RealTime IT News

Webvan: Top of the Food Chain

When people are selling, it may be a good time to start buying -- especially when the selling seems to be distressed and indiscriminate. In the e-tailing sector, investors have been treating all companies as virtual pariahs.

One of the pariahs has been Webvan, which had its IPO in November last year. The IPO was priced at $15 and had a 52 week high of $34. Now, the stock is trading at $7.

In essence, Webvan is creating the infrastructure for online shopping, by creating a network of huge distribution centers across America. Webvan is focusing on the grocery market, in which sales are about $440 billion. Currently, Webvan offers 18,000 grocery and specialty items, including fresh produce, premium meats, fresh seafood and prepared meals, as well as non-perishable and non-prescription items. Company figures show it has served 47,000 customers as of December 31, 1999.

True, Webvan is not profitable. Then again, its first distribution center is expected to turn a profit in the third quarter of 2000.

Webvan's hi-tech distribution centers give it significant competitive advantages. Reasons: there is no need to locate the centers in high-rent districts (thus, rent is cheap); there is much better tracking of customer behavior; there is a high degree of automation. In fact, these distribution centers are so efficient that they can do as much volume as 18 to 20 grocery stores.

Over the next three years, Webvan plans to extend its presence in the 26 largest U.S. markets. In keeping with this, last month they announced the expansion into four new markets to service Greater Baltimore, Denver, Northern New Jersey, and Philadelphia. Webvan signed lease agreements for 345,000- to 365,000-square-foot distribution centers in each of these areas with startup costs of about $30 million a piece. Each center has the capacity to generate annual revenue of $300 million a year.

Gross profits per delivery is the measure of success for online grocers. In the third quarter of last year, Webvan had an average order of $73, with a gross profit of $9. But in the fourth quarter, it had improved to $81 per order with gross profits of $15 per delivery. The key benchmark is $100 per order, in which the company generates profits.

Webvan formed a hot all-star team to undertake this challenge. They are backed by CBS Inc. and Knight-Ridder Co., as well as some of the leading sources of venture capital, including Benchmark Capital, Sequoia Capital, and Softbank Corp.. And in September George Shaheen, the former head of Anderson Consulting, became the president and chief executive officer. He has lots of incentive to do well: He has options to purchase 5 percent of the stock.

Maybe investors think the company will run out of money -- somewhat like a CDNow or Peapod. However, this may be difficult. Looking at the financials, as of the end of last year, the company had cash and marketable securities worth about $638 million. This should be enough for some time for the company to execute on its business model and allow for investors to warm-up to the stock.

------------ "The company looks attractive because of its expertise and revenue potential for distribution and its online grocery business. A lot of investors might be missing the point that thousands of etailers will utilize Webvan's infrastructure at some point." Discuss it here


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