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Gas prices latest threat to online grocers

Soaring oil and gasoline prices are taking their toll on the consumers and so-called "old economy" companies. But a handful of Internet companies once considered impervious to the dangers of something as arcane as rising oil prices are feeling the pinch.

For online grocers such as Webvan Group Inc. (Nasdaq: WBVN), Peapod Inc. (Nasdaq: PPOD) and HomeGrocer Inc. (Nasdaq: HOMG), these skyrocketing fuel costs couldn't have come at a worse time.

All of these upstarts are trying to find their voice in a market that's extremely competitive and has limited margin potential. They're all burning through cash to ramp up their distribution networks while throwing millions of dollars at advertising firms.

Webvan, widely considered the best prospect in the sector, finds itself smack dab in the middle of the country's most expensive gas prices. Operating through out the San Francisco Bay Area from its Oakland distribution center, Webvan's paying more than $2 a gallon.

While most analysts say escalating fuel prices are the least of these companies' worries, the prospects of even higher gas prices down the road might dissuade investors from giving these stocks a second glance. Profit margins for traditional grocers are already slim and they don't have to drive all over town to deliver their merchandise.

"Right now, it's not that big of a deal," said Pete Swan, an analyst at Pacific Growth Equities in San Francisco. "A company like Webvan is expecting deliver expenses will be about 5 percent of its revenue with gas making up about 1 percent. But if gas prices moved considerably higher, that might be a problem."

Wall Street's losing interest

Another problem, from an investor's perspective, is the lackluster performance of these stocks of late.

Webvan shares soared as high as $34 a share in December, giving it a market capitalization of more than $10 billion.

On Tuesday, the stock closed around $9 a share, good enough for a market cap of about $2.9 billion.

HomeGrocer's initial public offering earlier this month didn't exactly set the world on fire. After pricing at $12 a share, it closed up 2 1/8 to 14 1/8 in its first trading day but now sits at about $10 a share.

It's not unusual for an Internet stock to drop precipitously in the weeks and months following its ballyhooed IPO.

But when Peapod announced the departure of CEO Bill Malloy and the loss of $120 million in financing, its shares went into a tailspin, dragging the rest of the online grocers with it.

Peapod shares fell from around $9 a share to below $3 a share shortly after the bad news hit the Street. Webvan and HomeGrocer saw similar declines over this same period.

"It didn't help that Peapod had bad news," said Barry Stouffer, an analyst at J.C. Bradford & Co. "The action in Webvan's stock has nothing to do with gas prices."

Hustling to stay alive

Regardless of the impact of current or future gas prices, these online grocers face an uphill battle.

Swan said the company needs to reach a point where its making 8,000 deliveries a day with an average order of $100 before its stock's going anywhere.

Right now, Webvan's making between 2,000 to 2,500 deliveries a day at about $90 an order, Swan said.

"It's counter intuitive, but maybe the higher gas prices will work in Webvan's favor," he said. "Customers might use this service if the prices are comparable to traditional grocery stores rather than burn that gas themselves."

In its latest quarter, Webvan met analysts' estimates, but still lost $25.7 million, or 8 cents a share, on sales of $9.1 million.

On the bright side, Webvan's expanding into the Atlanta area next quarter and has plans to roll out service in at least eight of the top 20 markets within the next few years.

"We love the space," Swan said. "It's a great service for consumers and someone's going to figure out how to make money servicing it."

Forrester Research forecasts booming growth in the sector, with sales of $17 billion within four years.

First Call consensus expects Webvan to lose 13 cents a share in its first quarter and 70 cents a share in the fiscal year.