Gregory Kalinin and Neil Bienstock of Peachtree: "We expected people would buy only non-perishables. But the No. 1 product is dairy, and No. 2 is fruits and vegetables."

Peachtree Network Inc., a Montreal-based E-commerce grocery company, is making a big leap into the lucrative U.S. market by acquiring a potential competitor, myButler.com.

The $13.2-million acquisition, which will be announced today, will add up to 400 new stores to Peachtree's network.

Launched in 1995, Peachtree sets up Web sites and marketing plans for regional and independent grocers. The firm's site (www.PeachtreeNetwork.com) also sells cookware and related items and lets customers surf for recipes and nutritional advice.

Peachtree, which raised $2.4 million in its initial public offering in March, recently joined forces with the five-store Mourelatos chain in Quebec. It also works with grocery stores in 11 other Canadian cities and six U.S. urban centres.

MyButler.com, a San Francisco-based private company started by Montrealer Louis Brouillet, specializes in technology that helps grocers sort out the logistics of filling online orders.

Peachtree CEO Gregory Kalinin said the mix of myButler.com's technical expertise and Peachtree's know-how in Web-site content and marketing made the two companies a good fit.

Given the size of the U.S. market, the move was also crucial to Peachtree's growth, according to Kalinin.

"Regional grocers in Canada have between one and 20 stores in their chains," Kalinin said. "In the U.S., they have between 50 to 300. And regional grocers make up about 45 per cent of the entire shopping market in the U.S."

Peachtree plans to stick to its original business plan of hooking up with smaller grocery chains instead of building its own distribution warehouses, a strategy adopted by some of Peachtree's competitors.

Toronto-based GroceryGateway, for example, is building its own 75,000-square-foot warehouse to serve that region's shoppers. In the U.S., Peapod Inc. and Webvan have also adopted the warehouse model. But Peachtree refuses to be intimidated by those giants.

"The regionals and independents can provide better service because their focus is personal service," Kalinin said. "Existing retailers are also already set up close to their clients, so it's cheaper to get the products to them than from a warehouse."

While Peachtree provides the E-commerce solution, grocers in the network still pick, package and deliver the merchandise, so having a grocer who knows how to judge the ripeness of a melon or select a cut of meat is essential Kalinin said.

Regional chains and independents also need to find ways to win shoppers away from the bigger chains.

"Online shopping is a way for them to increase their market share," Kalinin said. "An online purchase is more likely to be an incremental sale or new customer for them as opposed to someone shopping on the site of a large chain."

In Canada, IGA offers online shopping and Loblaws is starting a pilot project this year in Toronto.

Kalinin said he and his partners have been pleasantly surprised by what customers are willing to buy online.

"We expected people would buy only non-perishables," Kalinin said. "But the No. 1 product is dairy, and No. 2 is fruits and vegetables."

Peachtree hopes to draw in even more customers by increasing the range of items and adding more pictures to sites, now that new technology allows them to be downloaded more quickly.

The company also tries to tailor product lines to the idiosyncrasies of different markets.

"In B.C., there is a big demand for organic products," Kalinin said. "In Toronto, there is a big focus on the convenience aspect. In Quebec, people tend to be interested in lifestyle choices, products that are delicious."

A roughly equal percentage of consumers buy groceries online in the U.S. and Canada, but the average order tends to be higher in the U.S., Kalinin said.

Despite Peachtree's success, online grocery shopping still only represents "a couple of percentage points" of total grocery purchases, according to Kalinin.

But Peachtree has managed to increase its revenues from $310,591 in 1999 to $666,062 in 2000. Increased spending on technology and beefed up sales and management teams contributed to a loss of $182,394 this year compared with a $16,459 profit in 1999.

Kalinin said the company should turn an operating profit again in 2002. Revenues come from transaction and consulting fees charged to grocers and advertising and sponsorships.

The myButler.com acquisition is subject to due diligence and regulatory approvals. The deal is scheduled to close by the end of October.

After the transaction, Peachtree will employ about 50, with about half of the work force being in Montreal. The bulk of technological development work will be centred in Montreal, Kalinin said.

Peachtree's shares closed at $1.11 on the Canadian Venture Exchange yesterday, up from $1 the previous day.