Attention NetGrocer Shoppers! This Bargain May be Too Good to Last
Cheap shipping is burning a hole in its balance sheet
Until recently, NetGrocer Inc. seemed like an entrepreneur's dream
concept -- a really useful national Web service that charged bargain prices.
Small wonder the company was all set to go public before the market's gyrations
ruined investors' appetites for IPOs. Now the question is: How long can
it afford to offer such a great deal?
It's an issue that other entrepreneurial pioneers in the Web grocery
business are likely to watch closely.
NetGrocer sells nonperishable groceries and other consumer goods over
the Net, undercutting grocery stores by as much as 20%. It specializes
in the sort of heavy stuff city dwellers loathe lugging home by hand. And
shipping costs, which tend to be the drawback to shopping via the Net,
run only $2.99 for orders of less than $50 and $4.99 for larger purchases.
That's cheaper than taxi fare. (I tried it and was delighted. My 50-pound
order was a bargain, and it arrived in four days, as promised -- intact
except for one dented can.)
Unfortunately, the consumer's savings are coming right out
of NetGrocer's pocket. Daniel Nissan, NetGrocer's president, concedes that
the company is not only operating at a loss, but it has negative gross margins
on goods sold because it subsidizes the cost of shipping. That means that
until it can lower its own shipping costs and improve margins, the more
groceries the company sells, the more money it loses. According to a prospectus
filed with the Securities & Exchange Commission, "The company believes
that it will incur substantial operating losses for the foreseeable
future and that the rate at which such losses will be incurred will
increase significantly from current levels."
NET LOSSES. Operating losses at Internet companies are the norm. That
said, FedExing 49-cent soup cans does seem like a recipe for balance-sheet
trouble. "This is a high-volume business with razor-thin margins," says
Ryan Jacob, manager for the Internet Fund and a long-time tracker
of initial public offerings. "When you include shipping costs, it's
tough to see where this becomes economically viable."
The company filed for an initial public offering, which it hoped would raise $38 million, on July 31 -- just as the IPO market dried up. It has
since delayed the offering indefinitely due to market conditions and is
seeking additional capital through a private placement. NetGrocer's 1997
revenues were only $281,000, and its net loss that year totaled $3.58 million.
Its accumulated deficit from inception through Mar. 31 is about $7.2 million. As of Mar. 31, NetGrocer, in which Cendant has a minority stake,
had $7.12 million in working capital.
One reason shipping costs are so exorbitant is that New-York-based
NetGrocer (www.netgrocer.com) ships nationally out of one distribution
center in New Jersey. The company plans, once sales volume makes it feasible,
to open more distribution centers, reducing shipping distances and costs.
Although the negative margins look bad, Nissan says the company would have
lost more money if it had already opened local distribution centers around
"A SUPERIOR MODEL." Nissan believes that NetGrocer has a superior economic model to ordinary
bricks and mortar grocery stores. Its fixed real estate and labor costs
are much lower than those of traditional stores. And despite its lower
prices, it is making money on products sold. Part of its plan to boost
margins is to sell more expensive goods along with groceries. Along
with dry goods, for instance, NetGrocer sells small appliances, music,
books, and children's toys. If the company can sell more products, its
marginal cost per shipment will decrease, says Nissan. It also plans to
make money by providing market research and marketing services to manufacturers.
In fact, it announced such a deal with Unilever Foods earlier this year.
This business model assumes the 24-hour-a-day convenience of Net shopping
for groceries will lure customers by the droves. Online U.S. grocery sales
totaled $85 million in 1997 and are expected to reach $270 million in 1998
and $6.6 billion in 2002, according to Jupiter Communications, an Internet
research company. That will total about 17% of online consumer spending,
but it's a fraction of the overall $500 billion spent annually on groceries
in the U.S. About 40% of household spending on groceries is for dry goods.
To attract customers, NetGrocer boasts an exclusive marketing deal
with America Online (AOL), and it has alliances with high-traffic sites
including Excite (XCIT) and Yahoo! (YHOO). Even so, NetGrocer faces plenty
of competition on the Web. Peapod (PPOD), which operates as a membership
service in seven metropolitan areas and sells fresh fruit and meats, is
probably the best known. It went public in June, 1997, at $16 a share and
now trades at less than $3 a share. In the first half of 1998, it lost
a net $8.5 million on revenue of $36.4 million.
NetGrocer also competes with regional online shopping services, including
Streamline, Home Grocer, and HomeRuns. But Jupiter says they're less of
a threat to NetGrocer because local businesses can't benefit as much from
economies of scale. Jupiter also believes that focusing on discount nonperishables
is a business model that will work eventually. "Online sales of dry goods
will drive the majority of volume sales in this product segment in the
future," Jupiter's 1998 Online Shopping Report predicts.
Investors probably shouldn't hold their breath for NetGrocer's IPO.
But online shoppers will find that its service will save time and money
-- as long as it can afford to offer such good deals.
By Amey Stone in New York
Back to top of story