"FILING FOR GROCERY DOLLARS"
redherring.com
By Peter D. Henig
Red Herring Online
August 5, 1998
Here's your IPO shopping list: fruits and veggies, a home
computer network, and don't forget the marketing
automation software (in a shiny, clear wrapper).
NetGrocer, Tut Systems, and Exchange Applications
have all recently filed with the Securities and Exchange
Commission to take their companies public -- but none
appear to be standouts.
Turning a business model inside out
There's no way a still-developing company like
NetGrocer can file to go public without drawing at least
a few criticisms -- if not a few outright laughs.
"It doesn't deserve to be public, and wouldn't have a
chance if Peapod weren't already out there," says
Francis Gaskins, editor of Gaskins' IPO Review.
Is this too harsh?
Not really, says Mr. Gaskins, if one evaluates NetGrocer
purely on its fundamentals.
The most glaring problem with NetGrocer is that its
business model, as it stands now, simply can't work. In
order to build market share and brand-name recognition,
the company is incurring negative gross margins. In
layman's terms, it's buying groceries for more than it can
sell them.
And this is no secret. Read from NetGrocer's
prospectus: "the Company has incurred a gross margin
deficit in each quarterly period since it began selling
groceries on its Web site. Since the Company's cost of
shipping orders exceeds the amount the Company
charges to its customers for delivery, it is unlikely that the
Company will achieve positive gross margins with its
current business strategy without the opening of
additional distribution centers."
Mr. Gaskins is unyielding in his criticism. "This is the first
company I have seen that is going public with a negative
gross margin," he says. "That means in the quarter ended
March 31, their sales were $406,000, and their cost of
sales were $692,000. Hello?"
To its credit, NetGrocer does not plan on losing money
at an ever-increasing rate forever, although its filing
leaves the turning point toward positive margins highly
uncertain: "The company will continue to have a negative
gross margin until such time as it is able to, among other
things, realize other efficiencies and economies of scale,
improve product mix, and realize certain purchasing
economies."
NetGrocer has also signed a series of exclusive
marketing agreements with some of the Web's top
landlords like Yahoo (YHOO), America Online (AOL),
and Excite (XCIT), to which it will make fixed payments
over the next 12 months of $16 million, according to its
prospectus.
"This is just another in a long series of companies which
are raising public money to pay AOL and Yahoo, who
end up being the real winners," says Mr. Gaskins. "If this
company goes public, it will definitely prove my theory
that fund managers in general do not read prospectuses."
But how does Mr. Gaskins really feel?
"That company is the biggest joke I've seen. Really."
Now, now.
NetGrocer expects to raise $38 million in its public
offering, underwritten by CIBC Oppenheimer and Volpe
Brown Whelan. |
