Safeway makes online move with $30 million deal

Grocery giant Safeway is investing $30 million into a small, one-city online grocer, GroceryWorks in Dallas, in an exclusive deal to sell goods on the Web, the companies said today.

The move comes as investor enthusiasm wanes for online retail companies, and online grocers face increasing competition. After losing a much-needed $120 million cash infusion, Peapod last month was looking for a buyer. The company received a $73 million investment from international food provider Royal Ahold last week.

Shares of online grocers Webvan and HomeGrocer are both trading below $5, well under their offering prices.

"It's clear it's not going to be possible to get venture capitalists to absorb the huge costs and huge losses involved with building up a business on this scale anymore," said Malcolm Maclachlan, e-commerce analyst at IDC.

Safeway, which operates grocery chains Vons, Dominick's, Carrs, Randall's and Tom Thumb, will brand its service with GroceryWorks in each new market. GroceryWorks will draw from Safeway's inventory to pick, pack and deliver online orders.

Safeway will invest in Groceryworks through a newly formed subsidiary--which will own 50 percent of the closely held GroceryWorks--along with a $20 million investment from another unnamed party.

The deal is expected in close in mid-May, when GroceryWorks plans to introduce service in Fort Worth and Houston. The company, which currently operates only in Dallas, offers same-day delivery service without delivery fees or minimum orders. They plan to operate in 16 markets and open 21 fulfillment centers by the end of 2001.

Safeway operates 1,663 stores in the United States and Canada and has annual sales of about $31 billion.

Steve Burd, president and chief executive of Safeway, said in a conference call that the company has held back its online efforts to research the best strategy and learn from others' mistakes.

"The only viable approach here is bricks and clicks. Being first isn't always what it's cracked up to be," Burd said.

"We want this to be a seamless experience for the customer, whether they buy online or in stores," said Gary Fernandes, chief executive of GroceryWorks.

GroceryWorks can greatly increase its brand awareness through Safeway, a 70-year-old business. It also said it will be able to increase its gross margins earlier, expand faster, and offer a greater selection of goods and services such as in-store delivery and online pharmacy services.

"It would make sense that sooner or later the grocery store chains would dominate this market," said Maclachlan.