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Homegrocer is paying a fortune for face time with users--from Pittsburgh to Paduka--who can't use its services even if they wanted to. Homegrocer’s seeing a real return on this five-year agreement depends entirely on the speed with which it can open more distribution centers, thereby making the service available to AOL (nyse: AOL) users in the hinterlands.

There's no doubt Homegrocer is counting on its pending IPO to finance this agreement. It filed on Dec. 17 of last year, but shouldn't count on a huge IPO windfall since consumer plays continue to fall out of favor with the investors. At $8.75, PeaPod (nasdaq: PPOD) shares are a dollar below their $9.75 opening price, and Webvan's (nasdaq: WBVN) price of $12.87 is well off its all-time high of $34.

"The fact that they're only in a few markets certainly makes this deal seem expensive," says Gomez Advisors analyst Matt Stamski. "I suspect the other Web grocers ran the cost-of-customer-acquisition numbers and felt they could generate new customers in a more cost-effective manner."

Indeed, AOL probably chose Homegrocer for its grocery partnership over the other ten or so services out there--such as Webvan, Peapod or NetGrocer--because it was the only site willing to pay AOL's exorbitant placement fees.

According to Stamski, other e-tailers that have cut similar deals with the portal have had mixed results. "Some but not all of AOL's partners report incremental sales," he said. Part of the problem is that the daily traffic to e-tailers generally spikes during the lunch hour, roughly between noon and 3:00 PM, when users are at work, using a corporate Web connection and not the AOL service they have at home.

The good news is that although Web-based grocery plays have been extraordinarily slow to catch on with consumers, evidence suggests than when people do give them a try, they return. "All of the grocers have outstanding retention rates, around 75% to 80%," said Stamski.

It's just a matter of convincing people to let strangers pick out their produce and then work out the persistent delivery problems most Web grocers have faced.

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