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Start-up: Slow, steady wins Net grocer race

Little-known online delivery company, fresh off its first acquisition, is unfazed by the closures in its sector and says it is making it work by keeping it simple.

What started out as a drag race between online delivery companies has in the last year turned into a demolition derby.

Just a year ago, analysts were gushing about the prospects of a dozen or so online companies offering home delivery of retail goods. But the so-called last mile of e-commerce, the distance between the retailers and their customers' front doors, has proven to be a "killing zone," as one analyst put it.

But the closures of one-time highfliers such as Kozmo and regional online grocer ShopLink has not discouraged 2-year-old, the little-known Aliso Viejo, Calif.-based online delivery company that acquired a majority share of ailing online grocer PDQuick last week.

Unlike its predecessors in home delivery--many of which spent huge sums on expensive automated warehouses or on costly television advertisements--WhyRunOut has kept costs down by satisfying itself with profits, Chief Executive Dan Frahm said.

The company also took a much different tack to home delivery than did big online grocers Peapod and Webvan, and Internet convenience store Kozmo. Unlike WhyRunOut, those companies burned through money to seize market share and fund nationwide expansion.

The acquisition of PDQuick is the first for WhyRunOut, which operates in San Diego and Orange County, Calif.

The company said it is determined to keep its operations simple.

"We've always focused on profitability rather than market share," Frahm said. "We never expanded just for the sake of expanding."

A different route
WhyRunOut differs from most of its competitors because it leaves the retailing to others. It cuts deals with offline merchants, such as dry cleaners, cobblers and grocers, to host their products on its Web site and then deliver the goods to customers, Frahm said. The privately held company calls its business "e-logistics."

Most of the online companies that dispatched legions of deliverers to transport goods to customers, such as Kozmo, and, have crashed, been dismantled and sold for parts. As the companies grew, many of them wrestled with execution problems.

Jim Casparie, chief executive of Angel Strategies, an investment firm holding the largest stake in WhyRunOut, said the online delivery companies that failed did so because of "unworkable" business plans.

"How are you going to make a profit when you spend hundreds of millions on warehouses and delivery trucks?" he said.

Internet research group Jupiter Research concurred.

In a new report, Jupiter predicts that the strategy of building $30 million warehouses and trucking groceries to customers' front doors has proven too costly and has lured too few consumers for Internet-only grocers to survive.

For instance, PDQuick, known for years in Southern California as Pink Dot, drew a large following by taking home-delivery grocery orders by telephone. But when the Internet came along and companies like Webvan started attracting millions in private and public financing, PDQuick decided to jump on the bandwagon.

The reasoning: If these Internet upstarts can do it, why shouldn't a company with more than a decade of experience be able to flourish? PDQuick Chief Executive Dan Frederickson has said.

But the Camarillo, Calif.-based company burned through most of its cash just building its Web operations and expanding into Maryland and San Diego.

PDQuick executives told employees last month that the company would have to close within weeks if a buyer or new investors could not be found. Earlier talks with Kozmo about merging the two companies had broken down. Weeks later, Kozmo shuttered its own operations.

Pizza, anyone?
WhyRunOut charges customers a small delivery fee and merchants a percentage of each sale the company has a hand in delivering. It compares its business plan to pizza parlors that offer delivery, in that it makes money off the actual delivery. Casparie said that WhyRunOut makes $12 on each order it delivers, whereas a pizza shop usually makes $4.

"We have great confidence in our model because we're generating more profit than the pizza places and we already know the pizza model works," Casparie said.

Vernon Keenan, an analyst with Keenan Vision, praised WhyRunOut's strategy of keeping costs down by eliminating the need for costly warehouses, but he said the company's decision to support other retailers' products on its Web site could prove expensive.

"I think people grossly underestimated the costs of e-business systems," he said. "Technology is one of the areas that companies like Kozmo sunk a lot of money into...One thing that the e-commerce meltdown has proven is that the geeks should stick to thinking up cool new technologies and leave retailing to others."