Tesco's Homeplus Chain in South Korea Scores Home Run With Smart Phone-Enabled Virtual Grocery Stores in Subway Stations

Food & Grocery Retailing 2.0

As part of its search for different ways and formats to reach food and grocery shoppers in South Korea, where its Homeplus is the second-largest retail chain after number one E-mart, United Kingdom-based Tesco recently created virtual stores in subway stations (pictured at top) in the city of Seoul as a way to try to make grocery shopping more convenient for the busy and time-pressed urban residents in what has become one of the most work-focused country's in the world.

The Homeplus discount chain is jointly-owned by Tesco and Samsung, with Tesco holding 94% of the stock in the venture.

The 115-store chain consists of big discount hypermarkets - which are similar to a Walmart supercenter in merchandise selection and similar to a mini mall in that the big marts also feature numerous independently operated (they lease from Tesco) smaller stores like travel agencies fast-food shops, bookstores and others inside them- along with smaller Express format stores. Homeplus also has an e-commerce store or mall.

Tesco's strategy with Homeplus in its quest to overtake E-mart, which is owned by Shinsegae Group, as South Korea's leading retailer is to find different ways, in addition to building actual stores, to use the online world to grow its sales.

It's Homeplus online store or mall is now the number one e-commerce site for groceries, general merchandise and consumer goods in the nation, which offers it a solid base in those strategic efforts. The virtual stores located in the subway stations are an extension of that online paradigm and strategy.

The Homeplus product-less stores in the subway stations consist of virtual grocery shelves and fresh and perishable food cases, which are designed to look just like the inside of a brick-and-mortar store, as you can see in the photograph at top.

Shoppers walk up to the virtual store, choose the items they want to buy, and then scan the product QR code using their smart phone.

Once the product QR code is scanned, the item goes into a shopper's online grocery cart.

When a shopper completes his or her purchases, they then request a time for the groceries to be delivered to their home later in the day.

The concept is essentially three-fold for Tesco's Homeplus.

First, research conducted for Tesco by the Seoul, South Korea office of marketing firm Cheil Worldwide showed that a significant percentage of urban-living and hard-working South Koreans are finding the task of weekly grocery shopping to be a burden because they're so busy at work,with family and in other activities.

Additionally, many South Korean consumers expressed a preference for being able to use waiting time, such as waiting for their subway car in the station, in productive ways.

Therefore putting these two consumer insights together resulted in the concept of attempting to allow people to shop at Homeplus wherever they may be, so to speak.

The rapid adoption and use of smart phones in South Korea also made possible the concept of converting this waiting time to shopping time, since all the technology needed to access and order groceries from the virtual subway station-based stores is contained in the hands of most urban consumers who use the subway system.

From November 2010 through January of this year, Cheil Worldwide (which produced the three minute video above featuring a look at the subway stores) launched a marketing and advertising campaign for the Homeplus virtual subway station stores. During the three month period, 10,287 consumers visited the Homeplus online store using smart phones, according to the firm. Additionally, the number of new registered members rose by 76%, and on-line sales increased 130%.

Before taking over as the head of United Kingdom-headquartered Tesco in March of this year, CEO Philip Clarke was in charge of the global retailer's operations in South Korea in his position as head of Tesco's European and Asian operations, its second largest unit after the United Kingdom.

Yesterday, Cheil Worldwide's office in Seoul, South Korea, which created the virtual subway stores for Tesco's Homeplus, won three awards for its marketing, adverting and communications campaign for the concept and brand at the 56th annual Cannes International Festival of Creativity (in France), which is affiliated with the famous film festival of the same name - Cannes.

The firm won a Grand Prix (the festival's highest award) in Media, and two Gold Lions in the direct advertising and Outdoor advertising categories, for the virtual subway stores. (See here.)

Tesco's Homeplus says it's looking for other similar venues in South Korea where it might put the virtual stores. Among the key criteria for such locations are public places and spaces that attract a high volume of people on a regular basis, along with having the "captured audience" characteristics of the subway stations, meaning places where people congregate and even better have to wait for something or someone.

The Homeplus virtual subway station-based stores from Tesco is one of the more innovative food and grocery retailing concepts we've seen over the last couple years.

It's also, in our analysis, a perfect example of where smart phone technology is taking us when it comes to retailing. In the not too distant future, don't be surprised if instead of using the conventional checkout stand in the supermarket or other format retail store (it's already starting in limited tests), shoppers instead will use their smart phones to ring up their own purchases, along with using the devices to pay for the purchases, in what is going to be the next wave of global retailing evolution.

