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REVENGE OF THE BRICKS

Business-to-consumer on-line grocery ordering has been the subject of intense hype followed by profound skepticism in the past year.tegies fell on hard times, the companies were similarly undervalued. Participants in SN's Technology Roundtable are watching these developments carefully with an eye toward when they might enter the market.Some are further along than others, but all agree that the traditional

Business-to-consumer on-line grocery ordering has been the subject of intense hype followed by profound skepticism in the past year.

tegies fell on hard times, the companies were similarly undervalued. Participants in SN's Technology Roundtable are watching these developments carefully with an eye toward when they might enter the market.

Some are further along than others, but all agree that the traditional supermarket company will enjoy a distinct advantage if and when they enter the business-to-consumer -- or B2C -- e-commerce fray.

Meanwhile, supermarkets are using their Web sites to provide customers with product information and to direct internal communications, even down to store level, roundtable participants said.

SN: In the light of the difficulties faced by "pure-play" Internet grocery retailers, what are the prospects for Internet-based home shopping for traditional supermarket companies?

MILLER: I think that we'll make them better define their business plan before engaging, which is a good thing. The brick-and-mortars will subsidize the start-ups and there will have to be some disciplines about staying in at a loss and the accountability for hitting the numbers promised.

We have just about seen the end of the day when there is a tolerance of pure cash outflow without making a profit. Click-and-mortar is probably going to be the biggest growth area of the business-to-consumer arena. It wouldn't surprise me if some of these pure-plays get involved in business relationships with traditional retailers.

PINK: I'm a believer in B2C for grocery, but I've been frustrated by the pure-play guys in that I don't understand how they ever thought they were going to make money. Grocery has been a narrow-margin, in-the-customers'-face business for a long time, and I really don't think the lives of the pure-play Internet guys are going to get a lot better. There is going to be more shake out.

I wouldn't be surprised to see more and more of them disappear. I think the only people who can reasonably make B2C work are the brick-and-mortar companies.

If you are in a high-service area, like Harmons, a customer is going to want relationships both on-line and in-store. There are things they are not going to want to buy on the Web, logical things, like produce, meat, deli, perishables. Do you really want to trust Peapod to slice your roast beef? So people will buy their cat food on-line, and they'll put it in a big box and send it out. But people are still going to go to their grocery stores. With food, it becomes a little less convenient to shop on-line than buying a book on Amazon.com, because they don't have to go to their bookstore anymore.

In grocery, they don't have any better prices than we do. So what's in it for the consumer if they still have to go to the grocery store for the perishables? To me, it has always been pretty obvious, unless you can somehow get consumers to buy into the fact that a pure-play grocer is somehow going to Fedex you your roast beef. It's still a shopping stop. So what's the difference if you pick up your Cheerios and throw them in your basket?

HERMAN: Very few people are making money in home shopping now, except for the high-end market where customers are willing to pay for the convenience. I really think we are going to have to wait and see which retailers find a model to make this thing work, to offer the service that people are willing to pay for. We haven't been very much involved in the business-to-consumer piece. A few of our retailers have done some things, but as a wholesaler, we haven't gotten terribly involved.

Generally, I think there will be various winners out there -- it won't necessarily be one model. It is going to depend on the company that is offering the service. I'm especially excited about things that Webvan and HomeGrocer are doing. I think there is a good chance that they are going to be successful. But I also think that your major retailers are also going to find a way to be successful in at least a certain percentage of the home shopping business.

BUTLER: The brick-and-mortar companies are the ones that are going to succeed. I don't think the pure-play Internet grocery retailers are going to make it. In the long run, they are going to have to align themselves with a brick-and-mortar company. That viewpoint is supported by recent developments.

There is brand recognition, number one, and customers want the opportunity to be able to return the product. They want to have the comfort level and confidence that they can go to a regular store and supplement what they buy and have delivered at home. The real problem for the pure-plays is they don't have the infrastructure in place to do all the buying, warehousing, transportation. They don't have the expertise that the brick-and-mortar grocery chains do. That's where it really makes a difference. They can compete with the front end -- with the look and feel that they present to the customers on the web, they can be just as good or better. But when it comes to that last mile, delivering to the customer and fulfilling the customer's expectation, that depends on your infrastructure, your transportation systems, your buying systems, the merchandising, the things that grocery chains already do best.

