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Cyber-Grocers Questioned as Homegrocer.com
Prepares for IPO

By Rachel Beck   Associated Press
NEW YORK — As Homegrocer.com Inc. becomes the latest cyber-supermarket to go public, Wall Street is rethinking its view of the online grocery business and questioning whether these companies can ever make money.

Web grocers face huge costs as they expand to cities around the nation and advertise aggressively to woo shoppers. They also must fend off new competition from traditional chains that are moving online.

That's worrying investors, who just months ago touted the promise of these sites. Stocks in the sector, including Webvan Group Inc., Peapod Inc. and Streamline.com Inc., have plunged in recent months, which may not bode well for Homegrocer's expected IPO later this week. The Kirkland, Wash.-based company plans to offer 22 million shares for between $10 and $12.

"I am just not convinced that we are at the point that there are enough people out there with Internet access who want to buy their groceries online or plan to do so in the near future," said Peggy O'Neill, an analyst with the Internet research firm Milpitas, Calif.-based Nielsen/NetRatings.

Online grocery sales are quite small, totaling about $200 million in 1999, less than 1 percent of the $440 billion in total supermarket sales, according to New York-based Internet research firm Jupiter Communications.

The business is expanding fast, with many Web grocers moving into the nation's larger metropolitan areas. Jupiter estimates sales will rise to $800 million this year and grow to $7.5 billion by 2003.

But industry watchers are quick to point out that sales growth doesn't necessary translate into profits and many things still stand in the way of these companies making money.

"It's hard to make the economics work in this kind of business," said Rich Miskewicz, a consumer industries consultant at Kurt Salmon Associates in Chicago.

Most importantly, supermarkets — both online or traditional stores — have razor-thin margins, so they must sell huge volumes of goods in order to be profitable.

In addition, online grocers face startup costs when they enter a new market, from building warehouses and fulfillment systems suited for each community to hiring and training delivery personnel.

They also face other hurdles, such as local advertising and trying to convince shoppers that they won't receive spoiled food or late deliveries.

"Buying from an online grocer isn't like buying books on the Web ... where people are basically happy if their order comes in four days," said Ken Cassar, an analyst at Jupiter. "With groceries, people expect a high standard in terms of service and product, and they won't come back if they don't get it."

Among the relatively few who have bought groceries online, the satisfaction levels appear to be quite high.

Michael Goff, a Holliston, Mass., resident who has been using Streamline for more than a year, praises the experience, except for the occasional turkey breast that is sliced too thick for his wife's taste.

"It lets us do other things in our free time than going to the grocery store," Goff said.

But Goff remains in the minority. A recent survey of 1,708 Internet consumers by Greenfield Online, a Wilton, Conn.-based market research firm, found that only 31 percent of respondents had ever visited an online grocery site. Of those who had, only 12 percent actually bought something.

Sixty-two percent of respondents said they didn't buy from the cyber-grocers because of the shipping or delivery charges, while 46 percent said that they didn't like that they couldn't touch or see the items.

"I'm just one of those people who likes to look over each piece of fruit before I buy it," said Maria Williams, while shopping at a supermarket this week near her New York home. "I don't think I could change that mentality."

Some consumers, who reject the idea of buying food online, instead are turning to a completely different Web grocery concept — Priceline.com Inc.'s WebHouse Club. The service lets consumers name their own price of products on the Internet and then pick the goods up at their local store.

A new threat is also loominge services. With their large-scale buying power, they can offer better prices, but will likely force Web-only grocers to do the same.

While falling prices is always a boon to consumers, it could be devastating to online grocers that are already struggling to earn a dime.

"There are a lot of people who are enthusiastic about the idea of this business, but it is a very tough business to be in," said Jupiter's Cassar.

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