The virtual stores, in subways or other public space are, in our analysis, a niche business with limited widespread utility for Tesco or any other retailer at present and in the near-to-medium term. But that's fine because that's as it's intended to be - one of a number of new ways and formats designed to reach shoppers where they are.

It's really all about convenience - bringing the store to the consumer - although it's important to note South Koreans' can already access the Homeplus online store with their smart phones wherever they are.

But the subway station-based virtual store does have the added benefit of the visual - the big screens depicting the virtual grocery shelves in the photograph at top.

It also has what we call the "captured audience element," meaning the subway stations, where the chief human activity is waiting, offer a good venue for suggestive selling (or shopping), which is really the key marketing feature behind the offering. A place featuring a captured audience throughout the day and night, with time on its hands while it waits, equals a good potential venue to get people to interact with the virtual grocery store and do some shopping.

We're going to be seeing numerous new and innovative experiments like the virtual stores from Tesco, Walmart and other retailers over the next few years, all made possible because of the smart phone and the new technology being added to it on what seems like a daily basis.

Stay tuned.

'Walmart To Go' - Walmart Stores' Launches Test of Grocery Home Delivery Service Today in San Jose, California

The Insider - Heard on the Street

As the once popular song asked - "Do you know the way to San Jose?"

For mega-retailer Walmart Stores, Inc., which wants to sell more groceries than it's currently doing in the San Francisco/San Jose Bay Area region, and today launched an online-based grocery home delivery service in San Jose, California, the answer is - hopefully.

In my April 7, 2011 column - A Walmart Grocery Home Delivery Service in San Jose, California Wouldn't Likely Be Much to Write Home About - I wrote about Walmart's probable plan to test an online ordering-based fresh food and grocery home delivery service in San Jose, California. The story was first reported by Bloomberg News (here).

Walmart launched that grocery home delivery service test - which it's named "Walmart To Go" - today in San Jose, beginning with a website section attached to its Walmart.com site, where shoppers in the neighborhoods where the Arkansas-based retailer is conducting what it has announced is a "limited test," can order a selection of fresh food and grocery items and have the products delivered to their homes.

You can view the website, Walmart.com/togo, here. Click here for details on the website about "Walmart To Go."

Walmart is offering a limited assortment of fresh food and grocery items on its grocery home delivery site (which is in beta test mode at present) across the basic grocery store categories, ranging from fresh produce, meat, seafood and other perishables; to packaged food and groceries, health and beauty/body care, pet food and supplies, baby food; and household supplies like paper goods, cleaning products and relate non-foods items.

There's also a section on the site for promotional items (Rollbacks), offered at temporarily reduced prices.

Shoppers can also have their drug prescriptions filled using "Walmart To Go," and have the medications delivered to their homes, along with their groceries.

Walmart is currently charging $5 and up for home delivery. According to the website, the current minimum purchase amount required to get a grocery order delivered is $49.00.

As part of the launch, "Walmart To Go" is offering an E-Voucher that shoppers can use to get their first order delivered free of charge.

In order to find out if "Walmart To Go" delivers to their neighborhood, potential online shoppers in San Jose need to put their zip code into a section on the website. If the service is available in their neighborhood, it will let the user know.

I typed in a few different zip codes for various parts of San Jose. The site indicated "Walmart To Go" delivered to about 40% of the zip codes I  punched in. But I didn't do a random sample. Nor did I try all of the available zip codes for the city.

The prices on the assortment of items currently offered on "Walmart To Go" are about in line with what Walmart charges at its hand full of stores in the San Jose area.

The everyday retail price-points for most items, particularly basics like milk and eggs and popular items like 12-packs of Coke, range from being slightly lower to about the same, and in a few cases I noticed higher, than those everyday prices the two leading supermarket chains in the market region - Safeway Stores, Inc. and Save Mart-owned Lucky Supermarkets - charge for like and similar items in their respective stores.

For example, "Walmart to Go" is selling a dozen of its private brand large-size eggs for $1.68, which is about the same as at the two chains mentioned above do for their best-priced private label versions.

Other grocers and discount format stores in the area sell similar quality eggs for less than $1.68, while other grocers retail the item for more than $1.68.

Eggs, particularly large-size, are also regularly advertised by grocer's in the region, just as is the case in other parts of the country.

