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Harvesting the Web

Online food retailers make headlines, yes. But do Internet companies such as Webvan, Peapod and Streamline pose a serious threat to grocery-anchored shopping centers?

Most experts don't think so, at least for now. But many believe that rising Internet food sales will force brick-and-mortar groceries to change the way they do business. Some analysts and developers say the so-called "click-and-mortar" approach could lead to different parking lot sizes, store designs and space requirements. Projects that incorporate the Internet might even win a little leverage with lenders.

"I believe that eventually every supermarket retailer is going to have to offer online service," says Andrew Witherell, former vice president of real estate at Dominick's supermarkets. Witherell, who helped the chain expand its "Fresh Store" concept into the Chicago suburbs, says property owners and developers are paying more attention to the prospect of widespread online grocery sales. He now provides strategic services for Mid-America Real Estate Corp., a leading commercial real estate firm in the Chicago area.

"With time being the most precious commodity these days, to have someone do a task for you is a benefit," Witherell says. "Until the grocery stores figure out how to eliminate checkout lines, conventional shopping will continue to be a somewhat negative experience. It's clearly a time issue."

Established national chains - including Cub Foods, A&P, Kroger, Grand Union, Albertson's and WholeFoods - are studying online models or experimenting with test stores. One company, Grocery Shopping Network of Minneapolis, has designed about 500 websites for brick-and-mortar food retailers across the country. About 20 of those stores offer online sales.

As in other segments of retail, some grocers are warming to the idea of "360-degree marketing": using both websites and brick-and-mortar stores to provide customers with as many options as possible.

At shopping centers of the future, for example, parking lot-weary consumers might use drive-thrus to pick up groceries ordered on their PCs. Inside their local stores, they might redeem "cyber coupons" downloaded from the web. In their kitchens, they might replace hastily scribbled grocery lists with nifty gadgets linked to Internet sites operated by brick-and-mortar stores.

"Some of the options include having scanners - like Palm Pilot-type scanners - so that you could scan items in as you used them," says Howard Solganik, president of Solganik & Associates, a Dayton, Ohio-based supermarket consulting firm. "It would become kind of a replenishment system."

Best of both worlds In Woodbury, Minn., the Kowalski's supermarket chain is building a new store designed to accommodate Internet sales. The store will include a drive-thru where customers can pick up groceries ordered on the web, says manager Mitch Caron.

"The drive-thru area only requires a 3-foot opening in the front of the building," Caron says. "That's because we're still unaware of how big online shopping is going to be. Later on, it could mean large staging areas within each store, or even an offshoot location for the online pick-up."

All three Kowalski's locations sell online through sites designed by Grocery Shopping Network. Kowalski's is among the first chains in the country to alter a store design in response to e-commerce, says GSN President Andy Robinson.

Robinson predicts such an approach will become commonplace in the future, with busier stores requiring more space to install drive-thrus and staging areas. Most retailers will advertise on websites and allow customers to order groceries online, he says.

Slowly, consumers will grow accustomed to using the Internet to plan meals or find out what's in stock at a local store. However, Robinson predicts that working families will reject the notion of grocery delivery. They won't want the hassle of waiting for a truck to arrive, he says, and they'll be hesitant about giving a stranger access to their house or garage to leave food in an icebox. (The e-grocer Streamline, based in Boston, now employs such a strategy to make deliveries when customers aren't home.)

"We really believe that consumers are going to be much more comfortable with a click-and-mortar situation where they know their grocer," Robinson says. "They don't want to eliminate retail space to rely on distribution warehouses and so forth."

The WholeFoods model Austin, Texas-based WholeFoods, which launched its online store in March, provides an example of an integrated model. is expected to offer more than 10,500 items by year's end. WholeFoods advertises the site throughout its 92 stores. Sales clerks, who earn hourly wage increases for promoting the website, wear buttons, pass out coupons and reassure customers that purchases made on the web can be returned at retail stores.

Evie Black Dykema, an analyst with Cambridge, Mass.-based Forrester Research, says WholeFoods was able to cut the cost of launching its site by focusing on in-store promotions and carefully targeted media placements.

Dykema says brick-and-mortar retailers can and should "steal liberally" from the WholeFoods model. By using online promotions, they can increase in-store sales and build customer loyalty. Unlike other Internet food sellers, some of which began operating in 1997 but still haven't earned a profit, should make money in as little as two years, Dykema predicts.

Landlords undaunted Developers of grocery-anchored shopping centers concede they're watching e-commerce trends. But many say they don't feel conventional grocery stores are in any danger. Although projections vary widely, most studies show that Internet food sales will reach no more than 2% of total grocery sales in the next few years. (According to grocery industry estimates, total brick-and-mortar grocery sales in the U.S. now average about $450 billion annually.)

