2HRS2GO: Don't lump all online grocers together

5 min read

At first glance, today's news release from Peapod (Nasdaq: PPOD) reads cryptically:

"Peapod announced today that Bill Malloy, the Company's CEO and President, has informed the Company that due to health reasons he will not be able to continue his involvement with the Company."

Replace "Peapod" with "The Politburo", "Bill Malloy" with "Nikita Khrushchev" or "Mikhail Gorbachev", "Company" with "Party" and "CEO" with "General Secretary". All you need is "retired to the Crimea" to complete the picture of a Soviet-style change of leadership.

Ok, that's an unfair way of looking at today's mess. At least one person working for Peapod says Malloy really did suffer health problems severe enough to put him in a hospital and render him unable to sign resignation papers, which is why the news release says "leave" instead of "resign". Besides, it's hard to believe Peapod co-founder Andrew Parkinson wants the CEO job again -- dealing with Peapod's ailing operations on a day-to-day basis might be enough to cause anyone health problems.

Still, you could say Peapod now sits in the same position the Soviet Union was in following the failed 1991 coup. With neither cash to finish this year nor good prospects for more financing, Peapod appears doomed.

But don't write off online grocers entirely.

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Stock market sentiment flows against all online consumer retail these days, including the whole field of Internet grocers. Webvan (Nasdaq: WBVN) and Streamline.com (Nasdaq: SLNE) have been tanking since last fall. HomeGrocer.com (Nasdaq: HOMG) saw a relatively mild IPO by contemporary standards and now trades below the initial offering price.

Typical of the market to lump everything under the same umbrella. It's a mindless approach that ignores problems specific to Peapod:

  • Timing.
  • Peapod started operations 11 years ago, before there was a commercial World Wide Web; the company provided modems for its customers. It was far too early, and by the time Internet commerce started years later, Peapod was old hat.

  • Business model.
  • Until late last year, Peapod relied entirely on local grocers to fill orders. HomeGrocer, Streamline and Webvan went public with their own distribution centers, which provide better control over the product and improved order fulfillment, not to mention fatter margins because one level of distribution is eliminated.

  • Leadership.
  • Webvan didn't go public until it lured CEO George Shaheen from Andersen Consulting. HomeGrocer brought in Mary Alice Taylor from Federal Express. On the other hand, Andrew Parkinson led Peapod for more than two years before realizing he couldn't run a publicly-traded company. And now he's back by default.

  • Backing.
  • HomeGrocer's investors include Amazon.com (Nasdaq: AMZN) and perhaps the two best known tech venture capital firms, Hummer Winblad Venture Partners, and Kleiner Perkins Caufield & Byers; Morgan Stanley Dean Witter led the IPO. Webvan has heavy hitters with Softbank (majority owner of ZDNet), Sequoia Capital and Benchmark Capital, and went public under the auspices of Goldman Sachs. Peapod has ... ?

    That last point is the most important. Any successful B2C company has to be able to lose money for years, and online grocers more than most because of the capital costs. Those warehouses aren't cheap.

    Peapod started with the wrong business and by the time it figured out the right one, it was too late. Webvan and HomeGrocer had the big money sewn up, which meant Peapod basically had to subsidize itself, since it already used up its stock market chance by going public in 1997. Unfortunately for Peapod, the Internet consumer market is still too young for any online retailer to pay for itself.

    Yet if a company has the cash and backing to hold out, an online grocery idea can work, because it's one of the few Internet consumer shopping experiences that is truly better than the physical thing.

    In most cases, buying a consumer product online is not better than buying it in the real world. Take books as an example.

    Which is more enjoyable? Looking at a list of customer comments on Amazon.com, or going to a Barnes & Noble or Borders superstore to relax in plush couches while you read the book and figure out if you really want it. I love buying books in the real world. Heck, Amazon.com CEO Jeff Bezos says he loves buying books in the real world.

    Is the Internet cheaper? Not for the majority of low ticket items, because of shipping costs.

    The only edge of online shopping is breadth -- you have access to far more product than in a bricks-and-mortar store. And that's not a big edge, since you can walk into many stores and have them order items for you.

    But except for people who enjoy walking through grocery aisles -- and admittedly there are some of those folks -- ordering groceries isn't fun. It's a chore, a necessity.

    And unlike buying a car or jewelry, it's not like you need to see most groceries before you buy them. A can is a can. A bag of rice is a bag of rice. You can't taste uncooked pasta in the box.

    Maybe you'd want to see veggies and meat, but that's not as critical as test-driving a $20,000 vehicle or examining a $2,000 engagement ring. Anyway, it's not like the supermarket will let you test ground beef for e.coli bacteria.

    Hauling groceries is also a pain. If someone else wants to do it at no extra cost, many people would jump at the chance, just as I do now -- Webvan dropped off my groceries yesterday, as a matter of fact.

    Convenience sells itself in the long run, as long as the business is competent. Peapod's current travails signify nothing more than just another poorly run business dying, which happens all the time.

    If anything, Peapod's death would be good for other online grocers. Never hurts to have one less competitor. 22GO

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