As an example, Save Mart has its Sunnyside Farms private brand large eggs on sale this week at its Save Mart and Lucky banner supermarkets at buy-one-get-on-free (BOGO). At that promotional price, the cost per-dozen comes out lower than $1.68. But it is a promotional rather than an everyday price.

Walmart's private label fluid milk is selling for $2.41 on the "Walmart To Go" site. That's considerably lower, for example, than what Safeway is currently retailing its Dairy Glen (the lowest-priced of its private label fluid milk brands) fluid milk for. As of today, Safeway is selling a gallon of the Dairy Glen milk for $2.89, and to get that price shoppers are required to purchase a minimum of two gallons.

Other retailers in the San Jose area sell similar gallons of milk for less than $2.89. However, at $2.41, the "Walmart To Go" price-point is among the lowest I've seen when doing price checks in the area.

Lastly, Coca Cola, in the popular 12-pack cans size (Classic, Diet, ect.), sells for $4.38 on the "Walmart to Go" site. That price is about the same as what the two chains and many other grocery stores in the region offer the popular soft drink variety for on an everyday price basis.

Like eggs, 12-packs of Coke are an item promoted and advertised regularly by grocers and other format retail stores. In fact, it's hard not to find one or more retailers in any given market in the U.S. that aren't advertising 12-packs of Coke at least two, and often three, weeks out of a month, particularly in spring and summer.

For example, Raley's Supermarkets, which operates stores under the Raley's and Nob Hill Foods banners in and around the San Jose region, is currently promoting the Coke SKU in its weekly advertising circular for $2.25, based on a minimum customer purchase of four 12-packs.

Eggs, fluid milk and Coca-Cola are among the ten top-selling products or items in U.S. grocery stores.

Safeway Stores is the market share leader in the San Francisco Bay Area, followed by Save Mart and Raley's.

Safeway Store's operates the only major online ordering-based grocery home delivery service in the San Francisco Bay Area. Safeway's delivery area includes San Jose.

Therefore, at least in the parts of San Jose where Walmart is delivering groceries to residences, Safeway will have a new competitor - "Walmart To Go" - although at present the assortment of products Walmart has available to online shoppers on the website doesn't come close to matching the assortment Safeway offers on Safeway.com. But Walmart can add items to its selection easily, which I suspect it will. It's just launched the service as a "limited test," after all.

A few things about "Walmart To Go ... before I go.

First, I like the name. It's short. It's descriptive. And it fits well with Walmart's emerging multi-channel (brick-and-mortar and online), multi- (brick-and-mortar) format food and grocery retailing strategy.

Under the new strategy, there's the supercenters -  the big guys, and the lead horse of the brick-and-mortar store pack.

Next is "Walmart Market", the name Walmart is changing all of its Neighborhood Market supermarkets to, as well as what it will call its new grocery markets in the about 30,000-60,000 square-foot range.

Lastly, there's the smaller guy, "Walmart Express," the name of its new convenience format grocery stores, which will be about 15,000 square-feet.

I think "Walmart To Go," as a name, fits nicely in that mix.

[There's also "Walmart on Campus," the retailer's tiny (about 3,000 square-foot) convenience store on the University of Arkansas campus. But it's really a one-store test for now. So I don't include it yet in the overall multi-channel/multi-format strategy.]

In terms of my lack of enthusiasm for a Walmart home grocery delivery service in San Jose - and it's limited to that region, by the way, as I look at each market region as unique and see some strong potential for such a service by Walmart in other parts of the country - as expressed in my April 7, column, it's still my analysis that from a sales standpoint, at least in the near-to-medium term, a Walmart grocery home delivery service in San Jose, and in most if not all parts of the Bay Area, isn't going to be much to write home about.

However, I like that Walmart is testing it.

And they are testing it in a smart way - just like they did with the "marketside by Walmart" small-format stores in metro Phoenix, Arizona (although I would have tested the stores in the San Francisco Bay Area and in urban parts of Southern California, for example, as I've said before) - which is to start with a very limited test, in this case the city of San Jose, and then see what happens. The investment is low, particularly for Walmart, and as such if the retailer decides not to go forward and expand the service, the loss will be moderate.

I also think in a longer-term sense a grocery home delivery service operated in certain parts of the U.S. could fit well within what is a growing and emerging online business at Walmart Stores.

Walmart's ASDA chain in the United Kingdom has a grocery home delivery service, so the concept isn't completely new to the chain. In fact, Walmart has transferred one or more executives from the UK operation to work on "Walmart To Go." The U.S. and the UK, where online-based grocery home delivery is much more popular, are very different animals though when it comes to the business.

