By David Jones and Janet McBride
LONDON, June 25 (Reuters) - Britain's biggest grocer Tesco Plc (TSCO) said on Monday it would pay $22 million for a stake in U.S. group Safeway Inc.'s (SWY) online outlet GroceryWorks to get a toehold in the world's largest home-shopping market.
In return, Safeway's GroceryWorks would benefit from the know-how that has made Tesco.com the world's biggest and only profitable online grocer, the two firms said in a statement.
Tesco claims its online shopping service, supplied from its supermarkets, has a two to three-year lead over other Internet retailers like U.S. based Webvan Group (WBVN) that have burned cash building a network of expensive warehouses.
Under the deal, Tesco has taken a 35 percent stake in GroceryWorks for $22 million in cash, intellectual property and technical resources. California-based Safeway holds 50 percent of the business and the rest is held by other shareholders.
A round of financing had raised a total $35 million cash, including Tesco's contribution.
"This is a very good combination of Safeway's very strong business in the United States and our expertise as the clear leader in online shopping," Tesco Chief Executive Terry Leahy told Reuters in an interview.
"We expect GroceryWorks will be operating profitably by the end of next year," he added.
In Britain, Tesco.com says it will generate online sales of around 300 million pounds ($423 million) this year and has access to a potential 50 million customers, compared to 150 million in the United States. Currently, 60 percent of U.S. households have Internet access compared with 30 percent in Britain.
Vasant Prabhu, Safeway's chief financial officer and president of e-commerce, said the aim was to turn GroceryWorks into the biggest online grocer in the United States.
The business will temporarily close on Tuesday and reopen under the Safeway Inc banner, with future deliveries coming from Safeway stores, the two firms' statement said. Tesco has no store base in the United States.
HUGE POTENTIAL
Prior to Monday's announcement, Tesco had spent 40 million pounds developing its online business.
"This is very much seed corn, but for the long-term the potential is huge if GroceryWorks grows to be a major business," said analyst David McCarthy at Schroder Salomon Smith Barney.
Peapod Inc (PPOD) in the U.S., owned by Dutch group Royal Ahold (AHLN), is the next biggest online grocer, but it has had to raise more cash to sustain losses.
Webvan Group, a one time darling of the dotcom boom, has seen its stock price collapse and has slashed its workforce as it scales back its business to preserve cash.
Leahy said the single most important decision behind Tesco.com's success was to pick from stores rather than build expensive warehouses. Tesco.com's chief executive John Browett told Reuters earlier this month that to make a warehouse work a staggering 10,000 orders a week are needed.
Tesco.com picks around 70,000 orders a week fom 300 British stores and reckons it can comfortably pick up to 1,000 orders a week from each store before it needs to build warehouses.
Worldwide Tesco has 900 stores and 240,000 staff. Safeway operates 1,747 stores in North America and employs almost 200,000 people.
Tesco.com's Browett has said the firm plans to widen its reach to Seoul by the end of the year. South Korea is world leader in the number of high-speed Internet connections per head, and Tesco has seven hypermarkets there.
Tesco.com has also begun to carve out new markets at home, including a site specifically for use by the blind, and it recently linked to OnDigital, a digital television service owned by Granada (GAA) and Carlton (CCM).
Tesco's shares were up one percent at 266.95 pence at 0945 GMT. |
