January - 2003 issue > Cover Story

By Venkat Ramana

THE STOREFRONT WAS THE WEBSITE. THE STORE itself was a huge warehouse. Delivery was made by heavily decal-ed trucks. The model was so hot that one company, Webvan, went through a market-cap of $8 billion, before it crashed. Online grocery shopping was yet another dot-com infancy death. Or was it? A traditional brick-and-mortar supermarket chain is now attempting to bring online grocery shopping to realistic proportions. Vasant K. Prabhu, executive vice president and chief financial officer of Safeway (NYSE:SWY, market cap $35B), is also the president of Safeway.com, the chain’s newest effort in grabbing what others have dismissed as an impossible market. “Webvan needed very high numbers of customers, everyday. Repeat customers were necessary to keep the business profitable,” comments Prabhu.

No one spouts the “transformative” rhetoric of the dot-com era. The strategy of Webvan, for example, was breathtaking in its scope. Founded by bookstore mogul Louis Borders in 1996, the company went public in 1999 and tried at a breakneck pace to establish itself in 26 markets nationwide, building warehouses and a vast delivery network from scratch. All the while, the company—which briefly enjoyed a market capitalization of $8 billion—was indulging in the usual dot-com excesses, including lavish ad campaigns and bloated salaries.

Real Ambitions Vs Virtual Reality
Safeway has no such ambitions. Prabhu estimates that online shopping could bring in 3 percent of Safeway’s overall business over the next five years by serving a few carefully chosen additional cities, such as Chicago, Dallas and Houston. Even with those modest projections, that translates to a billion-dollar online business for a company with 1,800 stores and $35 billion in annual sales. Perhaps the biggest departure from the dot-com era is in the business model itself. While Webvan and other online grocers frittered their capital on new warehouses and delivery fleets, Albertsons and Safeway already have stores and trucks. Safeway has teamed with British supermarket chain Tesco—which operates a thriving online business in the U.K.—for technical support. When a customer places an order, it’s routed according to ZIP code to a nearby store. The order is effected from the store and a delivery charge—ranging from $6.95 to $9.95—applies to each order.

“The online grocery business in the U.S. has dramatically changed in a few short years,” says Prabhu. “We believe the successful online grocery models will be operated by an established brick-and-mortar grocery retailer such as Safeway, which has significant purchasing power, a well-established brand and distribution infrastructure, high-quality perishables and premium store brands.” The pure web-based retailer has to stock up on thousands of SKUs, on each product line. “The capacity to carry many brands for a single product tells heavily on the capital cost,” says the CFO. “If you look at a Safeway.com model, it is very easy for us to put our entire brick-and-mortar store online, overnight.”

People who place high value on their time will come, declares Prabhu. “This is a good product for the affluent woman, who has a large family, and would rather spend her time on more useful tasks, than on daily shopping,” says Prabhu. “While her trips to the supermarket would occur twice or thrice a week, her online visits are down to once a week. And in that one visit, she would spend as much or more than what she spends in her three weekly visits to the local store. And we have numbers to prove that.”

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