Dutch Firm Rescues Peapod from Brink

Holland-based Royal Ahold plucked beleaguered online grocer Peapod from the edge of bankruptcy Friday, pledging to buy 51 percent of the Skokie, Illinois-based firm. Peapod will remain a stand-alone company, while Ahold will supply goods and services, including the use of its network of warehouses and distribution centers.

The $73 million (US$) cash infusion "will provide the needed injection of capital," said George Dahlman, an analyst at US Bancorp Piper Jaffray. "It provides [Peapod] with a very powerful partner."

The news sent Peapod shares higher Friday, even as shares of most other companies were hit hard. The stock rose 11/16 to close at 3 3/16.

Game Over?

For months, e-commerce analysts have been trying to draw lessons from what appeared to be Peapod's impending demise. The firm reported 1999 losses of $29 million on $73 million in sales.

Earlier this month, Forrester Research analyst Evie Black Dykema declared that "the game is over" for Peapod. However, she also predicted that on-demand delivery services would continue to thrive, with the market growing to $20 billion by 2002. Dykema said online grocers who can tap into traditional customer bases and widen the still narrow margins of online grocery sales will be most likely to succeed.

Separately, Forrester had pegged Peapod as a likely victim of the e-commerce shakeout, which the research firm now says will take down more than half of all online retailers by the end of 2001.

Peapod's high-profile woes have been mounting in recent months. In March, CEO Bill Malloy resigned for health reasons, prompting four would-be investors to withdraw $120 million in financing. The online grocer recently said it had used up all but $3 million of its cash and warned earlier this year that it might not survive the search for new investors.

Deep Pockets

Royal Ahold brings considerable resources to the deal . According to Hoover's Online, the firm operates more than 3,600 supermarkets, retail and specialty stores in 17 countries.

Peapod already works with Ahold subsidiaries Stop & Shop and Edwards in the Boston and New York areas. The companies said they will convert storage areas for these stores into fulfillment centers for Peapod. "Our partnership with Peapod enhances our e-commerce strategy and positions both companies as leaders in online consumer food shopping," said Ahold USA President and Chief Executive Officer Bob Tobin.

Peapod Chairman Andrew Parkinson said the deal "should ensure a solid future in online food retailing," and creates "a huge potential for Peapod to capture the rapidly growing online grocery business in the highly populated area along the U.S. eastern seaboard."

"We're going to go as fast as ever now," Parkinson added. "We're feeling very good about the deal because we'd been written off by a lot of people."

Competition Fierce

Peapod, which was among the first firms to join the online grocery business 10 years ago, is the largest in the field with about 130,000 customers in the United States.

Peapod may still have some fight left in it, but faces a sea of competitors in its core markets, including West-coast based HomeGrocer, Webvan -- which announced earlier this year it would enter Peapod's home market of Chicago -- and HomeRuns, which plans to expand on the strength of the $100 million in private equity it garnered earlier this year.

US Bancorp's Dahlman said the Peapod deal could be a sign of things to come for the online grocery industry. "I'm not going to be surprised" if similar combinations between online grocers and traditional retailers are announced, he said.

Peapod shareholders will vote on the Ahold plan at a meeting this summer. Principal shareholders and directors holding 30 percent of the company's outstanding shares have agreed to vote in favor of the deal.