Safeway Inc., the Washington area's second-largest supermarket chain, has begun offering its online shopping and delivery service in the region, bringing new competition to a service that has made only limited inroads with consumers.
The new Safeway.com service was rolled out quietly two weeks ago, and an announcement is scheduled for today as the company begins to promote it.
The Washington launch comes after much hand-wringing on the part of the Pleasanton, Calif.-based chain, which already has online services in six metropolitan West Coast markets and Philadelphia.
Safeway.com faces its most entrenched competition in the Washington market, where Peapod LLC has dominated the online grocery business for the past five years in partnership with Giant Food Inc. Peapod and Giant are owned by Royal Ahold NV, a Dutch company.
"We've had our eye on the Washington market for probably about two years," said Mitchell Rhodes, president of Safeway.com. "We wanted to come sooner, but because we had a competitor, we wanted to bring our best effort forward. . . . We wanted to make sure we had something really good versus something that was just okay."
Since the failure of a string of Internet grocers in the late 1990s, most notably WebVan, online grocers have made a small comeback. But like Safeway, they have been selective about the markets they enter, limiting themselves to urban areas densely populated with affluent, Internet-savvy, time-pressed consumers.
The approach seems to be working. Peapod said it increased its online sales by about 25 percent in each of the past two years and expects to turn a profit next year. Safeway said its online sales have doubled in the same period, with consumers spending $130 on average, compared with $28 at their stores.
Both companies impose a $50 minimum purchase for online orders and charge $5.95 to $9.95 for delivery, depending on the size of the order. Peapod orders must be placed the night before delivery, while Safeway will deliver orders placed before 9:30 a.m. on the same day.
The chains declined to release more specific sales or profit numbers, but they acknowledge that online purchases are a tiny part of their overall businesses. Rhodes said Web sales are to his company what catalogue sales are to a retailer. Catalogues, he said, generally capture only 4 to 8 percent of revenue.
But with such intense competition in the grocery market, the major chains will seize any advantage, said Jeff Metzger, publisher of Baltimore-based trade publication Food World.
Safeway and Giant are in a heated rivalry. Together, they sold 46 percent of the groceries in the Washington area in the year that ended March 31. Safeway's market share increased to 18.8 percent, from 17.9 percent a year ago, and Giant's market share fell to 27 percent, from 28.5 percent.
Meanwhile, competitors such as Whole Foods Market and Wegmans have been attracting more affluent consumers, while discounters such as Wal-Mart and Costco have gained sales through lower prices.
"The supermarket realm was sort of untouchable and now it's under attack," Metzger said. "The name of the game today is 'share of stomach.' If you can create a new segment for yourself, all the better."
Generally, the online grocers operate in the same way. They drop off fruits, meats, vegetables, household items and even prescriptions, as Safeway does, at your doorstep and tack on a delivery fee.
Their business models vary, however. Some have no stores, such as three-year-old FreshDirect.com, which specializes in delivering gourmet foods to New York area homes.
Peapod has a distribution warehouse in Gaithersburg and delivers to homes within a certain time. Shoppers can create lists, sort products by price and view nutritional information.
Safeway.com distributes its groceries from stores that deliver within 20 miles. As the online sales at a particular store grow from 4 to 6 to 10 percent, the company begins distributing from another nearby store, Rhodes said.
Willard R. Bishop Jr., president of Willard Bishop Consulting Ltd. in Barrington, Ill., said Peapod must "climb a much steeper hill" than Safeway with its business model because it is a free-standing entity.
"Safeway regards the [online] business as an incremental business versus a completely new one that has to carry all the weight associated with it," Bishop said. Peapod "has to pay for all of the building, the inventory, the utilities, the insurance. There's a lot more fixed cost."
Peapod says it is not worried about the new rival in town.
"We don't see our business being interrupted by Safeway.com," said Elana Margolis, Peapod's manager of public relations. "We think there's enough business to go around."