Webvan Buys Rival HomeGrocer.com

Monday, June 26th 2000, 12:00 am
By: News On 6

NEW YORK (AP) — Webvan Group Inc. is buying HomeGrocer.com Inc. for about $1 billion in stock in the first sign of consolidation in the money-losing online supermarket business.

The acquisition announced Monday positions Webvan to be the dominant player in the Web grocery market, ahead of struggling Internet rivals such as Peapod and Streamline.com and brick-and-mortar chains moving online like Safeway.

While analysts lauded the deal, they were quick to point out that Webvan still faces significant hurdles, and questioned whether the Foster City, Calif.-based company will ever be able to make money.

Shares of both companies plunged. Webvan, which will be the name of the combined company, tumbled $1.25, or 14 percent, to $7.469, while HomeGrocer dropped $1.063, or 13 percent, to $7.031, both on the Nasdaq Stock Market.

``The problem with the online supermarkets is that their business model is so cost intensive that profits are very hard to come by,'' said Ken Cassar, an analyst at Internet research firm Jupiter Communications.

The online grocery business is still quite small, with sales totaling only about $200 million in 1999, less than 1 percent of the $440 billion in total supermarket sales, according to Jupiter.

But the sector is rapidly expanding. Jupiter estimates sales will rise to $800 million this year and grow to $7.5 billion by 2003.

While sales are on the rise, Web grocers face huge expenses as they expand into new cities and advertise aggressively to lure shoppers away from their local supermarkets. They must also fend off new competition from traditional chains that are starting to move online.

On top of that, supermarkets — both online and offline — have very thin margins, so they must sell huge volumes of goods in order to be profitable.

Webvan said its purchase of Kirkland, Wash.-based HomeGrocer will help it expand faster into new markets and increase its purchasing power with suppliers.

The companies' combined operations will serve nine major metropolitan areas: Sacramento, Calif.; San Francisco; Atlanta; Los Angeles; Orange County Calif.; Dallas; San Diego; Portland, Ore.; and Seattle. It plans to have operations in 13 metropolitan areas by the end of 2000 and in 15 markets by this time next year.

The merger is expected to save the companies $200 million in capital investments — such as costs for building distribution centers — this year and next, and $20 million to $30 million in headquarters and marketing costs in 2001.

``Without the merger, both companies had to expend monies to win the customer from the brick-and-mortar alternative, and then they each had to spend additional monies to win the customer from each other,'' George Shaheen, president and chief executive of Webvan, said during a conference call with analysts.

Now, ``the total spend can be more efficiently directed on the brick-and-mortar competitors.''

While the deal makes Webvan into a more powerful competitor, analysts still question how the two companies would integrate their businesses.

HomeGrocer operates with low-tech distribution centers, where people walk through picking and packing customers orders. Webvan, on the other hand, uses a very advanced automated distribution system created by the Bechtel Group.

Shaheen said the company would be looking at both distribution models and would likely strike a balance between the two concepts.

Also, analysts will watch to see how Webvan adds other products besides groceries — such as magazines, consumer electronics and books, all of which Webvan sells — into HomeGrocer's distribution centers.

Monday's merger comes at a tough time for online retailers in general. Many businesses have failed, while others — near the brink of death —have been scooped up by larger rivals. E-retailing stocks have tumbled in recent months amid concerns about the health of the industry.

Under the terms of the deal — worth about $1.2 billion before investors sent the stock plunging — HomeGrocer shareholders will receive 1.07605 shares of Webvan stock in exchange for each HomeGrocer share held. Shaheen will remain CEO of the combined company and founder Louis Borders will remain chairman.

As part of the deal, former Netscape Communications Corp. CEO and HomeGrocer board member Jim Barksdale will join the Webvan board. Other HomeGrocer backers included Amazon.com and venture capital firms Hummer Winblad Venture Partners and Perkins Caufield & Byers.

The deal is expected to close later this year. No decision has yet been made on job cuts.