|
BUSINESSWEEK ONLINE: Business Week ebiz | |||||||||||||||||
| |||||||||||||||||
 |  | |
 | |
 |
||||||||||||
Has This Online Grocer Found the Right Recipe? Peapod's new strategy may soon start to deliver, and if Amazon enters the market, investor excitement could boost the field In many ways, online grocery shopping has been the backwater of the Internet sector. Not only does the idea of going online to buy, let's say, a banana, strike some people as funny but grocery sites have been a disappointment for E-commerce investors. NetGrocer failed in its attempt to come public last year and has since morphed into a kind of general merchandiser. And Peapod (PPOD), the only publicly traded online grocer, is now at around $12 a share -- below its 1997 IPO price of $16. All that could change soon, however. Peapod has revamped its business model, and analysts are expecting to see signs that its new strategy is working when it reports quarterly earnings on Apr. 28. Meantime, Streamline.com, a Boston area Internet grocer, filed for an initial public offering on Apr. 15. Next, E-commerce behemoth Amazon.com (AMZN) may enter the online grocery business. According to an Apr. 20 report in the San Jose Mercury News, Amazon may have made a large minority investment in HomeGrocer.com, of Bellevue, Wash. Amazon declined to comment on the report. Analysts believe that if Amazon does get into groceries, it will give the business the legitimacy it has lacked. "It validates the principle that there is potential in the grocery business," says George S. Dahlman, an analyst with U.S. Bancorp Piper Jaffray. While Amazon would clearly pose a competitive threat to grocer sites, some analysts believe that an Amazon/HomeGrocer.com deal would generate excitement over online grocery shopping that would spill over to Peapod. The stock gained 13/16 on Apr. 21 to close at 12 11/16.
Peapod started out as a membership service where customers would phone or fax in orders and Peapod employees would "pick and pack" items from the shelves of commercial supermarkets for trucks to deliver to homes. The service eventually migrated online. But as business ramped up, the basic model started to hit its limits. In some supermarkets, Peapod shoppers were emptying out store shelves as they competed with off-the-street customers for items. Peapod ended up delivering orders with many items listed as out of stock. And profit margins were low. "It was not a costly model to get started, but long term, it is incredibly inefficient," says Ken Cassar, an analyst with Jupiter Communications. "ON THE CUSP OF A TURNAROUND." In early 1998, Peapod began to switch to a centralized distribution model where orders are filled at warehouses (without paying a cut to supermarkets) using a more efficient picking method. The resulting savings let Peapod halve its fees from an average of $15 an order charged under the prior system. Gross profit margins from sales via the distribution centers (only in Chicago, Long Island, and, soon, San Francisco) should near 30% within the next year, vs. 20% under in the old system, says the company's chief financial officer, Dan Rabinowitz. Peapod's revenues from marketing and advertising deals should also grow. On Apr. 15 it released a study showing advertising on the site had click-through rates of 30% -- higher than other sites report -- which should attract advertisers, Rabinowitz believes. Revising a business model is no sin for an Internet business. But Peapod held back on marketing while implementing the transition, which slowed growth dramatically and caused investors to abandon the stock: Its shares fell to a low of 2 11/15 on Oct. 14. Total revenues in 1998 increased only 22% (plodding by Internet standards), to $69 million from $56.9 million in 1997. In the fourth quarter, revenues were flat with the prior year at $17.2 million.
Peapod has tripled in price from its low, but by some measures the stock is still cheap. It is currently trading at 2.7 times its prior 12-month sales, while Amazon sells at 35 times 12-month sales, notes Bhatia. "Their business model is beginning to work, and they are not being paid for that," he says. Dahlman evaluates Peapod in the same way he does other food distribution companies and rates it a Strong Buy. Looking at its projected cash flow and earnings, he has a price target of $16 near term and $36 long term (two to three years out). Investors should keep in mind, however, that Peapod may never achieve the valuations of Internet stocks simply because it must operate on a local, rather than a national, level, says Cassar. "It really is a hybrid of a delivery system, grocery store, and Web-based business," adds Dahlman. Clearly Peapod will have to fend off increasing competition -- and Amazon, if it does get into the business, will be a formidable competitor. But even if only 1% of the estimated $3.5 billion grocery market moves online over the next three years, as Jupiter predicts, there will be plenty of room for several Internet competitors. "We think there is enough business for everyone," says Dahlman. And while Peapod doesn't offer discounts on groceries, the time savings it offers customers should prove valuable. "We no longer question demand for this service," says Rabinowitz. What Peapod will have to prove, though, is that it has found a way to turn that demand into profits. Amey Stone is an associate editor of Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
| |
 | |
 Amey Stone covers the markets and investing for Business Week Online RELATED LINKS Peapod HomeGrocer Amazon NetGrocer | ||||||||||||
