Online Grocer Peapod Splits Open

SAN FRANCISCO (03/16/2000) - The turf has gotten rocky for online grocer Peapod Inc.

The firm said today that Chief Executive Officer Bill Malloy has resigned and that four firms have backed out of US$120 million in planned investments.

Moreover, the company says it might not be able to continue operations without additional sources of funding, and it has asked its financial advisors to look for potential buyers. The news sent the company's stock tumbling.

"There can be no assurances that the company will be successful in finding or completing a transaction or that the company's resources will be sufficient to enable it to continue its operations during this process," the company said today in a press release.

Shares of Peapod lost more than half their value after the announcement, falling to $3.72 from $7.81 by end of day. Shares of competitors Webvan, HomeGrocer and Streamline.com fell only slightly today, showing little reaction to the Peapod news.

On the one hand, Peapod's stumble could be a boon for other online purveyors of groceries and food. Webvan's pockets are deep, and it continues to expand into new markets. Kozmo.com's online delivery service is growing by 40 percent per month in the five markets it serves. The stronger players are now in a position to buy -- at a much-discounted rate -- Peapod and its customers, infrastructure and knowledge.

However, Peapod's difficulties cast a shadow on a sector whose profit potential many analysts have questioned for some time. Online food merchants will have to jump to a profitable model without expending their financing too quickly.

Peapod's failure might cause investors to think twice before pouring additional funds into a similar company.

Earlier this week, HomeGrocer went for an IPO (initial public offering) and rose just 18 percent by the end of its first trading day -- a fairly low bump for an Internet stock. Shares in every public company in this sector have fallen in recent months as investor interest has weakened. Analysts have pointed to the high cost of setting up physical distribution centers as companies expand to new cities, and the expertise needed to arrange difficult logistics for home delivery.

"Webvan has a much bigger burden of proof on its hands as a result of today," says Dana Serman, an Internet analyst for investment bank Lazard Freres.

"There's a lot of pressure on them to figure out what it's taken FedEx 30 years to figure out what to do, which is how to make money off delivering goods and products to the home."

Clearly, Peapod was in trouble before Malloy made his decision to leave. Even as consumer purchases on the Internet has skyrocketed in the past year, Peapod revenues have fallen off. For the first nine months of 1999, Peapod posted $51.5 million in revenues, down slightly from the same period a year ago. The company has lost $19.3 million so far this year. At the same time, Peapod has been forced to increase spending in order to remain competitive. It spent $2.5 million for a signing bonus to land Malloy, a former AT&T Corp. executive. The online grocer's costs in fulfilling orders increased 21 percent for the first nine months of 1999.

Malloy is vacating the roles of CEO and president due to health reasons, the company said. Current Chairman and cofounder Andrew Parkinson will assume the position of CEO. Investors pledged the financing on Feb. 14, but they terminated those promises today, Peapod said. With just $3 million in cash on hand, the company has asked Wasserstein Perella & Co. to look at alternative sources of financing or a possible sale.

Peapod faced new competitors this year, including NetGrocer, HomeGrocer and Streamline. In early November, the company said it might not be able to secure funds to continue operations beyond the third quarter of 2000.

"I think Peapod was a company that had to reinvent itself a couple of times," says Anthony Noto, an e-commerce analyst for Goldman Sachs who says Peapod's troubles mean "less clutter and more clarity for the online grocery sector."

Goldman Sachs underwrote Webvan's offering, and Noto covers the company.

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