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).

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.

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