The Online Grocer Invasion

By Rick Aristotle Munarriz (TMF Edible)

(Dec. 1, 1999) -- Cyber Spam. It's all about the Cyber Spam. It's all about laying back in front of your computer, clicking on a 12 ounce can of processed pork and mechanically separated chicken parts, and having it delivered to your front door. Cybergrocers are beginning to sprout like this morning's harvest. The ability to check your grocery list online, and have it delivered to your doorstep, has arrived. It's about this. It's about time.

Until last month, online grocers were passed over by Wall Street like a past due milk carton in the dairy aisle. Webvan (Nasdaq: WBVN) changed all that. With its highly touted plan to spend as much as $900 million over the next three years to open three dozen distribution centers nationwide, the ambitious upstart has turned heads. When the stock opened at $26 on its first day of trading it gave the company an $8.2 billion market cap. That would be enough to buy the 1114-unit Winn-Dixie (NYSE: WIN) supermarket chain. Twice. That has left some pretty lofty expectations for a company that only started servicing its core San Francisco market earlier this year.

While the valuation may have many wondering which of Webvan's aisles is stocking pickled euphoria, the cybergrocer has invigorated a sector that had seemingly been left for dead. Only Peapod (Nasdaq: PPOD) and (Nasdaq: SLNE) traded publicly before Webvan. Neither company has left much of an impression on the investing community. Even with the "Ride Me" sign on Webvan's coattails providing a short-term pop in both stocks, they continue to trade below their IPO prices. Membership at Peapod has actually fallen over the past year while Streamline has only generated $10.2 million in sales over the first nine months of the year.

Webvan is expected to fare much better. Sales are projected to explode -- topping a half billion by 2001. That has opened the floodgates of financing. Last month HomeGrocer received $100 million in venture capital. Times have changed quickly. Back in April HomeGrocer had received just $42.5 million from (Nasdaq: AMZN) for a 35% piece of the company. Last year mail-direct retailer NetGrocer scrapped its IPO plans after Peapod's tumble.

Now it is only a matter of time before HomeGrocer taps the equity market since it too has ramped up expansion plans to keep pace with Webvan. Peapod, low on cash to grow, found Texan millionaire Drayton McLane Jr. eager to invest in the company and join the board. McLane, who also owns the Houston Astros, is a seasoned industry veteran who once served on the Wal-Mart board of directors.

Pockets are getting fatter. The mainstream grocers are at critical crossroads. Already, Hannaford Brothers (NYSE: HRD) has been delivering online orders in the Boston area. Albertson's (NYSE: ABS) began servicing Seattle via the Internet on November 10. Naturally these are trial balloons for companies that serve much larger markets. The biggest chains, Kroger (NYSE: KR) and Safeway (NYSE: SWY), won't be able to ignore the groundswell much longer.

E-Commerce research specialist Jupiter Communications is expecting $3.5 billion in online supermarket purchases by 2002. While an impressive sum, that is still less than 1% of domestic grocery store sales. That too will change with more ambitious projections calling for 20% of all grocery orders to be placed online five years later.

Who will win? Unlike existing e-commerce sectors, the benchmarks of success are unclear. While traditional bricks-and-mortar book and toy stores have failed to topple the Amazon and eToys (Nasdaq: ETYS) of the e-tail landscape, different rules apply this time. First to scale takes on new meaning with the cybergrocers. To expand competitively, distribution centers must dot the target markets. That is why this sector is experiencing a boom but the full potential will not be realized overnight. According to plan, three years from now the mighty Webvan will still only have a presence in 36 markets. HomeGrocer is hoping to lock up 20 over the next two years.

This is the wake-up call for the established grocery chains who have been lulled to sleep with what seemed like a predictable low margin industry for decades. They have a head start over the pure online players in that their distribution centers are already in place. Mindshare will not come as easily, but that is why it is not beyond the realm of possibility, for consolidation to perk up like paper cuts on coupon clippers.

Webvan, or even HomeGrocer, might acquire regional physical chains on the cheap. Kroger or Safeway might set their sights on buying Peapod or NetGrocer. Like peanut butter on chocolate, the marriage of new media and old standards is sweet and logical. One thing for sure, once the first vows are struck the rest will make a mad rush for the altar.

The convenience of shopping for groceries via the Internet is too strong to ignore. Few consider supermarket sprees fun. They lack the creature comforts of cozy bookstores and we have seen how online book sales have spearheaded the e-tail consumer movement. Grocery stores fail in the interactive tinkering of toy stores (even if you do manage to squeeze the Charmin) and we are seeing how strong the holidays are gearing up for the eToys of the world. It is the one routine experience that consumes more time than it delivers in entertainment value.

The online process is not perfect. The initial purchase typically takes as long, if not longer, than a stroll through the aisles. Yet the software gets tweaked to become more efficient as personal shopping patterns are established. Right now, the experience seems foreign. To entrust Webvan to deliver fresh goods within a preselected 30 minute window, to justify paying Streamline $30 a month for a refrigerated box that can receive orders unattended -- it's hard to get used to.

That will change. The online grocers are coming. By next year you might be toasting the lifestyle change with a glass of champagne -- a bottle, no doubt, you bought from your friendly neighborhood cybergrocer.


You'll find more information on online grocers in Industry Focus 2000. Pick up a copy from FoolMart.