Tesco Pays $22 Million For 35% Stake In GroceryWorks

Dot-com pure plays in the grocery business have soured in recent months, but bricks-and-clicks supermarkets keep gaining momentum.

The latest example: Tesco Inc., Britain's largest supermarket, is paying $22 million for a 35% stake in GroceryWorks, the online arm of Safeway Inc. Tesco brings more to the table than just capital dollars. The company's online service, Tesco.com, expects to post about $420 million in sales this year, and is already profitable--unlike U.S. online grocers.

"Tesco has a proven model, and their expertise and systems will help us achieve greater efficiencies," says a Safeway spokeswoman. The British grocer's online experience will help GroceryWorks reach strategic goals sooner than previously expected, she says. Currently taking between 1,000 and 2,000 orders per day, GroceryWorks had already started to shift away from warehouse operations in favor of store-picking systems. Tesco, which has a sophisticated store-picking system of its own, has helped accelerate GroceryWorks' shift. GroceryWorks, based in Texas, plans to expand but no specific regions or rollout dates have been chosen yet, the spokeswoman says.

Another bricks-and-clicks grocer may join the fray in coming months. Earlier this year, Publix Super Markets Inc. revealed plans to test its online shopping service, PublixDirect.com, in Florida this summer. While the online grocery market hasn't delivered on earlier expectations--WebVan Group Inc.'s stock now hovers around 10 cents compared with its $34 high in late 1999--that doesn't spell doom for all. Jupiter Research estimates online purchases will account for 2% of all grocery sales, or $11 billion, by 2006.

Online groceries have provided an example of why pure-play wisdom has serious limits compared to fusing years of retailing experience with online savvy. That's why partnerships are important to take businesses to the next level, says Alan Alper, analyst at Gomez Inc. But sometimes that lesson takes a while to learn. "We've been waiting for WebVan to cry uncle and admit that they can't do it themselves."