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Tesco to click with net shoppers in US

By Becky Barrow (Filed: 26/06/2001)

TESCO, Britain's most profitable retailer, yesterday made its first move into America with a $22m (£16m) investment in the US supermarket giant Safeway's online venture GroceryWorks.

Under a deal labelled "ironic but also notable" by Tesco chief executive Terry Leahy, the retailer will introduce its online systems, pioneered for the launch of Tesco.com, into the heart of America's high-tech capital.

The trial will begin in San Francisco, an area which loves to boast about its internet expertise and entrepreneurialism in the high-tech arena, before being rolled out into other parts of the US. Mr Leahy said that GroceryWorks will have access to a potential customer base of 150m people, compared with 50m in the UK. At present, Tesco.com has about 1m customers.

The all-cash investment, which is small fry in the grand scheme of Tesco's £1 billion profits last year, gives the retailer a 35pc stake in GroceryWorks, a dotcom operation founded by a 31-year-old former lawyer called Kelby Hagar in 1999.

Like many internet retailers, GroceryWorks signed a deal with an established operator in a bid to bring down the heavy costs of online delivery. It signed the agreement with Safeway last June.

Just 12 months later, Tesco has joined the alliance in a move which will completely shut down GroceryWorks' existing systems, which used two warehouses to source all the goods. A big question mark still hangs over the warehouse model, used most notably by the American internet giant Amazon, which has proved an expensive and cumbersome way into the online arena.

Unlike many of its rivals, Tesco's internet operations Tesco.com use its network of 690 shops in the UK to source all the online orders, currently around 70,000 each week. Safeway, which was described by one analyst as "the Tesco of north America", has 1,747 shops in the US and Canada which will used to supply GroceryWorks, rather than the warehouses.

The existing GroceryWorks site will "suspend operations" today, and the new site, run according to the Tesco system, will open in the San Franciso Bay area in the autumn, according to Mr Leahy. For the people of San Franciso, who love to joke about Britain's stumbling efforts to keep up with their high-tech advances, Tesco's move will be something of an embarassment.

Vasant Prabhu, chief financial officer of Safeway, has high hopes for the revamped GroceryWorks site. He said: "Our goal is to create the biggest and best online grocer in the US." It is, however, an aim which has caused a catalogue of problems for GroceryWorks' competitors, such as Webvan.

The online retailer, which operates in a handful of areas including the San Franciso Bay Area, has seen its shares crash from a high of $25 to just nine cents. In April, Webvan announced "further modifications" to its business plans, which includes job losses and the closure of its Atlanta operations. The news came shortly after the high-profile chief executive George Shaheen, former chief executive of Andersen Consulting, resigned.

For Tesco, its move into America follows a relatively low-risk strategy. Andrew Fowler, a food retail analyst at Merrill Lynch, said: "The financial significance is impossible to signify. It is somewhat less than huge, and somewhat more than zero."

The shares closed down 1 at 263p.

-- Anonymous, June 26, 2001