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Sunday, November 29, 1998 - Page updated at 12:00 AM

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Virtual Groceries -- Homegrocer.Com Courts Convenience-Hungry Shoppers To Turn Its Online Dream Into Reality

Seattle Times Eastside Business Reporter

At 10 in the morning, HomeGrocer.com's "shoppers" quietly pushed their carts along the warehouse aisles, filling shopping bags with everything from microbrews to apples.

By 1:30 p.m., about the time a dozen trucks were supposed to start on their rounds, calm had given way to something approximating panic. "It's controlled chaos," driver Bart Maxcy whispered as the shoppers raced around grabbing the final items.

"Do you know where Truck 49 is?" asked Brenda Heckathorn, the produce supervisor, a package of Eggo waffles in one hand, a bag of C&H sugar in the other.

Drivers were ordered to move away from the loading dock. Sneaker-shod shoppers flat-out sprinted down the aisles.

By the time the last plastic "totes" of groceries were carried onto the last truck shortly before 2, several others had left. One shopper turned to another: "Not bad for a record day."

"You guys did an awesome job," Maxcy said before hitting the road to Kirkland.

That's what it's like at the fast-growing Internet-based business, which ships groceries from its Bellevue warehouse to homes in Seattle and across the Eastside.

HomeGrocer.com hasn't been able to hire people fast enough to keep up with demand. In order to fill customers' Thanksgiving orders, the company's 100 employees worked nine straight days and, for the first time, made deliveries on Sunday and Monday.

Since moving from its experimental phase to full public service last May, HomeGrocer.com has joined half a dozen other companies competing to make money from a new frontier in electronic commerce.

That none of the young companies is yet profitable - and some are bleeding money at a frightful rate - hasn't dimmed their enthusiasm. HomeGrocer.com, initially funded by rich Seattle-area "angel investors," announced in September it had received the financial backing of two of Silicon Valley's top venture-capital firms, Kleiner Perkins Caulfield & Byers and Hummer Winblad.

The funds are being used to buy delivery trucks, hire drivers and shoppers, run ads on seven radio stations, and prepare to roll out the service in another city next year.

Terry Drayton, a native Canadian who is co-founder, chief executive officer and president of HomeGrocer.com, said the company has spent "darn close" to $10 million in its first 10 months of operation.

No one knows how much money - if any - an Internet grocery can expect to earn. Andersen Consulting last year estimated that total online grocery sales will reach $60 billion to $85 billion annually by 2007. Forrester Research in August predicted, more modestly, online grocery sales of $10.8 billion annually, or 2 percent of total grocery sales, by 2003.

Still a blip

In a year when online retail business is topping $5 billion, Forrester noted, e-commerce grocery sales "remain a blip on the radar screen." And in Boston, the report described four competing companies as "fighting over scraps."

Those words of caution aren't deterring the new entrepreneurs like Drayton. In a $439 billion industry, he figures, "There's room for at least one e-commerce grocery to do a billion."

Drayton first toyed with the idea of a home-delivery grocery in 1992, when he was delivering bottled water to homes and businesses in Toronto and Montreal. One snowy night, he came home and told his wife, Beth, that his company's 200 trucks had delivered water to 10,000 customers in a single day.

"I was really pumped," Drayton recalls. "It was a big accomplishment. She said, `That's wonderful, darling. That's wonderful, that's great, but if you really want to help me out, figure a way to get groceries delivered to the house. John's got an ear infection, we don't have groceries, there's snow all over the driveway, and I can't get out of the house.' "

Drayton thought that sounded like a good idea. His first notion was to set up a 1-800-GROCERY line to take food orders by phone. But he quickly calculated the cost of handling each order at $10 to $15 above a conventional store's cost. Worse, he couldn't figure out how to get up-to-date merchandise and price lists in customers' hands.

He dropped the idea. But after selling his bottled-water company and moving to Vancouver, B.C., in 1996, Drayton began talking about home delivery with two friends, food brokerage president Mike Donald and technology company manager Ken Deering. They studied the concept and concluded it was feasible, if they took orders over the World Wide Web as a way to reduce the cost and provide customers with a current catalog.

Their target customers were families with plenty of money and a lack of time or desire for shopping. They combed the U.S. for cities that had lots of computer-equipped families with children and incomes above $70,000. Nearby Seattle fit the bill.

Seattle also proved to be a hotbed of retail innovators who could offer expertise and some capital to the new venture. What other city of Seattle's size could boast the likes of Nordstrom, QFC, Starbucks, Amazon.com, Costco and REI?

A mutual friend introduced Drayton to Shurgard Chairman and Chief Executive Chuck Barbo, who became the first Seattle investor in HomeGrocer.com. Barbo introduced Drayton to Tom Alberg, a former McCaw Cellular Communicationss executive and a partner in the Madrona Investment Group.

The network of angel investors broadened, and former Macy's Chief Executive Phil Schlein of San Francisco joined the board of directors. Through Alberg, former Microsoft Vice President Jon Lazarus was recruited as an investor. Alberg, Schlein and Lazarus all helped land the venture-capital funding the company needed to grow rapidly in a highly competitive field.