The retailer is planning some interesting new developments online, including experimenting with using social media to help it improve the performance of its online shopping offering in a much more aggressive way than it is currently doing. If things go according to its plans, Walmart Stores will become a much more dominant online retailing force in the U.S. over the next couple years than it is at present.

On April 18, Walmart announced it has signed a definitive agreement to acquire Mountain View, California-based social media company Kosmix, which "has developed a social media technology platform that filters and organizes content in social networks to connect people with real-time information that matters to them," according to its two founders, Venky Harinarayan and Anand Rajaraman.

The two founders, whose first company, Junglee, was acquired by Amazon.com in 1998, have been involved in the social media space for a number of years, focusing on ways to better integrate social media with online shopping.

Harinarayan and Rajaramen, along with members of the team they assembled at Kosmix, are going to work for Walmart and will be part of a newly formed research and development operation the retailer has created in Silicon Valley, called @WalmartLabs.

Walmart says "it plans to expand the @WalmartLabs team and expects the new group will create technologies and businesses around social and mobile commerce that will support Walmart’s global multi-channel strategy, which integrates the shopping experience between bricks and mortar stores and e-commerce."

The @WalmartLabs operation is part of the retailer's Walmart.com division, which is based in Brisbane, a small city next door to San Francisco.

Mountain View, where Kosmix was based, is a 30-45 minute drive from Brisbane and less than 10 miles from San Jose. San Jose is under an hour's drive from the Walmart.com offices in Brisbane, depending on traffic conditions, of course.

I included the travelogue paragraph above in order to highlight the geographical - and human resource - synergies behind Walmart's launching the grocery home delivery service in San Jose, acquiring the Mountain View-based social media-based company, and setting up @WalmartLabs in Silicon Valley, which San Jose and Mountain View are part of.

From the human resource and talent angle, The San Jose -to- San Francisco geographical region is home to, among other top-flight social media companies (and start ups), Facebook (Palo Alto) and Twitter (San Francisco). It also has the human resource talent and infrastructure Walmart needs to become a leader in online shopping and in using social media to help it achieve that objective.

Walmart should be given credit for making the synergistic  moves. (I just don't think, in my experience and analysis, "Walmart To Go" will be very popular in San Jose from a sales perspective. But I could be dead wrong)

In addition to creating an e-commerce/social media research and development center, @WalmartLabs, putting the operation in Silicon Valley gives the retailer an added presence, along with having its Walmart.com facility there, in the Bay Area, where it plans to do all it can to become a serious player in food and grocery retailing over the next few years. And testing "Walmart To Go' in nearby San Jose does allow for the operation to be nearby both Walmart.com and the new @WalmartLabs start up.

According to my sources, the retailer is also looking at possibly testing "Walmart To Go" in at least one other part of the country, and perhaps even two regions. But for the immediate-term, my sources tell me, the focus will be on the limited test in San Jose, where Walmart wants to "find a way" to sell more groceries, and hopes one of those ways is through "Walmart To Go."

I will have more to say about "Walmart To Go" in a upcoming column, including hopefully some evaluations by one or two people who've tried the online ordering and home delivery service. Stay tuned.

- The Insider

Read 'The Insider's' past columns here.

A Walmart Grocery Home Delivery Service in San Jose, California Wouldn't Likely Be Much to Write Home About

Walmart's ASDA chain delivers fresh food and groceries to online shoppers' homes in parts of the United Kingdom.

The Insider - Heard on the Street

An April 1 non-April Fool's Day report by Bloomberg (here) that Walmart Stores, Inc. might be planning to test an online-ordering and grocery home delivery service in the San Jose area in Northern California's San Francisco Bay Area has been getting a considerable amount of attention in the press over the last week.

However, as most often is the case, the numerous publications that have picked up on Bloomberg's piece have merely either re-printed the story partially, fully, or added a couple comments from a favorite industry analyst or two to what Bloomberg had already reported.

Here at Fresh & Easy Buzz we like to offer a bit more depth, particularly when it comes to a story first reported on by another publication. Therefore, I'm going to offer a little analysis, observation and commentary on what Walmart is up to in the San Jose, California region with its potential e-commerce/ grocery delivery scheme.

First, a little history: The idea of launching an online-ordering and home delivery business for fresh foods and groceries isn't brand new at Walmart Stores, Inc. A little over three years ago then corporate head of business development, David Wild, who's team was responsible for the retailer's initial small-format food and grocery store development efforts - the result of which are the four 'marketside by Walmart' stores in suburban Phoenix, Arizona that opened in August 2008 - was also very interested in Walmart's starting up an online ordering and home grocery delivery service.

