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Peapod Is In A Pickle


News: Analysis & Commentary: E-Business

Peapod Is in a Pickle

The online grocer may be the first of many e-tailers to falter

Online grocer Peapod Inc. always seemed like a risky proposition. After all, not many people want to buy groceries sight-unseen online. That didn't stop Peapod from raising $58 million in an initial public offering three years ago. But now, with CEO William Malloy quitting on Mar. 16 and investors backing out of a pledge to sink in an additional $120 million, Peapod is on the ropes. The Skokie (Ill.) outfit declined to comment on its condition. But it does acknowledge that it is looking for a buyer, and analysts say it could fail without new cash.

Peapod may be just the first of many consumer-oriented online companies to hit a wall. E-tailers like Beyond.com, eToys, and EMusic have seen their stocks plunge at least 50% since December. And in the online grocery world, the stocks of Webvan Group Inc. and Streamline.com Inc. are in full retreat. "Unless they're very well-financed, those companies with unproven models are not likely to make it," says Stewart R. Flink, managing director of venture capitalist Dillon Capital Management.

The problems for many such sites include lack of cash, poor management, ineffective marketing, small target audience, and no clear plan to profitability. Companies that can't address these problems seem to be running out of time, as investors and venture capitalists look elsewhere. Industry leaders such as Amazon.com Inc. and priceline.com Inc. will probably continue to find funding. But players tapping tiny niches will struggle to get capital. "We're only looking for companies with proven models and a clear sign of profitability," says Gregory White, a partner at Chicago Venture Partners. "That was never Peapod."CLOSING DOORS. Nor do things look much better for companies targeting overcrowded markets. CDNow Inc., a music e-tailer, is struggling. Why? Rivals such as Amazon, Borders, and Wal-Mart have jumped in and are squeezing already thin margins. On Mar. 13, CDNow's planned merger with Columbia House, which is jointly owned by Time Warner and Sony, fell through. "To compete, CDNow needs either a partner or someone to buy them out," says Internet analyst Rob Martin at Friedman, Billings, Ramsey & Co. CDNow execs retort that they can survive on their own.

But CDNow and others also face a looming cash crunch. Goldman, Sachs & Co. says nearly half of the 28 publicly traded online retailers Goldman tracks will have to tap the capital markets this year. Strong companies such as Net drugstore PlanetRx.com Inc. will have little trouble, but the door won't be open for marginal outfits.

Nor are the venture-capital firms likely to step up for those that have yet to go public. Institutional investors are flocking to seemingly safer ground in the exploding business-to-business market. "The problems Peapod is having will only reinforce the aversion that institutional venture capitalists now have for business-to-consumer," says Mark Glennon, founder of the Illinois Venture Capital Conference. Peapod may be one of the first Net companies to crash to earth, but it's unlikely to be the last.By Darnell Little in ChicagoReturn to top

TABLE

Short of Cash and Short of Time

COMPANY ESTIMATED CASH

BALANCES DEC. 2000

(millions)

CDNOW -$62.6

VALUEAMERICA -46.6

PEAPOD -17.8

MOTHERNATURE.COM -17.8

AUTOWEB.COM 1.2

BEYOND.COM 4.6

EGGHEAD.COM 13.5

DATA: GOLDMAN, SACHS & CO

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