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Despite drop, Net grocers plan expansion, see growth

Although investors may be abandoning them, Web supermarkets continue to attract customers and expand operations, and analysts say demand is growing.

Don't pull a sheet over the heads of online grocers yet--they may have a little life left in them.

Net grocers, like other online merchants, fell hard during the recent stock market slump. Although investors may be abandoning them, Web supermarkets continue to attract customers and expand operations, and analysts say demand is growing.

"The bottom line is that this is a convenience-driven market, and consumers are beginning to realize that these companies provide convenience," said Gomez Advisors analyst Alan Alper.

Webvan, which expanded into Atlanta on Monday, said its San Francisco operations will turn profitable by September. Boston-based Streamline, for six years a regional company, is planning a 20-city expansion within the next five years.

Most encouraging to online grocers, whose stocks are generally far below their initial public offering prices, is that big offline grocery chains are moving into e-commerce, affirming their basic business model.

Peapod got a $73 million investment from Dutch grocer Royal Ahold, and U.S. grocery giant Safeway pumped $30 million into small Net firm GroceryWorks two weeks ago.

"Royal Ahold has 50 years in the grocery business in the Netherlands," said new Peapod CEO Marc van Gelder, formerly a senior executive at one of Ahold's grocery chains. "We believe that there is going to be a market for e-commerce, and it's going to be considerable."

The numbers back that statement.

Webvan reported an 85 percent jump in active customers in its first-quarter earnings announcement last month, and the average order size went up 11 percent from $81 to $90.

According to Jupiter Communications, the overall online grocer segment will generate $7.5 billion by 2003. Last year, grocery shoppers spent $100 million online and could spend twice that this year. Research firm NPD Online said a recent study showed that consumers will increasingly be buying groceries online.

But the stocks remain in the cellar. At the 1 p.m. PT close of regular trading, Webvan shares were at $6.23, about 57 percent below the company's $15 IPO price. Peapod was at $3.25, and HomeGrocer, which went public in March at $12, was at $5.50.

Analysts said that mounting debt and companies continuing to operate in the red have depressed stocks. For companies such as Webvan, which rely on costly automated warehouses, there also are huge start-up expenditures.

Some industry observers say the market is being unduly harsh toward Web grocers.

"I don't think the public has learned how to pick out the fresh produce from the rotting goods," Alper said. "The markets tend to tar everybody with the same brush."

The online grocers have set up their operations in different ways. Some, such as Webvan and HomeGrocer, are largely self-sufficient with their own warehouses and delivery systems. Others, such as Peapod and GroceryWorks, are using the resources of a partner.

In the end, the company that can get its products to customers at the best price and still manage to eke out earnings will win, Alper said.

"They must ultimately demonstrate that their infrastructure and their model is a reasonable investment," he said. "And they must demonstrate that it can lead to profits in a reasonable amount of time."