Fool.com: Read This Before Shopping at priceline's WebHouse Club (Fool on the Hill) November 8, 1999

FOOL ON THE HILL
An Investment Opinion

Read This Before Shopping at priceline's WebHouse Club

By Yi-Hsin Chang (TMF Puck)
November 8, 1999

I have the privilege of living in the city where priceline.com (Nasdaq: PCLN) recently launched its online WebHouse Club. The idea is simple: Like priceline's original and brilliant concept of allowing consumers to set their own prices for airline tickets via the Internet, WebHouse allows consumers to set their own prices for groceries. According to priceline, you can save up to 50%.

Before you rush off to shop online at WebHouse Club, you should know that unlike many well-publicized online grocery stores, such as Webvan (which lured away the head of Andersen Consulting to become its CEO), WebHouse DOES NOT deliver. The service is currently only available in the New York Metro area, including northern and north central New Jersey and southwestern Connecticut.

Here's how it works: You're supposed to shop for your groceries online, name the prices you want to pay, submit your credit card information, check out, find out whether the "Price Machine" accepts the prices you named, print out your prepaid grocery list, and THEN head to a participating grocery store, pick up the items on your list, and check out again.

That's right. With WebHouse Club, part of the money you save you're actually paying with time. You're definitely spending more time and effort on grocery shopping, but this might be worth it or even fun for some. If you're one of those people who gets ketchup packets from McDonald's and squeezes them into a bottle for home use, WebHouse is for you.

Seriously, there are consumers who might find the WebHouse model appealing. In the eyes of priceline, Americans already spend time every week clipping coupons. Most Americans watch six hours of TV per day, so time is not really an issue, the company contends.

Personally, I'm short on time, so the idea of spending time to shop for groceries online only to have to pick them up myself is not very appealing. If I want bargains, I'd rather make a trip to Costco (Nasdaq: COST) and stock up while probably saving more than I would using priceline, and on a wider range of items. In other words, I prefer letting Costco do the work for me by attaining low prices through economies of scale. If I can't make it to Costco, I prefer the convenience of running into a nearby store for whatever it is I need, whenever I need it.

Setting time constraints aside, there are other shortcomings to the WebHouse Club. For one thing, the selection, at least so far, is limited. WebHouse currently offers roughly 140 items. In each category, you can choose between two or three brands. For example, when it comes to chocolate chip cookies, you can choose Famous Amos, Keebler Chips Deluxe, or Nabisco Chips Ahoy. If you prefer some other brand, you're out of luck.

Another issue is technology. While the Internet has become a part of many people's daily lives, many Americans still have never been online -- some are probably busy watching those six hours of TV per day! It stands to reason that many of the most educated and thus Internet-savvy people are in the same boat as I am in terms of being time-deprived. The consumers who would most appreciate WebHouse Club simply don't have access to the Internet. There seems to be a disconnect between priceline and the people it's trying to reach. Maybe priceline is just ahead of its time.

Finally, I'll mention something my economics professor here at NYU-Stern, Dick Sylla, mentioned the other day: priceline's fundamental concept of the conditional purchase offer actually serves manufacturers rather than consumers. As we've learned in economics, producers would like to use price discrimination to eke out the highest price each individual consumer is willing to pay. Prior to the emergence of priceline, producers guessed at consumers' demand curve. Now, priceline's Pricing Machine gathers that all-important data for manufacturers. It's not surprising that manufacturers have jumped on the bandwagon.

Don't get me wrong. I'm not writing off priceline's WebHouse Club concept. I just think it will have a harder time proving its business model than priceline's airline ticketing service. In the end, priceline may be doing more to serve manufacturers than individual consumers.