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Tuesday, August 17, 1999

Peapod Inc.
(Nasdaq: PPOD)
Phone: 847-583-9400
Website: http://www.peapod.com
Price (8/16/99): $6 15/16


What do you do when the express lane doesn't quite check out? Online grocer Peapod thought it had the Internet supermarket in the bag. It was the first mover -- a pioneer treading on new ground a little over two years ago. At the time, the only real rival was NetGrocer, and that company was simply mailing off non-perishable sundries.

Peapod was different. It was collecting orders on its website with proprietary software and providing local delivery in select metropolitan markets. With electronic coupons and promotions, Peapod patrons had the advantage of strolling supermarket aisles without ever having to get out of their armchairs.

It was losing money, par for the course in the world of e-commerce upstarts, but it was unique and turning heads in the process. The shares traded as high as $18 1/2 at its June 1997 debut. While the company stumbled a few months later, the stock bounced back -- trading at $15 1/2 just four months ago.

But not all story stocks have happy endings. Anything short of aggressive expansion can be fatal. Peapod tried to evolve, ditching an agreement where it would literally pick the orders off the shelves of local Safeway (NYSE: SWY) stores and set up its own distribution centers.

Higher margins. Less dependency. More self-branded legitimacy. But in waiting so long to bulk up and in not having enough capital to grow beyond its core markets, the company found the barriers to entry were ankle-high. Upstarts like HomeGrocer.com and Webvan found deep pockets, each now with the momentum to eventually make Peapod as significant as a pea in a pod. No longer unique, this blue light special has been marked down this summer.


Peapod is the country's largest Internet grocer. It services 100,000 members in eight major cities. The company also provides media and research services to companies like Hershey (NYSE: HSY) and Coca Cola (NYSE: KO) on consumer shopping trends online.


Income Statement
12-month sales: $68.0 million
12-month income: ($23.1 million)*
12-month EPS: ($1.34)*
Profit Margin: N/A
Market Cap: $120.7 million
(*Includes one-time charges)

Balance Sheet
Cash: $20.3 million
Current Assets: $23.4 million
Current Liabilities: $8.2 million
Long-term Debt: N/A

Price-to-earnings: N/A
Price-to-sales: 1.8


In April, COO John Walder left the company. His new post is heading up the e-commerce efforts for Best Buy (NYSE: BBY), so this was not really a warning flag. Walder wasn't bailing, he was merely upgrading. In an odd way the move was almost a compliment to Peapod's executive ranks.

But on May 18 Wall Street's knee-jerk reaction was a jawbreaker. Amazon.com (Nasdaq: AMZN) announced it would pay $42.5 million for a 35% stake in HomeGrocer.com. The news sent shares of Peapod flying as high as $12 1/2 on the highest volume the stock had seen in a month.

But why? On the surface it might have appeared Peapod-friendly. The deal valued HomeGrocer at $121 million. Even at $12 1/2 the more experienced Peapod, with established brand and infrastructure, was worth only $168 million. A relative bargain, right? Not really. Overnight, Peapod's dominance became endangered. HomeGrocer suddenly had twice the cash hoard of Peapod.

To make matters worse, Webvan was on a roll -- lining up what could be a billion-dollar distribution center construction agreement. Peapod, which never managed to ramp up expansion into new markets, went from being the undisputed leader to the poorest of the lot.


Last year Peapod accounted for 46%, or $69.3 million, of the $150 million that was spent on online grocery purchases. That pales in comparison to the $440 billion that was rung up in actual supermarket sales.

The potential is clearly there. However, sales for Peapod have been lower this year -- not a good sign -- and that is with HomeGrocer and Webvan just starting to rev up. Earlier this month Webvan announced an IPO that would raise $345 million. Webvan just launched its service in the San Francisco area, but will debut with a market cap more than ten times that of Peapod.

With the capital infusion going into its new competitors, Peapod might soon be fighting for the bronze medal despite being the market leader today. However, there are a few positive scenarios for Peapod's shareholders. It's quite possible that a well-financed Webvan, ready to roll out automated distribution centers in 36 cities over the next three years, might find Peapod too tempting not to gobble up. It would gain the market share and infrastructure while ridding itself of a competitor in eight major markets.

The other course of action for Peapod is to bulk up itself. The Webvan offering may stimulate interest in the niche, and Peapod might be able to line up some secondary financing. The more likely route is for Peapod to find a sugar daddy itself. Companies like America Online (NYSE: AOL), CBS (NYSE: CBS), or even a venture capital company with a vulture mentality may come to Peapod's side. It's going to need it. Right now Webvan is offering free delivery of large orders, unlike Peapod's paid memberships and/or per delivery charges. Peapod is going to need that money to give away if it stands a chance to compete.

So Peapod is like a gallon of milk -- it can go rotten by tomorrow or it can be an enriching experience to the last drop. If Peapod goes preemptive, and battling against Webvan in San Francisco over the past two months has made that notion obsolete in one of its markets, it will be able to survive the onslaught. If it ignores its richer rivals, the company will perish like rancid milk.

-Rick Aristotle Munarriz

Call Your Boss a Fool.

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