Fool.com: HomeGrocer.com Flush With Cash (Breakfast News) November 2, 1999

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Tuesday, November 2, 1999

"Showing up is 80% of life."
-- Woody Allen

HomeGrocer.com Flush With Cash

By Richard McCaffery (TMF Gibson)

Up-and-coming online grocery store HomeGrocer.com has received $100 million in fresh venture capital to help it expand to perhaps more than 20 markets across the United States as early as next year, The Wall Street Journal reported.

Specifically, HomeGrocer.com will use the money to expand existing warehouses, lease more than 1,000 delivery trucks, and add 7,000 employees to its 800-person staff, according to the Journal. HomeGrocer.com currently operates in Seattle, Portland, Oregon, and Orange County, California.

The investment, which comes from high-powered venture capital firms Kleiner Perkins Caufield & Byers and Hummer Winblad Venture Partners, values the privately held firm in the neighborhood of $700 million to $800 million, according to the Journal. Both Kleiner Perkins and Hummer Winblad were existing investors, along with online retailer Amazon.com (Nasdaq: AMZN), which spent $42.5 million last May for a 35% stake.

HomeGrocer.com has plenty of competition. Webvan, an online grocery store and pharmacy, plans to go public later this year, and Priceline.com (Nasdaq: PCLN) announced in September that it had licensed its name-your-own-price business model to The WebHouse Club, a privately held online grocery start-up. Priceline has warrants to purchase a majority stake.

None of the online grocers is national yet, but that's where they're heading. Webvan operates in San Francisco and is expanding to Atlanta and more than 20 other markets. WebHouse Club is starting service this month in the New York metropolitan region.

There's big money behind all three ventures. WebHouse Club's backers include billionaire Paul Allen's Vulcan Ventures and Wit Capital Group (Nasdaq: WITC). Louis Borders, cofounder of Borders Group (NYSE: BGP), founded Webvan Group, and Kleiner Perkins is a household name in the venture capital community.

The stakes are high since the grocery business generated more than $450 billion last year. But can anyone build a successful Internet business model around it? With thin margins and the high cost of maintaining dispersed warehouses and fleets of delivery vehicles, will any of these players be able to create a sustainable business that rewards shareholders?

Mary Alice Taylor, HomeGrocer.com's chief executive, certainly thinks so. She expects the company's first sites to reach operational breakeven within 15 months. Research firm Jupiter Communications (Nasdaq: JPTR) thinks the online grocery market could leap from $63 million in 1997 to $3.5 billion by 2002.

There should be a good business lesson here. Online grocery shopping is a compelling idea even though the economics look rough. Can the Internet business model be pushed this far? You've got a front row seat.

News to Go

Commercial aircraft manufacturer Boeing (NYSE: BA) halted delivery of 34 jets after discovering that an improperly made cockpit part is a fire hazard.

Call accounting system manufacturer Xeta (Nasdaq: XETA) is buying privately held U.S. Technologies Systems for $26 million in cash and 150,000 shares of common stock as part of a plan to expand beyond the company's traditional hospitality market.

Leading toy manufacturer and distributor Mattel (NYSE: MAT) is spinning off a genealogy website that's part of its Learning Co. subsidiary. Mattel and a group of partners including Hearst Corp. and A&E Television Networks are investing $37.5 million in the business, called Genealogy.com.

Computer manufacturer and services firm Compaq (NYSE: CPQ) was named in a class action lawsuit for allegedly selling PCs with defective floppy disk drives and controllers, Bloomberg reported.

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