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2HRS2GO: It may not be the best investment -- but Webvan rocks

I won't tell you to buy shares of the Webvan Group (Nasdaq: WBVN), although you probably already have, judging by the 18-plus million shares traded so far today.

I won't promise that Webvan will find profits, although it has a better chance of making money than many Internet operations.

I won't claim this is a fantastic investment, although I believe Webvan will at least avoid major hits to its stock price because the company's main expenditures have already been delineated.

Yet I hope Webvan becomes a raging success and generates plenty of cash for its shareholders, because I love using the service. Some people might think online grocery shopping is a fad, but it's tough to give up once you get hooked.



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The convenience factor is obvious if you live more than a few blocks from a supermarket. And not just convenience in and of itself, but cheaper convenience. Believe it or not, I save money with online grocery shopping because it almost completely eliminates impulse buying; although the online grocers throw weekly specials at you, they can't put 13 aisles of junk between produce and dairy, and they can't throw racks of candy and magazines at you in the checkout line. And their prices stand up well to those at the local market.

When I started using Webvan in early July, I understood the perils of early adoption. Being a guinea pig meant almost nothing to me in this case, because I hate grocery shopping anyway. As far as I'm concerned, it's a necessity, not a pleasure. I suspect I'm far from being the only person to feel this way.

Before jumping into online groceries, I did some comparison shopping. Homegrocer.com doesn't operate in the San Francisco area, making it an easy elimination. Netgrocer ships everything from one central facility via Federal Express, which immediately knocked it out of the picture; I'm not interested in paying delivery charges so I can wait to receive an order that's been knocked around for one to three days, not know exactly when it's coming, and most damning, not be able to receive any perishables because of the aforementioned travel time. I want my online grocer to obviate the need for the supermarket; if I still have to go to the supermarket for dairy, meat and produce, I might as well do all my shopping there.

Peapod (Nasdaq: PPOD) lost in three points. Its website struck me as being a bit less user-friendly than Webvan.com. Peapod normally charges for delivery, while Webvan only charges for orders under $50; I don't know about you, but I can go through $50 of groceries in a fortnight or less, so I haven't paid any delivery charges yet while ordering every couple of weeks.

(Incidentally, Peapod recently began a special: free delivery through the end of the year. God Bless Competition)

And finally, Webvan appealed to every tightwad instinct in my body with a simple rule: drivers don't accept tips. They're not allowed to take tips. Peapod isn't so rigid -- although Peapod's website says "never feel obligated to tip to receive the highest quality service," let's get real here; as long as tipping is an option, some drivers will expect it and some people will feel compelled to do it.

Is that wrong? Not at all; in fact, I tried to tip the Webvan driver on the first delivery before being politely and firmly declined. But the mere fact that Webvan prohibits the practice sends customers a thrifty signal.

Differences between Peapod and Webvan can be fairly characterized as small ones, but with grocery shopping -- the realm of 50 cent coupons and two-for-one specials -- Edith Lindeman's words come to mind: little things mean a lot.

As expected, it wasn't always smooth in the beginning. You could tell this was a new company feeling its way through, with grocery lists screwed up (twice in the case of an order for soda, or 'paaahp', as they say in parts of the Midwest) and many items out of stock.

Maybe I'm just a forgiving soul, but I expected worse. Find me a company that had all its kinks worked out in the first five weeks of operation and I'll find you a spot in Liars Anonymous.

In any case, Webvan's customer support has been superb. Webvan's phone gets answered right away, and the company is quick to acknowledge problems. And over the last two months or so, there haven't been any problems at all, except for the one or two minor items out of stock.

The products themselves are comparable to what I'd find at the nearest Safeway. Packaged food is the same no matter where you buy it, so the only distinguishing factors are meat, poultry and produce, all of which Webvan does a fine job with. "Do you want to buy vegetables you've never seen?" I've been asked. All I know is, the stuff seems to be at least as fresh as what you'll find in the grocery store (how long do you think those zucchinis were sitting around the market before you picked them up at night after work?), and it's never damaged or bruised.

So I hope Webvan succeeds, because it does a damned good job, at least for me; as I said, perhaps I'm just more forviging than some folks. Not exactly sound investing, but it's the same theory used by more than a few Amazon.com (Nasdaq: AMZN) and eBay (Nasdaq: EBAY) investors -- they like the service, so they buy the stock. For the ones who got in at the beginning, the returns on investment so far have borne them out, recent slumps notwithstanding.

Lest this turn into a complete abandonment of financial principles, note that Webvan wields one big advantage over other IPOs, namely visibility. Thanks to TheStreet.com columnist Adam Lashinsky, Webvan was forced to revise its prospectus to include projections from the its roadshow. Thus, you shouldn't be surprised when Webvan loses tons of money for the next two years; lead underwriter Goldman Sachs sees losses of $154 million and $302.8 million for 2000 and 2001, respectively.

You know that Webvan expects margins far superior to the traditional grocery industry. At full capacity, the company's Bay Area distribution center would generate operating margin of 12 percent, compared to a 4 percent for its non-Internet rivals. You know that distribution center would hit full capacity if Webvan can achieve as little as 1 percent market penetration. And you know that at least so far in Webvan's brief history, the company's average order size and number of orders per week has risen.

Even without Lashinsky's work, you knew Webvan was going to spend $1 billion over the next few years to build distribution centers, so there are no hidden costs there.

That's the big difference between Amazon, which continues to surprise the market with announcements of more infrastructure spending, and Webvan, which has come right out and told us how much it'll bleed in capital costs. Visibility matters a lot. If nothing else, it should eliminate some of the volatility that typically plagues Internet stocks.

(Or not. Webvan saw a typical first-hour IPO performance today as it opened atop a high cliff before dropping faster than an anvil approaching Wile E. Coyote's head. But that might just be first-day jitters.)

Not that visibility guarantees the company will hit any of its targets. The competition isn't going to lay down, and if the grocer industry wages a price-loss-war along the lines of Amazon.com vs. Barnesandnoble.com or the entire memory chip industry from 1997 through early this year, Webvan will be hard pressed to maintain its ambitious expansion plans.

But there's been plenty of criticism leveled at Webvan already; read Larry Dignan's column if you want to hear about it. Me, I don't care if there are guarantees of success or not for Webvan. I know I'm happy with it.

Other issues:

  • Cobalt Networks
  • (Nasdaq: COBT) On the other hand, I've never operated a Linux server appliance and likely never will, which may explain why I can't see the sense in driving up Cobalt's share price as much as sixfold on the first day. On the other hand, most of the people buying the stock today will never run a dedicated server either.

    There's also one other big investment difference between Cobalt and Webvan -- market size. We know there's a huge grocery market. But how large will the market be for Cobalt's product? I have no idea, and despite what anyone out there may claim, no one else knows for sure either.

  • Wireless Facilities
  • (Nasdaq: WFII) For a group that counts huge money losers among its most prominent members -- Nextel, Sprint PCS, for example -- investors are putting an awful lot of faith into this industry. Wireless Facilities, which installs wireless networks for many of those major players, shot up more than 340 percent today in its IPO splash.

    Maybe people are attracted to this company because it makes money, unlike some of its clients. But there's that visibility thing again: gross margins for this company plunged in the first two quarters of this year because of "revised expense forecasts for the completion of two fixed-price contracts" that came with the acquisiton of Entel Technologies. Even without that event, you might have a tough time forecasting margins for Wireless Facilities; the company's increasing reliance on those fixed-price contracts means there's no way to adjust for unforeseen expenses, except by cutting into its own profit. 22GO>

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