SN: Which of the logistical models holds the most promise: delivery or pick-up, store-based or warehouse-based?

PINK: All Harmons stores have a drive-and-load facility where, after paying the cashier for your groceries, instead of dragging them out to your car, you hand the ticket to the kid who bags your groceries and you drive your car under a covered parking area and somebody loads them in your car for you.

We see that as a wonderful opportunity to integrate the Internet into our process. So the person who does the shopping can order 80% of their groceries on-line, everything but their perishables. They go into the store to pick up their perishables, and then they drive to the loading area and pickup their Internet order at the same store.

So now I am saving some time. I didn't have to go down every aisle and pick up all this stuff, but I did go into the store to get my perishables. I've got my milk, my Cheerios, my tomato soup, my toothbrush and all of those other things, all based on shopping list management, which is one very good thing about Internet shopping. I can still do that, and yet I can spend less time in the store and pick my own perishables. That's how it plays for us.

MILLER: We have familiarity with home delivery by virtue of our relationship with Peapod. We are supplying perishables, meat and seafood and wine to Peapod, and we have seen the significant cost it takes to maintain that distribution facility and the transportation logistics. So if we did not have the Peapod relationship, our model would be the store-based, on-line ordering from a computer or from an in-store kiosk, and pickup at the store, and with curbside pickup. We don't currently have curbside pickup at this time because of our relationship with Peapod, but ultimately I think the growth will be in curbside pickup, which is just an incremental cost.

BUTLER: You need to offer the customer the opportunity to have both, delivery and pickup. There is another reason why brick-and-mortar is going to succeed -- because it gives the customer the opportunity to place an order and pick it up on the way home, or have it delivered. That's what the customer is going to want.

Some people want the convenience of on-line ordering, but they don't want anybody coming to their house. They want the ability to drive by and pick up what they ordered, and off they go.

I just don't see store-based fulfillment ever working. You are paying to put the product on the shelf, then you are paying to pick it off again. I just don't see that as a viable solution. There's a little bit of success with some people doing it, but it is moderate. I think the warehouse model is going to succeed.

SN: How viable is using third-party software versus developing your own?

MILLER: The third party makes a lot of sense. We can focus on things like logistics and integrating that application to our production system. Also, the exposure that the third-party vendors get from some of their other customers enhances the product for us. It gives us some functionality we may not have seen.

But whenever you engage in those kinds of relationships, you have to have to some flexibility to apply your own creativity. Whether that means you have access to source code, or user access, or just have a good aggressive development with the supplier. When you have a great idea, you want to get it to market quick.

BUTLER: At this point in time, you don't have to build your own, you can take something and tailor it to fit your needs. I don't think you have to completely reinvent the wheel to do it. In the interest of speed and time, you can probably take something and tailor it. It's behind-the-scenes things that you are going to have to spend some time on -- the integration with your systems. The things that the customer doesn't see are real critical in the success of B2C.

PINK: My problem with the third party software we looked at is most of these people don't understand the grocery business. The customer that I have in one part of the world is not the same as another. We have different focuses in different stores.

We have stores with stronger delis, we have stores with stronger meat departments, and it is all based on the customer demands in that area. Also, most grocery stores have disparate pricing based on transportation costs, and the distance from the warehouse, and the like. So you might pay a few cents less for a product based on what location you shop at, and you should reasonably to pay the price of the groceries that you pay in the store that you normally go to, not some generic Internet price, which could be higher or lower than the store that you go to. So any kind of Web system has to reflect the live pricing in the store you want to shop in as a customer.

That's been our approach and Tomax Technologies [alt Lake City] is building a program for us that we are getting ready to test.

