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HomeGrocer closely watched on first day of trading

Shares of the online grocer rise in the first day following its initial public offering, but its ripe gains could soon spoil.

Shares of rose today in the first day following its initial public offering, but its ripe gains could soon spoil.

The Kirkland, Wash.-based online grocer's stock opened at $12.88, after being priced yesterday at $12. The stock reached a high of $16.25, but dropped to $14.12 by the 1 p.m. PST close of regular trading.

Many financial analysts think the stock will continue to drop in coming days.

"I don't believe this price is a sustainable level," president David Menlow said. "The services HomeGrocer provides are truly amazing, but the online grocery sector has really fallen on deaf ears."

Three online grocers that have already gone public--Webvan, Peapod and Streamline--have seen their stocks drop below their initial offering prices. Webvan shares are around $12, 20 percent below its $15 IPO price. Peapod, the granddaddy of online grocers, is trading around $8.50, down 45 percent from its June 1997 IPO. owns about 22 percent of HomeGrocer, but other affiliates of the online giant have struggled. and are trading at 35 percent and 30 percent below their IPO prices, respectively. is down 70 percent from its 52-week high although it continues to trade above its IPO price.

The grocery market represents one of the biggest opportunities in e-commerce. Retail grocery sales reached $449 billion in 1999, or about 18 times the total sales of books, both retail and online, according to the Food Marketing Institute.

But traditionally, the industry has been marked by low profit margins and intense competition. That's becoming the case online, where HomeGrocer will soon be competing with other Web grocers that are expanding into each other's territory.

Meanwhile, brick-and-mortar supermarket chains such as Albertson's have begun to set up shop online. With their deep pockets and broad reach, such companies could overwhelm the grocery start-ups.

"We expect our competition will intensify as more traditional and online grocery retailers offer competitive services, both in Seattle and other markets," HomeGrocer said in a regulatory document filed with the Securities and Exchange Commission.

"If we fail to effectively compete, we may lose existing and potential customers and face decreased demand for our products and services, which would hurt our business," the document said.

Most online businesses can ship products nationwide or worldwide out of a limited number of distribution centers. But to ship fresh food, online grocers have to set up warehouses in each market, which can be expensive.

Webvan, which plans to expand into 26 markets over the next 18 months, placed a $1 billion order with engineering firm Bechtel last year to build their infrastructure. Meanwhile, HomeGrocer said it would use the proceeds of its public offering to fund its expansion.

"Food distribution in the United States is pretty efficient already," Keenan Vision financial analyst Vern Keenan said. "To add a convenience layer on top of that and a last-mile distribution system is much tougher than other e-commerce opportunities today."

At $14.25 per share, HomeGrocer has a market capitalization of $1.8 billion. In contrast, Webvan and Peapod currently have market caps of $3.8 billion and $157 million, respectively.

HomeGrocer raised some $245 million after expenses by selling 22 million shares of stock to institutional investors yesterday.

HomeGrocer lost $84 million on $21.6 million in revenue last year. The company lost $7.9 million on $1.1 million in revenue in 1998.

Other investors include Kleiner Perkins Caufield & Byers, Jim Barksdale's The Barksdale Group and Martha Stewart Living Omnimedia. HomeGrocer is the first company that The Barksdale Group has invested in that has gone public.

HomeGrocer currently delivers groceries in Seattle, Portland, Ore., Los Angeles, and Orange County, Calif.. The company plans to expand into eight to ten new markets this year.