The other night I was at one of those dinner bashes where one encounters equal parts bow ties and stock tips. And I got to talking with a couple about how much they loved online groceries.

Who wouldn't, if done right? That's what I've always thought, anyway.

As it turned out, they were customers of (Nasdaq: SLNE). Having myself developed an interest in Web-initiated delivery companies (almost a guilty, voyeuristic pleasure, by now, after the beating these stocks have taken), I had quoted the stock only days before, so I had the distinct displeasure to inform them that their Streamline customer obsession might be short-lived.

Two weeks back, the company announced that unless it could find additional financing, it would run out of cash within 6 weeks. That announcement sunk further (after IPO'ing at $10 and rising over $14), the stock dropping from the $1.50 range to the $0.50 range. My new friends had no idea that the service "they couldn't do without" and had recommended "to all our friends" might -- come the time the deciduous trees here in the East go brilliant orange, gold, and scarlet -- be bankrupt. Might blow away with the leaves.

(That's not hard to do, when your market cap is $15 million.)

And yet one wonders whether, somewhere in this beleaguered area of Web delivery, there mightn't be the faintest sound of rules being broken. That distinctive whiff of cinnamon and gunpowder. Those mysterious tracks leading the wrong way down this other path you hadn't seen before. Might we find, somewhere in this divinity-forsaken wasteland of ticker symbols, a Rule Breaker?

Consider: Isn't the notion that one might possibly eat well and healthily for the rest of one's life without ever again visiting one's grocery store rather a Rule-Breaking notion? I've thought so, lo these past many months, and yet the players in this industry are far from profits, with declining amounts of cash to fund their mounting losses. Streamline itself in its most recent quarter reported losses of $11.5 million on less than that ($8.9 million) in sales, listing its cash remaining then at just $6.9 million. No wonder they're in dire straits.

Meanwhile, all those slowpokes like Safeway (NYSE: SWY) and Kroger (NYSE: KR), which were beaten to this opportunity by their young and nimble Web-based upstarts -- those same slowpokes now seem to be best positioned to lead this "industry" eventually. There's little hope for the underdogs left. Little, but there is a bit: Webvan Group (Nasdaq: WBVN).

Is Webvan a Rule Breaker?

RB Criterior #1: Top dog and first-mover in an important, emerging industry
We must begin attempting to answer that question by looking at the "industry." Notice how I put that word in quotation marks. In order to locate a Rule Breaker, we must first locate a truly important, truly emerging industry. Is online grocery delivery such a beast? Is Webvan a market monster? And will Maria Bartiromo survive the first round of Fool Survivor? Inquiring minds want to know.

Well, Webvan was not, on the face of it, the first-mover. Peapod (Nasdaq: PPOD) brought this business concept to reality earlier than Webvan, and my colleague Jeff Fischer wrote on June 20, 2000 that he's disqualified Webvan as a Breaker because it wasn't first at what it does. (What does it do? You visit its site if you're in the right metropolitan area, you click on the groceries you want delivered, you specify a 30-minute period when you want them delivered, and Webvan pulls down the goods from its warehouses and gets them to you. The company's branding line: "The world's market at your doorstep.")

Yet if you listen to some of our Fools, you'll see that Peapod hasn't necessarily mastered the art of customer satisfaction, whereas Webvan (and its merger partner consistently receives glowing customer praise. Perhaps that is why Peapod is today worth $35 million, while Webvan's market cap is $1.3 billion.

So we'll call Webvan the first-mover in online grocery delivery that is customer-focused and really praised and... well, successful. Still solvent, anyway. And so we can put checks next to first-mover and top dog because there is now no question that Webvan is the unrivaled top dog in its industry. But oops, there we go again -- calling this an industry. Is "online grocery delivery" an industry? No question about it "emerging," but is it an industry that is also truly important?

Like so much of Rule Breaker investing, this question is not quantitative but qualitative (and therefore highly debatable -- always debates that are illuminating, and worth having). From a quantitative standpoint, of course, Webvan's market cap is worth well more than that of most of its direct competitors' combined. But we call Rule Breaker investing more art than science. With art, there is always room for disagreement, and when debating the qualitatives of a Rule Breaker, one can sometimes go too far down the alley of pedantic debate. Apropos the subject at hand, my thoughts have not completely formed, which is why I will share them in the second installment tomorrow. In fact, because my thoughts haven't yet fully jelled on the topic, I'd be more than pleased to read the thinking of anyone sufficiently moved to share it. Drop by our Webvan discussion board, which I shall diligently read tonight.

Thus, we will begin the second and final installment of the Webvan Break Down by solving this puzzle, and then take Webvan Group through the other Rule Breaker criteria, as well.

Break Down August continues. Fool on!

David Gardner

Related Links:

  • Webvan home page
  • Streamline home page
  • Fool News, 6/7/00: Safeway Seals Online Grocery Wager