The new business development team's initial target test market for the online/home delivery scheme was the San Francisco Bay Area. Wild, who left the company later in 2008 to become the CEO of United Kingdom auto parts and bicycle retailer Halfords, worked out of Walmart's Brisbane, California Walmart.com offices. Brisbane is an industrial and residential suburb of San Francisco, located about 50 miles from San Jose.

The online ordering and grocery delivery service was one of a number of new business ideas and concepts Wild and his team came up with that didn't become reality.

For example, another concept the team proposed was a brick-and-mortar health and wellness-oriented small-format store of about 10,000 square-feet that would be part drug store and part natural foods market, the overall focus being on selling products with a health and wellness orientation. Walmart has incorporated some aspects of the format into its new Walmart Express convenience format, the first three stores of which are set to open in a few months in Arkansas.

As part of the e-commerce/home delivery food discussions with the business development team in 2008, Walmart began slotting packaged food and grocery items on its Walmart.com website in early 2009, and has continued to add categories and items to the website since then. The items are ordered online, just like everything else on Walmart.com, and shipped to customers' homes via a postal carrier like Federal Express or UPS, just like Amazon.com does. No perishable foods are offered, however, just shelf-stable products.

Over the last few years, Walmart has off and on looked at testing the online ordering and grocery home delivery service, both in the San Francisco Bay Area and in a couple other regions of the U.S. The retailer's main interest in possibly trying such a service in the Bay Area is because Walmart has few stores in the region that offer fresh foods and groceries. It also continues to struggle in gaining approval from various Bay Area cities in its attempts to convert existing discount format stores into hybrid supercenters that offer fresh foods and groceries, along with attempts to build new supercenters, even smaller units in the 100,000-140,000 square-foot range. The average U.S. supercenter is about 180,000 square-feet.

As a result, the idea of launching a test of an online ordering and grocery home delivery service in the Bay Area has become more interesting to Walmart's senior brass. In essence, the long-term strategy the retailer is looking at in the Bay Area, where it hopes to open numerous smaller-format Walmart Market (30,000-60,000 square-foot food and grocery markets) and Walmart Express (15,000-30,000 square foot convenience-style grocery stores), is to combine however many supercenters it can get approved with the smaller-format stores mentioned above, and then add a grocery delivery service, starting in the San Jose region, where Walmart has enough supercenters so the stores can be used as order-fulfillment centers for the online orders.

Potential: The question that must be asked by and of Walmart though is: Does going into the online ordering and grocery home delivery business in the Bay Area, particularly at this stage of its meager brick-and-mortar store development and presence in the market region, make sense for the retailer? My answer: History and the current state of the online/home delivery business in the region suggests the answer to that question is...no.

For example, from the mid-1990's -to 2001 there were three retailers offering online ordering and home delivery of fresh food and groceries in the nine county San Francisco Bay Area, which today has a population of close to seven million people.

The three retailers were: Safeway Stores, Inc., which is headquartered in the East Bay Area city of Pleasanton; Albertsons; and Webvan, which was a pure-play online/home delivery grocery retailer that went bankrupt in 2011, after only a few years in business. Albertsons, then owned by Albertsons Inc. of Boise, Idaho, closed down its online ordering and home grocery delivery service a couple years later. Today, Safeway Stores, Inc. is the only major food retailer offering the service throughout the nine-county Bay Area. (What was the Albertsons' Northern California division is now owned by Modesto, California-based Save Mart Supermarkets. The stores operated under the Lucky banner.)

The fact Safeway today remains the only major fresh food and grocery online/home delivery grocer in the Bay Area, which research still shows is one of the better markets for the business in the U.S., is probably one of the motivating forces behind Walmart's consideration of launching such a service in the San Jose region.

Safeway fulfills customers' online grocery orders out of some of its supermarkets in the San Francisco Bay Area, where it has about 200 stores. Walmart would do the same, using a couple supercenters it operates in the San Jose metropolitan area.

But despite being the lone e-commerce/home delivery grocer in the Bay Area - and Safeway does a pretty good job at it - it remains a meager business for the grocer. Safeway CEO Steve Burd has recently said as much.

