Peapod Online Grocer Faces Funding Crunch

FRAMINGHAM (03/22/2000) - With cash reserves dwindling, online grocer Peapod Inc. is working "round-the-clock" to replace a $120 million funding deal that fell through last week, according to a company spokesman.

Estimates of how much time Skokie, Ill.-based Peapod can buy with its $3 million in cash range from 30 to 45 days, depending on what its debts are.

Peapod's board of directors last week issued a statement saying it had directed its financial advisers to find alternative financing or a buyer.

On Monday, a class-action suit was filed against Peapod in the U.S. District Court in Illinois on behalf of investors who bought securities in Peapod from Nov. 8, 1999, to March 16, 2000. The suit charges Peapod and its officers with "misrepresenting its cash funding needs."

But Peapod's woes "are not an indictment of online grocers," said Barry Stouffer, a food industry analyst at J. C. Bradford & Co. in Nashville.

"From a consumer standpoint, it's a great service, a great time-saver," Stouffer said. "There just aren't enough people using the services yet to provide the scale."

The Holy Grail of profitability for online grocers is a high volume of customers, agreed Jennifer Marino, an analyst at eMarketer, an e-commerce market research firm in New York.

"It's easy in New York City, where you have the population density," she said.

The challenge lies in bringing less-urban areas online.

San Francisco-based competitor Webvan Inc.'s proprietary inventory and distribution software is a "linchpin" in the company's profit strategy, said Webvan spokesman Bud Grebey. Webvan licenses software, including Web fulfillment and logistics software from The Descartes Systems Group Inc. in Waterloo, Ontario, and "book-ends it with our own proprietary coding," he said.

A customer specifies a 30-minute delivery window for an order, and software determines when each item must be pulled, so the whole order arrives at once for packing and delivery.

But Stouffer downplayed any edge that efficiencies software might provide.

Profitability "will come down to making the math work," he said.

A 100,000-square-foot facility must generate $150 million in annual sales, Stouffer said. To do that, it must pack four to six 50-item orders totalling $100 each hour. It must also deliver three orders each hour for eight hours a day.

"None have proven they can meet that target," he said, although Webvan, with its moving carousel for packing, claims it can do one-third more packing per hour.

Ironically, Peapod just ended its most successful quarter yet. Sales were up 46 percent and margins had improved from 25.4 percent to 21.8 percent, said former Peapod CEO William Malloy in a statement released before he unexpectedly resigned last week because of health problems. Peapod's customer database tops 100,000, and, according to industry estimates, it commands a whopping 70 percent of the market.

Peapod's losses for 1999 were $28.5 million, but its competitors saw far bigger losses: Webvan lost $76.3 million, and Kirkland, Wash.-based HomeGrocer Inc. lost $84 million.

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