Ahold has increased its US online groceries subsidiary Peapod’s credit line to $50 million. Peapod’s bricks-and-clicks approach, sourcing products from Ahold’s distribution centers and supermarkets, should cut costs and allow it to break even sooner than pureplay rival Webvan. However, as the market grows, traditional retailers like Kroger may well take a significant share. Peapod should not take its leadership for granted.

Dutch supermarket group Royal Ahold, which owns more than half of US groceries e-tailer Peapod, yesterday increased Peapod’s $20 million credit line to $50 million. Peapod, which operates in Chicago and the East Coast, now has over $60 million in cash. The e-tailer will also now be co-branded with Ahold’s supermarket chains Giant and Stop & Shop.

The online grocery market is set for huge growth over the next few years. Datamonitor forecasts the US market value will rise from $1.7 billion in 2000 to $32.3 billion in 2005 – an annual growth rate of 78.3% – as established retailers develop new online services.

The key issue for all online grocers is customer acquisition, which pure-play online grocers are finding much harder than they originally expected, as they do not have the benefit of a familiar brand. Webvan, Peapod’s California-based rival, which hoped to kick-start online shopping with a network of automated distribution centers, is now on the verge of bankruptcy, having failed to attract and retain a critical mass of customers.

In this context, Peapod looks to be in a better position. It has a major cost advantage, in that it can source directly from Ahold’s supermarkets and distribution centers, while also benefiting from consumer familiarity with Ahold’s stores. This model has been followed with great success by the world’s largest online grocer, UK supermarket chain Tesco, whose 2000 sales were nearly three times Peapod’s $115 million at $310 million.

However, in the longer term, Peapod may lose out as America’s largest grocers Kroger and Albertson prepare to roll out online operations – and while Wal-Mart does not currently sell groceries online, this may change in future, particularly as its UK subsidiary Asda is the UK’s third-largest groceries retailer. With Ahold’s backing, Peapod is in a strong position, but will face tougher times ahead.

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