dcsimg
RealTime IT News

Grocery Shopping in the 21st Century

The success rate for online shopping has been, well, nil.

Peapod (PPOD), which went public, has been dead money, the stock selling for $8-5/16 or a $145 million market cap.

As for NetGrocer, it had to cancel its IPO last year.

There have been two big problems with online grocery shopping. First, there is no same-day delivery (known as the "last mile" problem).

Yet, this is crucial, since many grocery items are perishable. Second, the margins are low. Thus, to make profits, an online grocery needs to develop its own cost-effective distribution system.

Grocery shopping, of course, is one of the biggest markets in the US. In 1998, sales were about $449 billion.

But a company called Webvan wants to make online grocery shopping a reality. To accomplish this, the company is in the process of constructing 27 highly automated distribution centers.

Each distribution center has the capacity of about 18 supermarkets and allows for a flexible inventory system of over 50,000 items.

A Webvan warehouse is straight out of science fiction. There are many labor-saving devices, such as carousels and conveyors, which route items.

The warehouse has sophisticated software that regulates the temperature and there are even food preparation facilities, such as to prepare meals, cut meats and fish.

Webvan uses a hub-and-spoke system for distribution. So, when a customer makes a purchase, it is handled within the warehouse. The items are then placed in a temperature-controlled truck, which then delivers the items to a local station (each warehouse has about 10-12 stations).

Then a van delivers the items to the customer. The couriers who drive the trucks and vans are highly trained, having advanced wireless communications technology. They are even compensated by stock options.

The system, at least in theory, should provide for cost-effective fulfillment. Whats more, since the warehouses will be located in industrially zoned areas, the real estate costs should be lower.

Here are the valuation metrics (assuming the IPO is priced at the top of its range). The revenue multiples really dont make much sense, as the company launched its first warehouse in May 1999 (for the San Francisco area).

Webvan

WBVN

pro forma IPO

 
   

Shares offered

25.00

Price target/actual

$12.00

Proceeds

$300.00

Shares out

317.4

   

IPO market cap

$3,808.80

less working cap

$587.20

plus LTD

14.2

Enterprise value

$3,221.60

1999 Revenues

$0.40

1999 Losses

$35.00

Annualized rev.

$10.00

   

NaviSite

 

Revenue multiple

381

Rev. multiple enterprise

322

Conclusion

The founder of the company is Louis Borders, who as the name implies, was also the founder of Borders Books.

The company also has such directors as Christos Cotsakos, the CEO of E*TRADE, and Tim Koogle, the CEO of Yahoo!

Investors include such savvy players as SOFTBANK, Sequoia Capital and Benchmark Capital.

With all this, the IPO should do quite well. However, Webvan is a very ambitious project. Even the brightest minds cannot anticipate everything.

There is a good chance that things will not go according to plan. Sometimes, there can be huge miscalculations, such as the case with the recent bankruptcy of Irridium. Besides, it will take several years for Webvan to reach critical mass.

So, I would not be surprised if the stock is volatile for some time. In other words, patience may be a virtue.


ALL NEW! internet.com's HotWatch a monthly e-mail subscription for $99, featuring Internet Stock Report's top 10 noteworthy Internet stocks for the month. Each month you will receive in-depth analysis on the top 10 Internet stocks to watch with the information you need to assess the fast-paced nature of Internet stocks. Staying on top of market changes in the Internet Stock market is what counts. For $99 per year, you receive 12 timely issues sent to you by e-mail. Don't wait, our next issue will be out before you know it with a whole new perspective on the market. Sign up today at: e-newsletters