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

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