Safeway (US) buys Tesco e-system

Safeway buys Tesco e-system: US supermarket group adopts online shopping model developed by UK grocer
Financial Times; Jun 26, 2001
By ANDREW EDGECLIFFE-JOHNSON and SUSANNA VOYLE

California's biggest supermarket group is ditching its on-line retailing infrastructure to adopt the systems developed by Tesco, the UK's leading grocer.

The deal, announced yesterday, means that the simple home shopping model and systems developed in the Home Counties will be driving online deliveries in the state that led the dotcom revolution.

Tesco yesterday said it had signed a deal with Safeway to support its GroceryWorks online channel. Tesco's in-store picking system will replace Safeway's warehouse-based procedures.

As well as injecting its intellectual property, Tesco is contributing Dollars 22m (Pounds 15.6m) of a Dollars 35m refinancing of GroceryWorks – taking a 35 per cent stake in the business. The move sparked speculation of a potential marriage between Tesco and Safeway, which have similar capitalisations. At last night's close of 263p, down 1p, Tesco is valued at Pounds 18.23bn, while Safeway is valued at Dollars 23.4bn (Pounds 16.58bn)

Observers said the move was a huge compliment for Tesco, which has become one of the world's biggest online retailers and claims to make a profit on its 70,000 weekly orders, with an investment of Pounds 40m.

"Here is humble Tesco and its system that everybody thought was a classically British Heath Robinson-type invention – and it is going to be driving the deliveries in San Franciso," said an analyst.

Terry Leahy, Tesco chief executive, said the deal could lead to further partnerships, but stressed that other US tie-ups would have to be through GroceryWorks.

Mr Leahy said GroceryWorks should break even by next year in a market where internet penetration has reached 60 per cent – against 30 per cent in the UK.

The online market has been dominated by online-only grocers such as Webvan which have struggled with funding.

Safeway had invested Dollars 45m in GroceryWorks since striking the alliance last June. Yesterday, the group said it would have to take a Dollars 30m charge against its investment. Steve Chick of JP Morgan Securities said Tesco's move was another blow to online-only grocers such as Webvan.

Webvan, which was valued at Dollars 8.7bn at its initial public offering in 1999, is now facing the prospect of having its stock delisted. Other start-ups such as Streamline.com have closed, while Ahold, the Dutch grocer, took a majority stake in Peapod last year. Lex, Page 22 www.ft.com/retail

LEX COLUMN: Picking and choosing LEX COLUMN
Financial Times; Jun 26, 2001

Is Cheshunt, Hertfordshire, rather than San Francisco, California, the new global centre of online grocery shopping? For Safeway of the US to choose Tesco as partner for its GroceryWorks online channel – dumping its own model – is a coup for the British supermarket group. Tesco has eschewed the palatial warehouses that burned so much cash for start-ups such as the struggling Webvan. Instead, staff pick customers' orders from stores and deliver them by van. That slashes the upfront costs, and the number of transactions needed to break even. For a Pounds 40m investment, Tesco has built a Pounds 300m-a-year business, already making an operating profit.

The question is whether store-picking is sustainable as the business grows. Product availability is more difficult to guarantee, as are delivery time slots. And the aisles could get clogged with pickers as online customer numbers grow. Terry Leahy, chief executive, admits Tesco may ultimately have to move towards a warehouse system – though that may be some way off. But that means re-engineering the model, with associated costs and risks.

So it is still too early to mark out Tesco as a long-term winner in the fast-changing world of e-tailing. But it demonstrates the advantages old-economy retailers can have over internet start-ups. Tesco had existing stores to pick from, and to promote its online operations. And through a Dollars 22m investment in Safeway's venture, Tesco gets exposure to a potentially sizeable earnings stream. Could this be the beginning of a beautiful friendship between the two grocers?

Copyright: The Financial Times Limited