*Peapod to Debut Customer Acquisition Campaign

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Three months after being acquired by Dutch supermarket giant Royal Ahold, online grocer Peapod.com will begin its first prospecting marketing campaign under the new ownership in October.

The effort comes on the heels of Peapod's exit from the Texas and Ohio markets, the $12 million purchase of rival Streamline.com's Chicago and Washington operations, and the departure from the retail in-store pick format to fast-pick fulfillment and centralized distribution.

The campaign will target consumers predisposed to buying online in high-density, metropolitan areas of the East Coast, Midwest and West Coast where Peapod delivers.

"I would say that the fourth and first quarters combined account for probably 60 percent of our business," said Mary Conrad, Peapod's vice president of marketing. "We find that when people get back to business after the summer, they get more serious about life and more organized."

The media plan covers direct mail, door-hangers, online affiliate programs and e-mail marketing. The effort also includes take-one brochures in Ahold's five East Coast chains: Stop & Shop, Edwards, Bi-Lo, Giant and Tops. Peapod would not disclose the list sources or the size of its direct mail drop. DDB Worldwide, Chicago, handles the account.

There is no plan for splashy mass advertising in this campaign, Conrad said.

"Some of our competitors spend a lot of money doing television and radio, for instance," she said. "That is very costly, and their cost of acquisition is very, very high."

Conrad said Peapod's cost of acquiring new customers was a fifth of its rivals' spending and the lowest among online grocers, but she would not substantiate.

The Chicago retailer reported second-quarter sales of $22.7 million, up from $17.1 million in the same three months of 1999. At the same time, losses more than doubled in the second quarter ending June 30 to $10.4 million, from $4.9 million in the same period last year. Peapod sales in 1999 were $73.1 million, and losses were $28.5 million.

At last count, the grocer's site at www.peapod.com claimed an estimated 135,000 customers. Existing customers accounted for 91 percent of all orders placed in the second quarter. Peapod claimed its average order size of $115 was the highest in the online grocery category.

Still, that did not prevent the 11-year-old company from almost going belly up in March when it lost its then-CEO Bill Malloy and $120 million in planned funding from venture capitalists.

"They clearly need to increase the usage if they're ever going to build a successful business model," said Ellen G. Baras, analyst at William Blair & Co., Chicago. "With the immediate access to so many food shoppers, perhaps they can be more efficient or more targeted in marketing than if they didn't have the Ahold relationship."

Ahold in June paid $73 million to acquire 51 percent in Peapod as part of a multichannel strategy for the United States.

Peapod has continued to operate as an independent company, while Ahold supplies the online grocer with goods, services and fast-pick fulfillment centers.

The Ahold relationship has paid dividends, according to Peapod's Conrad. First, it lowered the cost of goods by 6 percent. Next, it can partner with Ahold's supermarket chains as it enters new markets piggybacking on locally established brands. Finally, it benefits by utilizing Ahold's pre-existing real estate for warehousing operations.

"The nature of the relationship is that we're co-branded in those markets," Conrad said. "So, in other words, in Boston, Connecticut and New York City, our brand is Peapod by Stop & Shop, and in Washington, D.C., it's going to be Peapod by Giant."

But the key benefit of the Ahold relationship is the economies of scale.

"When our retail partner orders their supplies, our order is also part of their order and it flows through to our warehouse as it's going to their facilities," Conrad said.

Fiercely competitive, the online grocery market also includes players Priceline.com, NetGrocer.com, egrocer.com and the well-funded Webvan.com.

Bricks-and-mortar chains such as Albertson's and Giant Eagle -- as well as Safeway, through its recent GroceryWorks.com purchase -- are slowly expanding online, leveraging their brand, retail locations and purchasing clout.

"The challenge common to the online grocery space is you have to get the right product to the right customer in the right condition at the right time," William Blair's Baras said. "It's more than just taking the bread and putting it on the truck. You've got to make sure you don't put the soup on top of the bread. And then there's minimum back-up."

Meeting customer product and time requirements is held largely responsible for the high costs of home delivery in a category that offers margins of only 1 percent to 2 percent. Heavy spending on marketing has further eroded bottom lines, leading to a gradual consolidation in that space.

In June, around the time Ahold invested in Peapod, Webvan, Foster City, CA, announced it would acquire competitor HomeGrocer.com in a $1.2 billion stock swap. The deal closed Sept. 5.

For now, though, the Internet is a mere blip in total retail grocery sales. According to Forrester Research, Cambridge, MA, U.S. food and beverage online sales were $513 million in 1999. Projections for 2000, 2001 and 2002 are $1.13 billion, $2.46 billion and $5 billion, respectively -- all under 1 percent of total sales in those years.

The consumer migration to online purchases of groceries is expected to continue its tardy pace. Even in 2003 online sales will account for only 2 percent, or $10.83 billion, of total groceries sold before touching 3 percent, or $16.87 billion, in 2004, according to Forrester.

"The big challenge for the whole industry is customer acceptance," William Blair's Baras said. "Will the mass of consumers really give up the touch-and-feel experience?"

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