Experts to Webvan: You Better Shop Around (for a Partner)

Fulfillment costs are going to kill beleaguered online grocery stand-alone Webvan Group if it does not partner or sell out to a large supermarket firm soon, industry sources say.

Webvan — the last stand-alone of its kind — must adopt a model similar to Peapod Inc., a firm that has partnered with various East Coast supermarket chains owned by its major shareholder, Dutch food giant Royal Ahold, the sources said.

Peapod is fulfilling orders from chain stores located in various Northeastern markets such as Boston and Long Island, NY.

In addition, Royal Ahold has become a major food supplier with distribution points throughout the eastern United States and has been giving Peapod supplier prices. This aspect of their relationship is particularly key to bettering Peapod's profit margins at its Chicago and Washington operations, where it has large fulfillment centers.

As for Webvan, mixed signals have come from its camp.

Webvan CEO George Shaheen made comments that could be interpreted as veiled suggestions that his firm was looking offline for help while speaking at the recent Credit Suisse First Boston Food & Drug Retailing Conference in New York.

“We would like to see the Webvan brand being leveraged with other retailers, both e-retailers and brick-and-mortar retailers,” he said, according to a report in Supermarket News. “By bringing the two together, we can leverage and provide an offering for a larger group of customers that makes sense.”

However, it was unclear whether Shaheen was talking about local and regional fulfillment partnerships or simply about co-branding arrangements.

Webvan spokeswoman Amy Nobile said last week that her firm does not plan to deal with traditional supermarkets.

Meanwhile, recent developments at Webvan look ominous.

The Foster City, CA, company shut down operations in Dallas Feb. 16. Webvan is also delaying plans to enter the New Jersey/New York market in order to preserve capital, though the firm recently completed a $30 million, 348,000-square-foot fulfillment center in North Bergen, NJ.

The company reported a total net loss of $598.7 million for 2000. And while it reportedly has around $212 million in cash, the firm has said it needs at least $40 million more to make it into next year.

Webvan's Nasdaq listing appears endangered because the grocer's stock price has fallen far below $1 a share, lingering at around 28 cents at press time. In addition, company founder Louis Borders, who was the firm's No. 1 shareholder, resigned from its board of directors on Feb. 14.

Webvan's troubles are indicative of the vanishing online stand-alone industry, said Robert Rubin, analyst at Forrester Research, Boston. He said the grocery stand-alones have been unable to generate sales figures to justify staggering fulfillment costs. He said that while there is not any one operational cost that has all-but-sunk the industry, its general fulfillment process is too expensive.

Rubin said Webvan would greatly benefit from a supplier-vendor relationship similar to the one between Peapod and Royal Ahold to improve profit margins and lower its prices for consumers. He said Webvan's prices are often high compared with offline stores.

“If I want a six-pack of Pepsi, why would I buy it at Webvan when I can get two six-packs down the street for the same price?” Rubin said.

Jim Mills, a 25-year supermarket veteran who now owns IGA Inc. grocery affiliates in Edmond, OK, said he was not surprised by Webvan's struggles and the downfall of grocery stand-alones.

“There's no way to justify the picking and packing and delivering of grocery orders if you don't get an extraordinarily high order volume,” Mills said.

Bob MacKalski, marketing director at Peachtree Networks, Montreal, a Web grocery company that has partnered with supermarkets throughout North America, pointed to high customer acquisition costs as the defeating element for the stand-alone model.

“You don't have a physical store, so it's not like people can just drive up and walk in,” he said. “Stand-alones have to go out and get them somehow, and that can be expensive — too expensive.”

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