In September, HomeGrocer.com closed funding deals with Kleiner Perkins Caulfield & Byers and Hummer Winblad. Kleiner Perkins is a legend for underwriting such successes as Sun Microsystems, America Online, Netscape, Compaq Computer and Amazon.com. The younger Hummer Windblad, which works only with software companies, has invested in Elekom, Wind River Systems, Netopia and NetGravity.

Kleiner Perkins partner Doug Mackenzie and Hummer Winblad partner Bill Gurley have joined the HomeGrocer.com board.

Competition isn't idle

The competition was not idle while HomeGrocer.com's founders were rolling out their new service earlier this year. The largest company, publicly traded Peapod of Skokie, Ill., has partnered with conventional grocery chains in selected cities to send personal shoppers to their stores and deliver orders to customers' homes.

It's a costly way to sell groceries, and Peapod lost $5 million in the third quarter. Aiming for greater efficiency, the company plans to open its first warehouses in Chicago and on Long Island, N.Y., soon.

NetGrocer, the only truly national grocery service, ships dry goods by Federal Express from its New Jersey warehouse. In the first quarter, the company lost $3 million on sales of $406,000.

NetGrocer last month scrapped plans for an initial public offering and announced that former President and CEO Daniel Nissan was no longer with the company. The company, which has agreed to pay several Internet marketing partners $23.8 million, is seeking to raise money privately.

The most viable e-commerce grocery businesses appear to be those that, like HomeGrocer.com, operate their own warehouses and deliver a full range of groceries on their own trucks. Since October, Nordstrom has bought an interest in two of the top contenders, Scotty's in Chicago and Streamline in Boston.

While some home-delivery companies drop off orders on customers' back porches or garages, HomeGrocer.com delivers only when the customer is home. Deliveries are scheduled within an hour-and-a-half "window" of time.

Fred Schneider, director of Andersen Consulting's electronic retail division, sees that delivery model as a problem for some customers.

Schneider quoted a potential home-delivery customer who said he wouldn't want to wait at home for his groceries: "I've taken one inconvenient experience - having to go to the store - and turned it into two inconvenient experiences: No. 1, I have to fire up the computer and, No. 2, I have to sit around and wait for the stuff."

Schneider also said HomeGrocer.com's use of the World Wide Web for all of its orders may discourage shoppers because that medium can be slow.

HomeGrocer.com customers seem happy enough to wait for a driver who will bring groceries right to their kitchen counter if they wish. How long it takes to order is a more serious issue. Customers report taking anywhere from one to two hours to do their first large order. Subsequent orders go much faster, in part because the Web site saves a personal shopping list based on past orders.

The Web site has been revamped repeatedly, and a team of 16 programmers rolled out a much faster version earlier this month. HomeGrocer.com also has plans to let first-time shoppers order by phone or fax.

Selling convenience

What HomeGrocer.com is selling is, above all, convenience.

That's why Kris Bizpensiere and her fiance David Williamson began ordering their groceries online earlier this month. They both work at Microsoft and lead busy lives. "Sometimes it's not really convenient to have to go grocery shopping or it's not the thing I want to do on my day off. There are other things I would rather do," Bizpensiere says.

So the couple casually shop online, usually on Sunday afternoon while watching a football game on TV. Bizpensiere also has HomeGrocer.com deliver candy, fruit and other snack food for the 100 employees in the MSN Gaming Zone.

Sarah Smith, a Redmond homemaker and part-time actress and model, relies on HomeGrocer.com as a way to avoid taking her boys, 4 and 8, on shopping trips. "Your kids are always going, `Can I have that? Can I have that?' You don't have those enticing throw-ins going into your cart when you're on the computer."

HomeGrocer.com's bold hopes of becoming a $1 billion company rest on its success in attracting a growing number of customers like Smith and Bizpensiere.

The company hasn't yet demonstrated it can generate profits. Drayton expects the first "store" - but not the entire company - to be profitable by spring. That's around the time when he plans to open the second store, somewhere in California. He's also talking about opening two more warehouses in the Seattle area.

Schneider, of Andersen Consulting, says that when one company demonstrates the viability of the online grocery business, "You're going to see an explosion of growth in this industry. . . . There are over 175 markets that we believe ultimately will see these kinds of services over the next 10 years. That's when the numbers will jump."

Compared to computers, financial services and books, groceries have been a slow starter in the fast-growing world of e-commerce. That's no surprise. The traditional grocery business depends on high sales volume and has a profit margin under 2 percent. Home delivery is extremely capital-intensive, and the risks are high.

But, with some online groceries already processing film, delivering ready-to-eat meals and carting clothes to the dry cleaner - much less drawing the interest and dollars of Nordstrom - no one's sure what other kinds of high-margin merchandise might ultimately piggy-back on the 21st century grocery business.

For now, HomeGrocer.com is limiting itself to groceries, hundreds of beers and wines, and a few of the incidentals you would find on the shelves of a brick-and-mortar grocery.

"We're going to do groceries better than anybody else," Drayton says. "We'll really nail that. We feel that groceries is the ultimate channel into the consumer. Ours is a $100-a-week relationship. There's nothing else in e-commerce that even touches that in frequency or size of the property."

Put that way, it sounds a bit like controlling a computer operating system.

Keith Ervin's phone number: 206-515-5632. His e-mail address: kervin@seattletimes.com

Copyright (c) 1998 Seattle Times Company, All Rights Reserved.

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