Can Online Grocers Expect Happy Holidays?

Some online grocers are ringing up big sales as the holiday season hits, but others are trying to dispose of their assets in going-out-of-business sales.

These divergent business results illustrate that the road to profitability in such a low-margin business is likely to be fraught with failures. For example, Streamline.com and ShopLink.com, rival online grocery stores based in Massachusetts, both announced plans to shut down late last month.

The key to success is clamping down on delivery and fulfillment costs, says Janet Suleski, an analyst at AMR Research in Boston. But many are struggling to do just that. For example, she says, New York-based delivery service Kozmo.com recently spent $26 million to fulfill orders for $3 million worth of groceries.

But some online grocers remain upbeat about holiday demand. Webvan Group in Foster City, California, did so well on Thanksgiving that it had a run on preroasted turkeys in the San Francisco area. (See "Will Surf for Food.")

But Ravi Kalakota, an analyst at e-Business Strategies in Atlanta, says Webvan and other online grocers won't be able to succeed because they can't integrate goods from different suppliers and ship them in a cost-efficient way.

Some online grocers benefit from affiliations with established brick-and-mortar retailers. Suleski says HomeRuns.com in Burlington, Massachusetts, is faring well partly because of its relationship with its parent, Hannaford Bros. in Portland, Maine.

HomeRuns.com's sales are up by double-digit margins compared with last year, says Alison Berglund, vice president of marketing and business development at the retailer. But the five-year-old company has yet to turn a profit, she adds. (See "The Bloom is Off the Web's Rose.")

Another example of bricks-and-clicks collaboration is Dallas-based GroceryWorks.com, which sold more turkeys and pumpkin pies during Thanksgiving than it did during the rest of the year combined, according to President and founder Kelby Hagar.

So far, Hagar says, there haven't been any inventory shortages or product outages, thanks largely to the experience of GroceryWorks.com's brick-and-mortar partner, Safeway in Pleasanton, California. Knowing what products to order and how much to have on hand at GroceryWorks' facilities, "is one of the real benefits of our relationship with Safeway," he says.

Julia King of Computerworld contributed to this article.