*Webvan Allies With PETsMART

Taking a leaf out of Amazon.com's August deal with Toys 'R' Us for a co-branded online toy store, troubled Internet-only retailer Webvan Group Inc. has partnered with PETsMART Inc. to open a pet supplies store on its Web site.

The PETsMART.com store last month replaced Webvan's own pet section, gaining a tab instead. The new store, at www.webvan.com, starts out with 1,000 products from brands such as Purina One, Iams, Nutro and Science Diet.

“We currently do and have sold a limited amount of pet supplies,” said Amy Nobile, public affairs manager at Webvan, Foster City, CA. “However, this is a much bigger announcement because we will actually for the first time have a store-within-a-store concept.”

The deal was announced only days after Nasdaq warned Webvan that its stock would be delisted from the tech-heavy index if its share price does not climb above $1 in the next 90 days and stay there for 10 consecutive days. Webvan has been quoting at less than $1 since late November.

In fourth-quarter results announced last month, Webvan recorded a loss of $109.1 million, compared with $56 million in the same period a year ago. Revenue for the fourth quarter was $84.2 million, up from $19.8 million in the year-ago quarter.

And while it ended the fourth quarter last year with $212 million in cash, the company admits it may need $40 million to $60 million in extra funding by 2002.

In a research note, Lauren Cooks Levitan, e-commerce analyst at Robertson Stephens, San Francisco, said she was “extremely concerned about Webvan's prospects, given the company's limited supply of cash achieving profitability in its initial markets, let alone total operations.”

Webvan has decided not to expand into the Baltimore, northern New Jersey and Washington markets, instead focusing on deals such as PETsMART.

As part of the new alliance, both retailers will market the new store, though site maintenance and fulfillment will remain Webvan's responsibilities while PETsMART, Phoenix, will supply merchandise.

Consumers clicking on the PETsMART.com tab on Webvan will still remain on the Webvan site. But a link on the co-branded store will take them to the site at www.petsmart.com for access to the complete inventory of the nation's No. 1 retailer of pet supplies.

The PETsMART.com store on Webvan will initially serve consumers in Chicago; Atlanta; and Sacramento and the San Francisco Bay area in California.

A phased rollout in the coming months is planned for Seattle, Dallas/Fort Worth, Los Angeles, Orange County in Southern California and Portland, OR.

Nobile said the move was in keeping with Webvan's aim to be a last-mile retailer and is a harbinger of things to come.

Starting life as an online grocer, the loss-making Webvan now sells books, CDs and videos, medical drugs, electronics, household goods, children's products, beer and liquor.

“We have sold other companies' goods and we continue to sell Old Navy and Gymboree goods, but this is a really monumental move for us because we're devoting a whole section of Webvan.com to PETsMART.com and we'll be offering a lot of their inventory,” Nobile said.

Evie Black Dykema, senior analyst at Forrester Research, Cambridge, MA, said the Webvan decision to ally with PETsMART was a no-brainer and in keeping with the online retailer's intention to extend into a broad range of replenishment categories.

“For categories like beauty products and pet products, it's more important for the consumer to have some kind of branded experience,” Dykema said.

This deal “makes it easier for Webvan to pick up on the cheap a ready-to-go commerce opportunity to offer an integrated content-commerce experience that would be too tough for them to develop on their own,” she said.

Terms of the deal were not disclosed.

For PETsMART, the Webvan partnership is its first major Internet effort after a December deal to buy broke retailer Pets.com's Web address.

The Pets.com name purchase came quick on the heels of an early-November decision by PETsMART to gain majority control of PETsMART.com, a Pasadena, CA, joint venture launched in May 1999 with outside investors and Internet incubator idealab.

Poor margins and prohibitive shipping and fulfillment costs have been blamed for the failure of online pet supply stores such as Petstore.com, Pets.com and Petopia.com.

Barrett LaMothe Ladd, senior retail analyst at Gomez Inc., Waltham, MA, said both Webvan and PETsMART have many challenges ahead.

“One is the whole fulfillment side of things and that PETsMART try and deliver 30 pounds of dog food economically,” Ladd said, “and since Webvan is already going to people's houses, it's clearly much more economical for them to add a bag of dog food.”

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