Tesco opens web grocery service in the US

Food retailer Tesco today began selling groceries online in the US through its partnership with Safeway. The latter is a different company to the UK food chain with the same name.

The low-profile launch of the internet home delivery service will initially run from a handful of stores in Portland, Oregon, and Vancouver, Washington State.

As US online grocers have been folding, Tesco will face only one big competitor in the shape of Peapod, although Albertson's offers online shopping through nearly 40 stores in the Seattle region and is evaluating expansion plans.

In June, Tesco bought a 35 per cent share of GroceryWorks, Safeway's existing online grocery channel, for £14m ($22m) so that it could extend its online shopping service in the US.

GroceryWorks has now been relaunched as Safeway.com and will use the Tesco model of picking goods from stores, not warehouses, to fill home delivery orders.

The deal combines Tesco's experience in developing websites and the systems to run a store-based grocery home shopping service, with Safeway's brand recognition in the US market, the companies said.

GroceryWorks has been operating in Texas since January 2000 but suspended operations in June so that it could be prepared for relaunch under the Safeway banner.

The store picking model is proving to be the most cost-effective means of fulfilling grocery home shopping orders.

Jupiter Media Metrix analyst Ken Cassar said that, although the store-based model saves money in the short term and makes sense in densely populated areas where most consumers are located a short distance away from the stores, "that hits a ceiling at some point".

Jupiter recently reduced its expectations for the market, dropping its 2001 numbers by 50 per cent from $2bn to $1bn, and its 2005 prediction from $18bn to $7bn.

Vasant Prabhu, Safeway's chief financial officer and president of its ecommerce businesses, agreed that the online grocery business in the US has dramatically changed in a few short years.

"We believe that the successful online grocery models will be operated by an established bricks-and-mortar grocery retailer such as Safeway which has significant purchasing power, a well-established brand and distribution infrastructure, and premium store brands," he said.

Last Monday UK food retailer Asda shut its two dedicated picking centres in Watford and Croydon so that it could transfer the Asda At Home online shopping service to 13 south east stores instead.

The new store-based delivery service will mirror that offered by Tesco in which staff pick home-ordered goods from the shelves of a nearby store.