them an offer that's hard to refuse. That offer: The grocery chain is tempting first-time users with a promotion that includes $15-off purchases of $50 or more, along with free delivery. If a shopper orders the minimum dollar amount required, that's a whopping savings of 30% - plus free delivery - off their $50 grocery purchase. Safeway charges from $6.95-$9.95 for orders under $150, depending on the time slot in which it's delivered.

The $15-off online coupon code voucher is in addition to any online manufacturers' coupons or Safeway Club Card deals a first-time cyber-customer might use.

Safeway has been offering the promotion in the markets where if offers online ordering and home delivery - the San Francisco Bay Area, metro Sacramento and the coastal Monterey-Salinas region in Northern California; Portland, Oregon; metropolitan Seattle, Washington; metro Phoenix, Arizona; Maryland; Washington D.C.; and metro Philadelphia - nearly every week since August of this year.

The promotion works like this: Safeway runs a banner ad or similar advertisement in its weekly advertising circular (see the ad at top) in which it promotes the $15-off purchases of $50 or more discount and free delivery for first time customers, as well as running the ad on its website and social media sites at times. The advertisement includes a promotional code, which the first-time cyber-shopper types into a box on Safeway's online grocery ordering site. The system gives the customer the discount plus a free delivery credit. If a shopper has used the online ordering and home delivery service in the past, the system will reject the deal because it keeps a record of all previous customers.

Giving away the store

The fact Safeway Stores is nearly giving away its gross margin on the promotion, along with eating the cost of delivery - which combined makes it basically a money losing proposition - demonstrates two key things when it comes to the grocery chain and its home delivery service.

First, Because its one of the few major grocery chains in the U.S. doing online ordering-home delivery, it sees the potential to grow the business significantly as a major point of difference via-a-vis its competitors, as well as potentially being a cost-effective niche-oriented way to grow its business overall. Online grocery shopping would have to grow by leaps and bounds in the U.S. in order for it to become a major revenue source for Safeway - or for any other U.S. supermarket chain.

Secondly, Safeway needs to grow its customer base in all of its markets - some much more than in others - to make it more cost-effective. That's why, in part, it's been offering such an aggressive promotion for first-time customers, hoping to give them a low-cost first-taste, then hook them, or at least have them use the service every so often, along with shopping at the grocer's stores.

Safeway's cyber-grocery beginnings

In the late 1990's, when the first dedicated online-home delivery grocers and supermarket-based operations like Safeway's popped up, many members of the media, along with numerous supermarket industry analysts and pundits, were predicting cyber-grocery shopping with home delivery as the next revolution in the business.

Safeway's original online-home delivery operation was called Grocery Works. It was a partnership between the supermarket chain and United Kingdom-based Tesco, which owns and operates Fresh & Easy Neighborhood Market, which has 155 stores in California, Nevada and Arizona, and is launching into Safeway Stores' home market of Northern California early next year.

Tesco was the first supermarket chain in the world to create an online grocery store with residential delivery, which it started in the mid-90's in the UK. In the UK Tesco also offers clothing, furniture, consumer electronics and other general merchandise on its online site, similar to in the U.S. The products are shipped to homes via carrier though. Only food and groceries and related non-foods packaged goods are delivered by the retailers directly to residences.

Ironically, Tim Mason, who is the CEO of Southern California-based Fresh & Easy, as well as being a corporate director of Tesco, headed up Tesco's online-home grocery delivery creation and launch as a marketing manager at the chain's UK headquarters at the time.

The Safeway Stores-Tesco Grocery Works joint-venture (Safeway was the majority owner) didn't last long - about long enough for Safeway to go to school on what was a primarily Tesco creation from a technological standpoint, since it was already operating an online/home delivery business in the UK. After less than two years, Safeway bought out Tesco's share, killed the Grocery Works name, and brought the operation in-house, branding it with the Safeway name.

Safeway Stores fulfills the online orders from a series of dedicated Safeway supermarkets in each region rather than using centralized distribution centers. The dedicated stores - there are numerous such units in each of the market regions where Safeway offers its home delivery service, have an area in the backroom where the orders are processed, scanned at a checkout counter and stored for pick up.

A typical order fulfillment scenario works like this: The centralized computer system routes an online shopper's order to the dedicated Safeway store closest to his or her residence. A store clerk then downloads the order and shops for it in the store. Once the order is picked, the clerk then scans it in the back room, bags it, tags it with the customers name and address, and moves on to the next order. All perishables are kept refrigerated or frozen in the store back rooms. Delivery trucks pick up the orders at the dedicated stores for delivery to the customers' homes. Shoppers pay for the groceries with a debit or credit card when they place the order.

