VIRTUALLY FRESH

The quality of fresh foods can make or break a conventional store, and the same holds true for online retailers.When shoppers cannot see, touch or smell the food, it's especially important for online retailers to make a good first impression - in cyberspace and in person at the point of delivery.In fact, winning customers' confidence is their No. 1 challenge, online retailers told SN. Yet it can be

The quality of fresh foods can make or break a conventional store, and the same holds true for online retailers.

When shoppers cannot see, touch or smell the food, it's especially important for online retailers to make a good first impression - in cyberspace and in person at the point of delivery.

In fact, winning customers' confidence is their No. 1 challenge, online retailers told SN. Yet it can be done with the first order of fresh produce that's as good as anything a shopper might select from a supermarket display.

It must be working, because business is booming and fresh food sales for some companies are outpacing overall sales.

"It's very important that we present perishables well on our website," said Peg Merzbacher, director of marketing at Peapod by Stop & Shop, Braintree, Mass. "On our site, what we show is 3-to-1 perishables. In the store, [the ratio between perishables and nonperishables] is just the opposite."

Leveraging a high-end, well-educated base of customers, most online grocers showcase high-margin items that set them apart from competitors.

The future looks rosy for Web-based food retailing. Cambridge, Mass.-based Forrester Research predicts that online retial sales of food and beverage will grow from its current 1% of total retail food and beverage sales in thsi country to 3% by 2010.

"It'll always be a small percentage of the pie, but remember that food and beverages make up the largest part of the retail industry and 3% of half a trillion is $16.9 billion," the Forrester analyst said.

Online grocer Christopher Brown, chief executive

officer of SimonDelivers, predicted that in the top 15 metropolitan markets in the country, the No. 1 and No. 2 market holders will be offering online home delivery services in the next five years.

Several factors are fueling the trend:

Twice as many people have access to the Internet vs. a few years ago.

More than half of consumers with access to the Internet use broadband high-speed connections. That's critical, sources said, because filling up a grocery cart while on dial-up could be daunting and time consuming.

Companies that survived the dot-com bust and the newcomers to online retailing have learned from the mistakes of their predecessors. Webvan, for instance, had nightmarish logistics, one source said. Other companies gave away the store in an effort to gain market share too quickly.

Now online grocers are charging adequate service fees. They've streamlined delivery systems, and are emphasizing high-margin products.

"We're not spotlighting paper towels. We're featuring items with a high margin and grouping them to present a meal idea. We'll have chicken breast and broccoli and olive oil together with a recipe," said Nick Stufano, Web merchandising manager for perishables at Peapod by Stop & Shop.

In fact, fresh food sales are outpacing overall growth by a good 10%, said Tony Stallone, Peapod's vice president, merchandising, at its Chicago headquarters. "We've had annual growth of 25% for the last three years, and perishables are going up 35% a year," he said.

Gettingin the Game

That's also the picture at Peapod by Stop & Shop, Merzbacher said.

"The longer people stick with us, the more perishables they order," she said. "Our particular mix is over-indexed on all-natural and organic, such as Coleman natural meats. Of some of those [SKUs], we actually sell more [by Peapod] than the store does."

The company fills orders from "warerooms," the retailer's term for mini-warehouses of about 8,000 square feet that are attached to Stop & Shop stores in key locations. That way, the company can leverage the buying power of Stop & Shop, even share deliveries from the Stop & Shop warehouse to the store, without interfering with store activities, Merzbacher said. Peapod has similar arrangements with sister chain Giant of Landover, Md. Peapod, Stop & Shop and Giant are divisions of Ahold USA.

Other companies including SimonDelivers, New Hope, Minn.; Bashas', Chandler, Ariz.; and HometownGrocers.com, Northfield, Minn., told SN they've experienced growth, and fresh foods are the key.

"There's been a tremendous flurry of activity just in the past six months," one source said.

Roche Bros. launched an online grocery service in the Boston area late last year. Peapod by Stop & Shop expanded its Long Island reach last month. With that, the division has a presence in 85% to 90% of Stop & Shop's market areas.

"It has even given us a way into ZIPs where Stop & Shop hasn't been able to obtain real estate," Stufano said.

Meanwhile, a start-up company, Aspen Grove Market, Boulder, Colo., thinks it's time to get in the game. Even in an area where Kroger-owned King Soopers operates its own online program, Aspen Grove Market's founders are confident they can tap a niche with a large selection of organic and natural foods as well as prepared meals to be offered when the company reaches an agreement with a meals-kit company.

Surveys showed that 80% of their potential customers buy natural and organic as well as conventional items and often shop at different stores, said Mike Ruth, co-founder of Aspen Grove Market, which opened for business this month.

"We're giving them a one-stop shopping experience, and it's online," Ruth said. "We think it's important to give them as much convenience in as many ways as we can. That's why we're going to be taking on a partner that'll enable us to offer ready-to-cook meals. All the chopping and marinating will be done for them."

In fact, the closer the online provider can get to offering a meal that's ready or almost ready to put on the table, the better, sources said.

SimonDelivers gets close to the table with its offerings. After partnering with one of the Twin Cities' largest caterers last year, the company now offers an appealing-looking variety of family-sized meals with all the trimmings, prominently displayed on its website.

Peapod by Stop & Shop partnered with Boston Market last year to leverage its brand and offer their sides and entrees online.

Smoothing out bumps

After hitting a few bumps in the beginning, several conventional retailers have been successful with online food shopping. Bashas', for instance, had first linked up with Shoppers Express a few years ago, but too many third parties made it cumbersome and inefficient, Bashas' officials said. In 1999, the company launched Groceries on the Go, an online program supplemented with a toll-free phone number for home-delivery ordering.

The program is run entirely in-house, said Alison Bendler, spokeswoman for the chain of more than 100 stores.

Personal shoppers, employed by Bashas', choose the products and pack the orders. The retailer's vans deliver the orders to customers' homes the next day.

The program has grown steadily over the years and a growing number of customers have made the switch from telephone ordering to online ordering, Bendler said. That number is up 6% in the last year, she added.

Customers' orders are filled from one fulfillment store in each area. The system is in place in Phoenix, Sedona and Page, Ariz., with sales growing steadily, Bendler said.

"Once they've received an order at their home and they see the quality of the perishables, they know we can do it," she said. "Then, there'll be repeat orders.

Officials think such a service is most efficiently run out of an individual store. So does HometownGrocers.com, which offers its services to supermarket chains for individual stores at a fixed, weekly charge.

Once HometownGrocers.com sells its services to a chain, handling the details at store level becomes the responsibility of the particular store in the chain. For example, the store provides the shoppers, order packers and the vans for delivery, and also determines the service fee to charge online customers.

HometownGrocers.com provides technical support, a daily updated website based on point-of-sale in the store, and training for store employees.

Hy-Vee, West Des Moines, Iowa, is a major client. In fact, 100 of its stores have individual contracts with the online company.

Judd Kirklin, president and chief executive officer of HometownGrocers.com, offered this explanation for the company's impressive 45% increase in business over the last two years.

"For one thing, we lost most of our competitors in 2002, but we've just plugged away and have been profitable now for over three years," Kirklin said. "Our model is a good one."

The company maintains close ties with retail stores and makes an effort to reach 100% of potential customers, he said. That's what sets the company apart.

"We aim to make things as easy for the retailer and his customers as we can," Kirklin added.

Other retailers also see growth on the horizon.

"Online grocery shopping will never be a big part of a grocer's business but it's a very important one," said Merzbacher at Peapod by Stop & Shop. "It's an option that's going to be necessary as time goes on. The retailer that offers the most kinds of conveniences will be the winner."