<<<A quick look at yesterday's quarterly earnings results for pioneering online grocer Peapod (PPOD) would suggest the company is a cyber-basket case, destined to stay for eternity as one of the Internet's biggest disappointments. Sales slipped for the first quarter to $18 million, compared with $18.9 million in the year-ago period. Peapod's loss for the quarter also widened to $5.1 million, compared with $4 million a year ago.
Internet investors, of course, are quite comfortable with accepting large losses in return for juicy top-line revenue growth, but Peapod's results provided neither. So, is this national online grocer doomed? Far from it.
Peapod has taken the necessary steps in the past six months to revise its business plan and position itself as a leading player in the emerging consumer direct channel. The Consumer Direct Cooperative estimates the market for direct Internet and over-the-phone grocery sales could grow to $85 billion by 2007, capturing 8% to 12% of the grocery market from traditional grocers. With such a big potential market at stake, I decided to take a deeper look at what Peapod's management has done to reposition the company.
Peapod At A Glance
Peapod provides delivery services in eight major metropolitan markets. Under the old Peapod business model, a customer had to log on to the company's site and select items for purchase. A Peapod employee then took the order to a local grocery store and actually purchased the items like any regular shopper. Finally, the employee delivered the items directly to the residence of the customer.
It was a nifty time saving idea, but as a business model it was flawed from the start. Busy professionals and working moms alike were upset with Peapod's relatively high service fees in a business where prices are watched closely. On top of that, Peapod was never able to achieve significant cost savings on purchases because they did not maintain their own fulfillment centers. Instead, they were left at the pricing mercy of the grocers they'd partnered with. The company's extremely narrow gross margins and high-operating expenses were a disaster waiting to happen.
Last year the company finally saw the light and announced it would begin operating its own centralized warehouse in each market. Peapod has already opened distribution centers in Chicago and Long Island, N.Y., and plans to open a similar center in San Francisco during the second quarter. A centralized warehouse model appears to be incredibly more economical than Peapod's prior "store-based" service.
Costs from establishing the distribution centers has hurt the bottom line, of course. Peapod management estimates that each new distribution center requires a capital expenditure of roughly $1.5 million, plus operating expenses which will result in a net loss at each facility during its first 12 to 18 months of operation. However, the new centers should eventually give the company higher overall margins, as well as greater operating efficiencies.
Obviously, none of this is good news for short-term investors who are looking for a quick turnaround from the battered online grocer. Even a turnaround artist like Chainsaw Al Dunlap couldn't get an operation like Peapod humming in only two quarters. Peapod appears intent on building a new distribution and operational infrastructure for the long term, not simply a stop gap solution to appease shareholders now.
It is important to note that with barely more than $200 million of market capitalization, Peapod's stock is trading at a piddling three times trailing 12-month sales through March. In comparison, a sexy high-flying Net e-tailing stock like Beyond.com (BYND) commands a price-to-sales ratio of about 14. Is Peapod so much of a laggard when compared to its online peers? Not if you consider the company's long-term prospects.
For the patient investor, Peapod offers the potential to build a valuable direct sales relationship with thousands of Internet users in almost every major U.S. market. This direct sales relationship is what really excites me about Peapod's potential. The company - and competitors like HomeGrocer.com and WebVan - hold the potential to be much more than simply an online grocer.
And So Much More
Think about all the related services an online grocer like Peapod could eventually offer directly to the consumer at home. What about video rentals, ready-to-eat meal packages, photo development services or dry cleaning services? Take this varied model a step further - why couldn't an online grocer like Peapod partner with online pharmacies like drugstore.com and PlanetRx.com to provide delivery services for those companies as well? They could, and I believe they eventually will.
Peapod already announced a partnership with Walgreen's, the nation's largest drugstore, to distribute Walgreen's over-the-counter health and beauty products to Peapod customers in the San Francisco area. The pact also covers a variety of small general merchandise categories.
I believe the grocery delivery service will eventually serve as no more than the initial building block to a variety of higher-margin services which Peapod and other online grocers will introduce to existing customers. In effect, Peapod and others have the opportunity to become the conduit between customer and e-tailer for a variety of frequent e-commerce purchases.
An example of such a structure is WebVan Group. Former Borders Group (BGP) Chairman Louis Borders recently founded WebVan with $120 million provided by investors including Sequoia Capital, CBS (CBS), Benchmark Capital and Japan's Softbank. The service will initially sell only groceries, but Louis Borders has already stated that he plans to expand WebVan's home-delivery network to handle much more than groceries. In fact, Borders believes his company can eventually become a FedEx of sorts for all kinds of merchants.
This reasoning might further explain the interest of Sequoia and Benchmark in funding WebVan. Both venture firms back a variety of e-tailers, including online pharmacy PlanetRx.com. While the online grocers won't replace traditional delivery services like FedEx or UPS overnight, they do have the opportunity to carve out a lucrative niche as a intermediary between various e-tailers and their customers.
Other Competitors
Seattle-based online grocer HomeGrocer.com has also received a good deal of attention recently. Yesterday, former Netscape Chief Executive Jim Barksdale announced he had invested $5 million in the online grocer startup and would be taking a seat on the company's board. The move comes on the heels of recent rumors that e-tailing giant Amazon.com (AMZN) will soon announce its own investment in HomeGrocer.com. An Amazon.com investment would not be surprising, because HomeGrocer.com and Amazon.com are both portfolio companies of powerhouse venture firm Kleiner Perkins.
Traditional brick-and-mortar grocers will eventually leap into this game as well, providing further competition. But so far, national grocers like Albertson's (ABS) are still hesitant to dive fully into the game - and with good reason. A traditional grocer like Albertson's can't afford to plow capital into an online grocery business at the expense of their bottom line. It's the same issue Barnes & Noble (BKS) had to deal with when they began competing with Amazon.com. Does a company sacrifice brick-and-mortar profits in exchange for building a strong online presence or does it just pretend the online competitors don't exist?
First mover advantage is essential on the Web, and Peapod has already amassed 100,000 customers. An offline grocery giant like Albertson's is likely to buy rather than build when they finally enter the online grocer wars.
Clearly, Peapod still has a number of hurdles to overcome before it can prove the long-term viability of its new distribution center model, but with the company's market capitalization I can't help but focus on the positives I see for this online grocer down the line. Americans want convenience and speed, and they are increasingly turning to the Web for much of their shopping. Peapod presents an interesting play on the intersection of those two trends.
While I don't that believe most shoppers will completely forgo the shopping mall, grocery store and other bricks-and-mortar operations, the opportunity to capture even a small slice of the online pie will eventually be enormous. Online grocers like Peapod have the ability to compile purchasing behavior research and related marketing data that most traditional retailers and other grocers can only dream about. Packaged goods companies like Kraft, Nestle and Ralston Purina (RAL) have already taken part in interactive marketing programs with Peapod.
Peapod is the only publicly traded online grocer. With "smart money" like Kleiner Perkins, Barksdale, Sequoia and Benchmark beginning to flow into the sector, Peapod will increasingly fall under the Street's spotlight.
Judging by the recent moves of these prominent investors, Peapod may have just found the winning recipe after all. Bye-bye checkout lines, hello online grocery shopping.>>>
Relevance to rdim? as posted on RB. Seems that rdim has taken very important steps to avoid the above problems. This suggests that rdim management is smart and has their business plan headed in the right direction!
patwrk
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