Remembering Webvan

The primary reason Safeway went the joint-venture route in the late 1990's with Tesco was because it needed expertise fast, most specifically in its home Northern California market, where at the time Louis Borders, the founder of the Borders Books book store chain, had earlier announced his plans to "revolutionize" grocery shopping the way Borders revolutionized book retailing - except via the Internet and home delivery rather than with a chain of brick-and-mortar book stores - by creating what he called the "" of food retailing - which he named "Webvan." And, Borders said at the time, Webvan would start in Northern California's San Francisco Bay Area, where Safeway is based, and then spread over a period of a few years to at least 26 major metropolitan market regions in the U.S. Tesco had that expertise.

At its high point, at least expansion-wise, Webvan operated in the following U.S. metropolitan market regions: the San Francisco Bay Area; Sacramento, Los Angeles, Orange County and San Diego in Southern California, Portland; Seattle; Dallas; and Atlanta. San Diego.

Webvan gained some of these markets when it bought out rival dedicated online grocer HomeGrocer, which went bankrupt, in June of 2000.

Borders invested millions of dollars of his own money, a small part of his take from the sale of Borders Books, in Webvan, and raised over a billion dollars from investment banks like Goldman Sachs, Silicon Valley venture capital firms Benchmark Capital, Sequoia Capital and Softbank Capital, private investors and companies like Yahoo, which was involved in an online advertising partnership with Webvan as part of its investment.

Webvan, which had its corporate headquarters in Foster City on the San Francisco Peninsula, build a massive (about 1 million square-feet) distribution and order fulfillment center near the Oakland, California airport, hired the best and the brightest from Silicon Valley to create a high-tech online grocery store, invested in the best Sun Micro Systems servers and other high-tech equipment available at the time, had state-of-the art delivery trucks custom-built, spent tons of money on marketing - and launched in the late 1990's.

Jut a few years later, in 2001, the "" of food and grocery retailing - Webvan offered everything on the site that a big brick-and-mortar supermarket offers - went bust, filing bankruptcy and closing the business.

Loses were in the $1 million- $1.5 billion range. Numerous creditors were left hanging, owed mega sums of money. Some creditors received a few pennies on the dollar from the sale of Webvan's trucks and other equipment. Others nothing. The Oakland distribution center was torn down and everything was sold, including half a million dollars worth of custom-made plastic totes the company used to deliver the groceries in, in an attempt to pay those pennies on the dollar to the creditors.

Ironically, bought what was left of Webvan. But not for much money. But it was the start of Amazon's online grocery products offering, as well as the infrastructure for the online-home delivery business it operates today in the Seattle, Washington area, where it's headquartered.

Back to the future

A little over a decade since it launched its online grocery business, Safeway Stores is doing the most aggressive promotion - the $15 off, free delivery new customer deal - and for the longest period of time, we've seen the grocer conduct in many years.

It's a gamble - many shoppers will take advantage of the promo for the big one-time savings, and never use it again.

But Safeway is the only one, or basically one of two players, in the markets where it operates If it can grow that business, say 8-10% a year for the next decade - and if in those ten years online grocery ordering with home delivery becomes more popular in the U.S., say getting closer to how much it's grown in the United Kingdom over the last decade, it could become a nice little piece of business for Safeway Stores, Inc.

After all, in the UK the nation's top three food and grocery retailing chains - Tesco, Walmart-owned ASDA and Sainsbury's - all operate successful online grocery stores with home delivery. However, after many years of growth, cyber-grocery shopping is essentially flat in the UK.

There are no current indications, in our analysis, that a major growth spurt in the online-home delivery food and grocery segment is on the near-horizon in the U.S. However, that doesn't mean Safeway can't build on its existing business through promotions like the current one and others.

But the proof in the online-home delivery pudding for Safeway Stores, Inc. will be in retaining those first time online cherry pickers. Will they return after getting a hot deal the first-time around? In our analysis only a very small percentage of those first time users will likely use the service a second, or third, time around. But if the universe of trial users created by the hot, multi-month promotion is big enough, it could be worth it for Safeway.

In the meantime, it is Christmas week. Therefore, if you live in one of the market regions where Safeway offers its online ordering and home delivery grocery service, and where it's currently offering the $15-off orders of $50 or more promotion, we know how and where you can get a $50 Prime Rib Roast for Christmas dinner for $35 - and have it delivered to your front door for no extra charge to boot.

1 comment:

Anonymous said...

Even Tesco has moved on with grocery home delivery (and it's #1 in that market in the world by any measure taking just the UK operation in account, but also offers in Ireland and South Korea). Several generations of software later than what was left with Groceryworks, phone apps, and in busy areas now picks from central automated picking warehouses like new competitor, Ocado (who are similar to Webvan in concept).

Home delivery is profitable in UK, Ireland and South Korea because it costs more to run and park a car, there is less car ownership and traffic congestion is worse, so home delivery is more attractive. Broadband penetration is higher and a bit more affordable and competitive, too. There are new entrants to come: Waitrose has started (even though they supply own-brand to Ocado) and Morrisons has announced their intention, leaving only Co-op (incorporating Somerfield) out of the picture (and their smaller stores aren't as suitable)

There is even now a price comparison website in the UK,, which compares your basket across all 4 (and can push your basket to a selected market for delivery and checkout)