The theory is, we already maintain different price groups with our back-office system. Why shouldn't our Internet site reflect the price groups that we already maintain so we don't have to do additional maintenance?

We are hooking live into our back-office pricing system for the Internet prices so we are not doing double maintenance. We can't afford it. There are too many price changes every week. The odds of error are astronomical if you try to do both at the same time.

Also, since we have stronger departments and stronger areas of emphasis in different stores, we have to give the department managers in the stores the ability to create local specials that will be reflected to their customers. That's part of the toolset that we required Tomax to deal with.

What we are trying to do is pick up the experience that customers have at Harmons' stores and give it to them on the Internet. They like Harmons. That's why they shop with us. It's a customer service issue. We want to give them an additional way to make their life a little easier.

Do I think it is going to create huge amounts of business for us? I don't, and neither does the operating board of the company. We expect it to be competitive, so we can compete with the Albertsons and the Krogers of the world, and we can offer our customers something that they don't in terms of the level of service and quality of the experience that they have with Harmons. That's all we have. We can't buy better than Albertson's or Kroger can, so we have to work at trying to differentiate ourselves in other areas, and technology is one of the ways that we can try to do that.

SN: Aside from home shopping, what are some of the key business-to-consumer Internet opportunities for supermarkets?

PINK: We have seen some interesting things recently with sites that do comparisons of ads. They will go out and actually shop all of the grocery stores in the area and have a comparison site. But nobody is admitting that the Priceline mentality is impacting anybody. We have it here, although Harmons is not participating. It seems to us to be a lot of work to get rid of your overstocks. But I don't know that because I can't get anybody to talk about their experience.

This next generation of customers are information-hungry, and the more we can tell them about stuff they are trying to buy, the better off we are. We see people being more and more educated about what they are putting in their bodies to eat. They want to know. We are focusing a lot on being able to give them information.

HERMAN: As consumer access to the Internet continues to grow, the Internet will become the best way to communicate with your customer. For example, with customer loyalty programs, that would be the best method to offer customer-specific promotions. I think e-mail will continue to grow. I also thing that the Internet is a great way of providing nutritional information and other product information for the customers that care about that.

BUTLER: We have a Web site, and we try to communicate to our customers, but we've got a ways to go yet. On product information, that's going to come. Customers are going to go to your Web site and click and learn about your private-label products, nutritional information, promotions, recipes, all those types of things.

MILLER: Something that is hard to put into a ROI, but is absolutely a fantastic customer service, is to provide a knowledge base, a source of finding information, providing the customer empowerment that we preach and we believe in.

There's a whole array of different tidbits of data knowledge that are important to customers that we can digitize. We've got products for entertaining lifestyles, for folks who really love and enjoy better quality wine, for very health-conscious people.

Our hope is that we develop a relationship with the customer so that if they find information about, say, a tofu offering, that they find everything they want to know about tofu either from a manufacturer's Web site, or maybe from our Web site. The challenge is to let them know that when they are looking for tofu, we sell tofu.

The pure commerce function is not the only benefit of the Internet, but unfortunately, that's what all the CEOs are interested in. That gives us the opportunity to differentiate our offering.

Something else. In the old days, if you wanted to find out what was going on in the industry, you packed up a van full of your directors and executives and took a road trip. Now, the frequency of road trips has been reduced because we are keeping an ear to industry developments through the Internet.

I like the idea of receiving e-mails with events happening. Although I have a hard time keeping up, it has been amazing how many times we have been in a situation where it comes time for us to make a decision, and there has been an article or a link to a web site that had pertinent information.

On the subject of customer empowerment, I have observed that customers will always go to their store managers and have a relationship with them, but the Internet has given customers the ability to get to deeper levels of the organization, back to the home office. A quick e-mail from the home page can get you to the director of operations, the vice president of human resources, the CEO. It's amazing. They can really get in there and rattle some cages very quickly.

HERMAN: The Internet creates the ability to talk to your customers one-on-one, which you really can't do any other way. If a customer has a question about how to prepare a meal, they should be able to send an e-mail to the meat manager in their particular store.