In fact, in an attempt to boost its online/home delivery business, last year Safeway held a very aggressive promotion over a number of months, offering first time users of Safeway.com, its e-commerce-home delivery site, $15 off any orders of $50 or more, along with free delivery. Safeway continued the aggressive promotion until mid-January of this year. Since then it's eliminated the $15-off deal but continues to offer free delivery to first-time users of the service. [You can read a December 15, 2010 story about the promotion in Fresh & Easy Buzz here: Safeway Wants to Grow its Online-Home Delivery Grocery Business - And is 'Giving Away the Store' to Prove it.]

Early this year Burd said in a conference call to analysts the promotion last year added some new business to Safeway.com but that basically it wasn't anything to write home about.

Keeping and continuing to promote the service makes good sense for Safeway though, in my analysis, because it fits well as an integrated and synergistic part of its overall food and grocery business in the Bay Area and in the handful of other U.S. regions where it offers home delivery. But, I can share this with you: Safeway's senior executives don't currently see Safeway.com as being one of the chain's major growth engines at present, even in its Bay Area home market.

Mega-Walmart can afford to experiment with and test an online ordering and grocery home delivery service in the San Jose region. After all, the start-up costs aren't huge - buying a few combination freezer/refrigerator/dry product delivery trucks, outfitting a few store backrooms to fulfill the online orders and spending some cash for marketing and advertising. But the benefits would likely also be meager, in my analysis.

Therefore, before it goes forward with the test - and our sources say Walmart hasn't decided if it will do so yet - the Bentonville, Arkansas-based mega-retailer should keep in mind that the majority of the customers of Safeway's online ordering and home grocery delivery service are dual-income (and higher income), well-educated younger professionals. These are the consumers in the Bay Area who primarily shop at Whole Foods Market, Safeway's more upscale stores and numerous other more upscale grocery markets in the Bay Area. They use Safeway.com primarily for convenience. Price isn't a motivating factor, particularly considering delivery charges add on $10 or more to a grocery order.

Will this demographic shop for their groceries at Walmart, even with home delivery? My analysis: I doubt it. Why: Walmart isn't their brand.Whole Foods is. Target is. Even Costco is. But not Walmart.

If I'm correct that means Walmart would need to reach a different shopper demographic (than Safeway does) with its online ordering and home delivery grocery service, like it does with its stores -  its traditional lower-income/middle income segment.

The problem with this segment when it comes to an online/home grocery delivery business for Walmart is consumers in these segments are looking to save money on grocery purchases not spend more, which unless Walmart delivers the orders for free or for a couple dollars, will be the case. Additionally, lower-to-middle income shoppers use online ordering/ home grocery delivery services in very low percentages, both in the Bay Area and nationally in the U.S., according to numerous studies.

Walmart might be tempted to think that because many lower-to-middle- income consumers use its Walmart.com service to buy products online and have the items shipped to their homes via a postal carrier, that these same shoppers will therefore use a home grocery delivery service in equal or similar numbers.

But the comparison is apples and oranges, so to speak. Why? Shopping for fresh food and groceries is a regular task and a very competitive enterprise. Most lower-to-middle income consumers shop at multiple stores, shop weekly ads, use coupons and look for the best deals. In contrast, ordering products, be it contact lenses, books, a television set or clothing, from Walmart.com for home shipment, which can actually be cheaper because there's often no sales tax on the items, is an irregular task that can be done after first comparing prices at brick-and-mortar stores.

Walmart's best strategy for the San Francisco Bay Area region is a smaller-format brick-and-mortar store approach, supplemented with as many supercenters of the smaller variety as it can gain approval for over the next few years.

What the retailer needs to do for starters is strike up a deal with the mayors and city councils' of the region's three biggest cities - San Jose, San Francisco and Oakland, like its done with Mayor Daley in Chicago, offering to focus on building and opening mostly smaller-format stores in exchange for getting approval for a few bigger supercenters. With municipal budgets in California so stretched, these cities are willing to listen, something they probably wouldn't have done five years ago when the region was booming and city budgets were flush with money.

Once Walmart has achieved a bit of critical mass in the San Francisco/San Jose Bay Area (eg: food and grocery sales market share) it's my analysis that perhaps then an online ordering and home grocery delivery service might make sense for the retailer. But until then, if Walmart tries it now, I don't think it will be anything to write home about.

- The Insider

Read 'The Insider's' past columns here



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 Safeway.com 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 Safeway.com 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 Safeway.com 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 Safeway.com 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 Walmart.com 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 Safeway.com 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 "Amazon.com" 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 "Amazon.com" 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, Amazon.com 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 Safeway.com. 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 Safeway.com 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 Safeway.com 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.