eRetailer GroceryWorks will close two warehouse distribution centers. The Dallas-based online grocer will instead use a 'store-picking' method to fulfill online orders. While the move will certainly cut costs in the short term, sourcing from stores will ultimately increase GroceryWorks' operating costs. Even though it's backed by offline major Safeway, the firm will need to tread carefully if it is to survive.

The recent shutdowns of Kozmo and Urbanfetch, the question mark over PDQuick's future, and the dotcom layoffs and downsizing in the face of an uncertain economy and poor revenues, have resulted in increased pressure for companies operating online grocery outfits to take aggressive steps in the move towards profitability.

GroceryWorks, the Dallas-based online grocer, announced on Monday that it will lower costs by shutting down its two warehouses, located in Grapevine and Houston, Texas, and instead pull goods from Tom Thumb and Randall's supermarket shelves to fulfill online orders.

According to Gary Fernandes, Chairman and CEO of GroceryWorks, a store-based fulfillment model "will allow us to get deliveries to people faster, lower our drive times and staff the same drivers to the same neighborhoods every day."

Although a store-based fulfillment model should lower costs for GroceryWorks in the short term, the model also leaves web grocers extremely vulnerable to increased operating costs and product availability complications. Given the labor-intensive and fragmented nature of in-store fulfillment, coupled with the difficulty of integrating real-time stock levels which are being constantly depleted by in-store customers, web grocers should carefully weigh the potential costs and customer satisfaction trade-offs involved in switching to in-store fulfillment.

GroceryWorks, which had 2000 sales of approximately $60 million, now resides under the Safeway umbrella, which acquired a 50% stake last April. Although GroceryWorks, like fellow online grocer Peapod, acquired by Ahold last July, now enjoys the financial backing and visibility afforded by its relationship with a major brick-and-mortar grocer, its future is by no means guaranteed without profitability. Given the investment community's wary attitude towards the eCommerce sector, unprofitable online grocers will most likely cease to receive funding from brick-and-mortar retailers as soon as they start to impact shareholder value negatively.

(c) 2001 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.