Joe Edens, chairman of Columbia, S.C.-based Edens & Avant, says he believes grocery stores will feel only minor effects from e-commerce. The company, which maintains a portfolio of 180 properties in 17 states, focuses on grocery-anchored necessity retailing.

Edens says online grocers face some tough obstacles, particularly when it comes to distributing food. "The perishables, the coordination of someone to receive the delivery - there's just a lot about it that is very difficult," he says. "I think all food retailers are going to get beneficial use out of the Internet. But as far as the actual sale of merchandise goes, I'm not so sure."

In retail, convenience is king, and millions of Americans already live less than five minutes away from a grocery-anchored center, Edens says. The average supermarket also offers tremendous variety, stocking its shelves with around 25,000 items on any given day. Looking up and down, left and right as they walk the aisles, consumers can peruse these products with ease.

Although websites enable consumers to automatically reorder their favorite products, Edens says, people frequently stray from item-by-item grocery lists, or don't use lists at all. "Impulse buying is very important," he says.

Bob Mitzel, executive vice president of leasing and management for Atlanta-based IRT Property Co., a community shopping center REIT, helps oversee 101 shopping center investments in the Southeast. IRT isn't too concerned about online food retailers, Mitzel says.

"We don't feel that we're going to be impacted by this as a company," he says. "We still feel that people want the opportunity to see the quality of groceries they're buying, especially produce."

And the social role of brick-and-mortar stores shouldn't be underestimated, says Stuart Tanz, president and CEO of San Diego-based Pan Pacific Retail Properties, a REIT with interests in 57 community and neighborhood centers in five western markets.

"The dominant grocery-anchored center is still a place where people socially interact, and I think that's important," Tanz emphasizes. "That social interaction plays into the daily needs of consumers."

Scrambling for market share Nonetheless, a growing number of Internet food retailers now scramble to solve distribution problems, win financial backing, and convince consumers to give up checkout lines and shopping carts for good.

The aggressive expansion planned by The Webvan Group, based in Foster City, Calif., is attracting particular attention. The company, which recently spent $1 billion to build automated warehouses in 26 markets, aims to achieve same-day delivery using a fleet of refrigerated trucks.

In September, Webvan was forced to delay its initial public offering, reportedly because it violated a pre-IPO "quiet period."

The Securities and Exchange Commission imposed the delay after a columnist for, a business website, gained access to an IPO briefing conducted by Webvan officials. The briefing was supposed to be for professional investors only.

According to the columnist, Webvan told investors:

* Each high-tech warehouse would generate the same revenue as 18 grocery stores, but with much lower costs. For example, each warehouse would employ 900 people compared to a payroll of about 2,700 required to operate 18 supermarkets. Webvan also said its overall real estate costs would be less than 1% of revenue, compared to about 6% for brick-and-mortar groceries.

* The company counted 21,000 active customers in the San Francisco area in September and has achieved 99% on-time delivery in that market.

* Webvan will expand into Atlanta, Chicago and Seattle in 2000, and plans to operate 34 distribution warehouses by 2001.

Following the pattern of other Internet start-ups, Webvan is losing money as it races to capture market share and rapidly increase its revenue. Goldman Sachs Group, Webvan's underwriter, predicts the company will lose up to $300 million in 2001 alone.

During the first half of 1999, Webvan posted revenues of $395,000 and a net loss of $33.5 million, according to The Wall Street Journal. Webvan, citing the quiet period, declined comment for this article.

Other food retailers in cyberspace include Netgrocer, based in North Brunswick, N.J., which ships non-perishables nationwide; Peapod, a Skokie-Ill.-based company that operates in eight U.S. markets; and Westwood, Mass.-based Shoplink, which operates in Massachusetts, Connecticut and New York.

Boston's Streamline, which raised $42 million in a stock offering in June, recently announced plans to enter its second market by launching operations in Washington, D.C. It continues to lose money but has announced plans to operate 50 distribution centers across the country by 2004.

In a volume-driven business with thin profit margins, online grocers will have a tough time competing with brick-and-mortar stores, analysts say. The Internet firms lack the buying power of large chains and often must compensate by tacking on unpopular delivery fees. Shoplink, for example, charges a monthly fee of $25 for once-a-week deliveries. Extra orders are $15.

Some firms, such as Netgrocer, which recently canceled its initial stock offering and replaced its management team, are struggling. Others, including Lombard, Ill.-based OnCart, a pioneer that once served five cities, have gone under.

No knee-jerk reaction As the e-grocery story develops, retailers and property owners should stay informed about emerging trends, says Tanz of Pan Pacific. But they should remember to pay more attention to the bottom line than the buzz about e-business.

"I can certainly say that in terms of our real estate and our primary product, it's nothing but good," Tanz says. "The fundamentals of our business have never been better."

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