Webvan Moves to Expand Reach

Online grocer Webvan Group Inc. Monday made a move to expand its presence in major markets across the country by acquiring competitor HomeGrocer.com Inc. for about $1.2 billion in stock.

Webvan will exchange just under 1.1 shares of its common stock in exchange for each HomeGrocer shares. In total, about 138 million Webvan shares will be swapped for all HomeGrocer.com equity. The deal, which has already been approved by both companies’ boards, is expected to close in the fourth quarter. The combined firm will retain the Webvan name.

Webvan expects the merger will enable it to serve Atlanta, Baltimore, suburban Bergen County, N.J., Chicago, Dallas, Los Angeles, Orange County, Calif., Portland, Ore.; Sacramento, Calif., San Diego, San Francisco, Seattle and Washington, D.C. by the end of the year.

Webvan President and Chief Executive Officer George Shaheen said the deal recognizes the fact that electronic commerce is an evolving marketplace and requires aggressive strategies for success.

“Webvan’s combination with HomeGrocer harnesses the energy and resources of both organizations and creates an even more attractive shopping proposition for our customers… With this merger, we are moving early and aggressively to consolidate two successful companies to build a strong ‘last mile’ Internet retailer,” he said.

Shaheen will retain his role as president and CEO once the merger is complete as will Webvan’s founder and Chairman Louis Borders.

Shaheen said the deal will help his firm build out the infrastructure to more effectively deliver a wide variety of goods directly to the home.

“With the grocery category, we are able to drive frequency of contact and build strong customer relationships. We continue to augment these offerings with a broad selection of premium consumer products and home entertainment,” he said.

A recent study by International Data Corp. predicted the online grocery market will blossom from less than $200 million in 1999 to more than $8.8 billion by 2004. However, the firm cautioned players will have to spend extensively to gain market share.

“The online grocery market is taking a growth path that no other e-commerce business has tread,” said Jim Williamson, senior research analyst with IDC’s Consumer eCommerce: Consumer Goods research. “Substantial capital costs are required to reach customers, consumer acceptance still remains a major barrier to growth, product margins are low, and competition is everywhere. This market shares many issues that have troubled offline businesses for years, including capital efficiency, obstacles to market penetration, and the price of gas.”

According to IDC, to penetrate a new market, some online grocers will spend more than $25 million — and that cost doesn’t include customer acquisition. Most of the expense is related to building fulfillment centers. Existing grocery stores will have just as difficult a time getting into the online business as the online pure-play start-ups.

A similar study by Greenfield Online found just under a third of its survey respondents had ever visited an online grocer. Of that total, only 12 percent reported making a purchase. Of those who purchased, almost half reported spending less than $50.

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