Tesco and Safeway will join forces in online retailing in the US. Tesco.com, the world's biggest online grocer, will work with Safeway to relaunch the US firm's home delivery service. The move reflects Tesco's confidence in its store-based model as the best way to make money out of online grocery retailing. It also looks like a low risk entry strategy into the US market.

Tesco will contribute $22 million in cash, as well as intellectual capital and technical resources, for a 35% stake in GroceryWorks, the struggling warehouse-based operator in which Safeway bought a majority stake last year. Despite Safeway's support, GroceryWorks has continued to lose money.

Part of the reason for this is that synergies between GroceryWorks and Safeway have not been realized. Although GroceryWorks is promoted as Safeway's exclusive online grocery provider there is little integration between the two companies' activities. GroceryWorks has continued to supply customers from its Texan warehouses, taking little advantage of Safeway's network of 1,700 stores across the western and Mid-Atlantic United States and western Canada.

Using Tesco's know-how, Safeway will implement the Tesco.com model. This will involve the introduction of product picking personnel at its stores to assemble and pack customer orders. It will then use the stores as delivery centers, replacing GroceryWorks' existing warehouses. In this way Safeway expects to be able to repeat Tesco's success in rapidly rolling the service out to most of its stores and creating a low-cost fulfillment mechanism that will enable it to cover its marginal costs through the delivery fee.

America should be an ideal environment for online grocery shopping, but to date the take-up of online services has been much slower than in the UK. Grocery eTailing in the US has been driven by pure-plays such as Webvan and Peapod, which have found it hard to deliver on customer expectations. Safeway's partnership with Tesco should enable it to drive the development of online retailers and steal a lead on its larger rivals, Kroger, Albertson's and K-Mart.

For Tesco, the deal brings a low cost, low risk entry into the US market. For the time being Tesco is not likely to be selling its own products in the US, but a takeover of one of the many mid-sized US supermarket chains should not be ruled out in the medium term.

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