The news sent shares of Priceline tumbling. In late afternoon trading, the shares dropped $3.34, or nearly 36 percent, to $6.03 on the Nasdaq.
Closely held WebHouse, launched a year ago, was developed by Walker Digital, the same intellectual property laboratory that founded Priceline.
WebHouse, which has nabbed funding from investors including Paul Allen's Vulcan Ventures, Wit Capital's Arista Fund and Goldman Sachs, operates as a separate company that licensed Priceline's business model and offered groceries and gasoline on the Priceline Web site.
Priceline's site allows consumers to name their own price for a range of products and services, from airline tickets and hotel rooms to cars.
The grocery and gasoline service has been under a cloud of doubt since its inception last year, largely because those products do not lose value if they are not sold right away. On the other hand, airline seats, hotel rooms and rental cars that sit idle do not generate any income.
"(The travel products) are inventory that becomes obsolete because of the time factor, while groceries are not," said Jill Frankle, director of retail research at Gomez. "That was the major difference in the model that made it difficult to keep WebHouse going."
Albright added that without those businesses, Priceline is just a travel business that faces growing competition from other travel sites and from Hotwire, a travel site started by a consortium of airlines.
Just yesterday, Priceline was slapped with two separate class-action lawsuits. One suit alleges that the company misrepresented how soon it would be profitable, how much customer loyalty was accelerating, and how long the name-your-price business model would be effective.
The other suit charges that Priceline knew but did not disclose that its third-quarter results would not meet expectations because of sales being lower than previously anticipated. The suit further alleges that a company insider sold 10 million shares of the stock for $240 million before Priceline disclosed to the public that its third-quarter results would not meet expectations.
In a separate statement, Priceline said that auction site Perfect YardSale, another affiliate, also plans to cease operations. Perfect YardSale, which has been in business for less than a year, offers consumers secondhand goods on Priceline's Web site.
Both WebHouse and Perfect YardSale said they will meet outstanding obligations to customers, employees and third parties as they wind down their businesses.
WebHouse customers with unredeemed gas and groceries will receive a full refund of any prepaid amount, plus extra money to cover the estimated savings they were expecting to receive at the grocery store and gas pump, the company said. Refunds will be processed no later than Oct. 20.
WebHouse said its cash reserves of approximately $50 million, as well as $20 million of additional working capital, will be "more than sufficient" to satisfy all obligations to customers, employees and suppliers.
The company in September cut 40 full-time and 100 contract positions. At the time, WebHouse said job reductions were part of a reorganization to help keep costs in line and make room for future expansion. The company boasts over 13,000 retail stores participating in the service, including approximately 7,200 grocery stores and 6,000 gas stations.
Priceline, which has seen its stock plummet to the range of single digits per share in recent months, far from a 52-week high of $104.25, said it will review its operations in the fourth quarter to remove the costs associated with providing services to WebHouse and Perfect YardSale. Priceline will also stop receiving royalties from the two licenses, which totaled $361,000 in the second quarter of this year.
The company, which will continue to focus on its core travel, financial services, telecommunications and auto business, expects to report approximately $125 million in cash and short-term investments as of Sept. 30 and has generated "significant" gross margins on its core business.
Priceline is slated to give details of its plans and outlook for the fourth quarter when it announces third-quarter results Nov. 2.