December 27, 2000, 2:31 PM — BRICK-AND-MORTAR companies struggling to build a viable Internet presence are capitalizing on a soft stock market to jump-start their e-business strategies with partnerships and acquisitions.
Two major deals last week between established supermarkets and their online counterparts demonstrate the importance of online shopping to grocery stores and other well-established retailers.
Safeway inked a far-reaching strategic alliance with Dallas-based GroceryWorks.com while Dutch conglomerate Royal Ahold rescued PeaPod from the edge of oblivion by purchasing 51 percent of the online grocer's sagging stock. The deals have renewed the debate over whether brick-and-mortar retailers should build their e-commerce strategies from within or turn to outside help.
"[The Internet] is a different channel, and it is not easy to make money in it. We didn't necessarily want to be the first ones in it, and until we saw GroceryWorks, we had not seen a viable model for it," said Debra Lambert, a spokeswoman for Pleasanton, Calif.-based Safeway.
Safeway conducted tests to determine whether it should develop a solution internally, and ultimately decided against in-house development. Instead, the supermarket giant, which owns brands such as Vons, Dominick's, Carrs, Randall's, and Tom Thumb, invested $30 million in GroceryWorks, and will endeavor to build out the online start-up's inventory, fulfillment capabilities, and customer base.
"[Safeway] brings a tremendous amount of buying power, which, in turn, makes our business model viable," said Kelby Hagar, president of GroceryWorks. Hagar said that all brick-and-mortar stores face the decision of either having to do online shopping themselves or to partner with an Internet expert. "We don't see the first choice as [being] much of a choice at all."
Other stores would disagree with Hagar's assessment. Boise, Idaho-based Albertson's has decided to go ahead with building out its capabilities internally. And, although the company declined to comment on the progress, analysts are saying that more deals similar to the ones last week are likely.
"We have been saying that the established retailers would end up buying these [Internet retailers], and now we are seeing it happen," said Charles Cerankosky, director at McDonald Investments, in Cleveland. "Nobody has figured out how to make this [hybrid model] work yet, but [Safeway and Royal Ahold] have a pretty good shot with what they're doing now."
Meanwhile, the deals of last week raise questions as to whether retail stores need to have both online and brick-and-mortar channels.
Online grocer pioneer WebVan believes that it can succeed as an online-only channel and sees storefronts as unnecessary.