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
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,
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
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
"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
"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
"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
"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