One Year Ago: Why Webvan Will Win the Online Grocery War

Just when it seemed that two Internet grocers were headed for the dot-com chopping block, a couple of food industry giants swooped in and saved the day with huge cash infusions.

Over the past several days, Safeway, Inc. paid US$30 million for a 50 percent stake in GroceryWorks.com, while Holland-based Royal Ahold NV agreed to shell out $73 million for a controlling interest in cash-strapped Peapod.com.

Safeway views its investment as a way to jumpstart the company's e-commerce strategy. "This alliance will greatly accelerate our ability to offer online grocery shopping to the market we presently serve," said Safeway president and chief executive officer Steve Burd.

Peapod's downward spiral has been well-chronicled. In March, CEO Bill Malloy resigned for health reasons, prompting four would-be investors to withdraw $120 million in financing. The loss of the funds triggered an announcement that the company had used up all but $3 million of its cash reserves and might not survive the search for new investors.

Peapod's white knight, Royal Ahold, is bringing considerable resources to the table. According to Hoover's Online, the firm operates more than 3,600 supermarkets, retail and specialty stores in 17 countries.

Lesson for Webvan?

While Peapod may have dodged a bullet for now, many analysts are wondering whether Webvan and other pure-play grocers will be forced to merge with a huge grocery chain or close up shop.

I think not. While it is true that Webvan posted a net loss of $57.8 million its latest quarter, active customer accounts as of March 31st totaled 87,000, up from 47,000 at the end of the fourth quarter.

Additionally, the heavy losses can be explained in part by the tremendous amount of cash that is necessary for a pure-play to build its own infrastructure.

For instance, in July 1999, Webvan placed a $1 billion dollar order with engineering and construction firm Bechtel Group to build up to 26 distribution and delivery facilities. By streamlining its fulfillment methods, the company will be able to maintain a more cost-effective delivery system than Peapod and pass savings on to consumers.

Funding Fundamentals

Another difference between the two companies is their funding partners. Webvan's backers include such venture capital heavyweights as Softbank and Benchmark Capital Partners. At this point, it is doubtful that any necessary cash infusion would ever be denied.

Finally, even though there has been a consolidation of online grocers, Forrester Research predicts that the market will grow to $17 billion within four years. The increased activity reflects a growing demand for services covering the "last mile" between online grocers and their customers.

By then, Webvan should have completed the rollout of its 26 warehouses, just in time to take advantage of the boom.