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Online Shopping: Food and Consumer Staples
Focus on Peapod, Inc.
...Updated 8/28/98

4/28/98: PPOD reported first quarter results:
... Revenues up 56% to $18.9 million
... Orders filled up 61% to 136,600
... Net product sales up 68% to $15.5 million
... Fulfillment operations cost up 33%
... Net loss $4.0 million from $2.9 million in first quarter '97
... Customers in last 12 months up 89% to 103,800
... Excel Logistics centralizing warehousing and picking.
7/22/98: PPOD Expands Into New York City
... details below.
7/31/98: PPOD reported second quarter results:
... Revenues up 25% to $17.5 million
... Orders filled up 33% to 128,600
... Net product sales up 42% to $14.4 million
... Fulfillment operations cost up 17%
... Net loss $4.5 million from $3.0 million in second quarter '97
8/4/98: "PPOD Packages" to offer national delivery
... dry grocery and household items will be drop-shipped from the same central warehouses that support PPOD's local delivery,
... advertised packs will be targeted at high-margin niche occasions such as new baby packs, college care packs and specific meal solutions in a box.
8/20/98: PPOD signs Net marketing deal with Excite:
...exclusive online grocery service promoted on the Excite co-branded portions of Netscape's Netcenter, such as Shopping, Health and Lifestyle, and Search.
...dominant placements in Excite's Webcrawler and the Quicken Personal Finance area on AOL.com. Per recent Media Metrix reports, this provides Peapod with access to over 35% of all Internet users.
...Excite's propriety targeting capability, through MatchLogic, allows Peapod to cost-effectively target consumers in Peapod's local markets via the Internet.

Previous Net Nugget articles (see especially BizNet97) discussed the rapid growth of online sales. Dell, Cisco and others demonstrated quite early that the sale of specific high-value equipment and PCs to Web-savvy buyers could be easily facilitated by the Web. E*Trade, Silicon Investor, Intuit and others have demonstrated the capability of delivering intangibles such as financial services (securities research, stock trading, term life insurance quotes) to a broader, but still sophisticated market on the Web. Most recently, we see the use of the Web to sell popularly priced tangible goods to the general population now being brought to the Web by WebTV and under $999 PCs. We see books, CDs, flowers, and other moderate cost items being sold, often by "upstart" companies entering markets long dominated by established retailers.

The Net offers tremendous opportunities for those who can appreciate the "increasing returns" economics of networks, the power of community, and its opportunity to eliminate the costs of intermediaries and manual hand-offs in the distribution chain. Those advantages are now being moved down to the part of the market long regarded as "low margin" ... food and consumer staples.

Retail Sales of Grocery and Consumer Staples have gone through repeated changes. The corner grocery and meat market is no long the norm, but survives (our own corner store: Bliss Market in prosperous suburban Wethersfield, CT is bustling with buyers of fine meats and prepared meals). The supermarkets, to survive, evolved into vast mega-stores challenged by WalMart.

How different is this from the evolution of sales of office supplies, electronics, books and CDs? Around here, the "big box" stores pay for real estate, inventory and sales help to present those items at places like Office Max, Circuit City, Barnes & Noble and Media Play. And compete head-to-head on "guaranteed low prices." We now see office supplies, PCs, books, CDs and videos being sold on the Net, eliminating the 'bricks and mortar,' inventory and intermediaries and selling direct from the central warehouse.

A March 1998 article in the Ottawa Citizen Online addressed various companies' entry into Net retailing, including Dell, Cisco, Egghead, Amazon.com, Bloom MicroTech, and The House of Scotland, who are experiencing rapid growth in sales volumes on their Net sales sites, following a "major undertaking" in getting the site set up.

Peapod Doubles Revenue, Again but Remains Unprofitable
That sales model has now come to food and consumer staples, with companies like Peapod (NASDAQ: PPOD), which is in the process of adapting Net technology to its home-delivery shopping service. Although Peapod first came public in mid-1997, it is far from a "start-up" company. Their business model was discussed in Harvard Business Review years ago as an example of a company that is deep into a one-to-one relationship with their customers. They successfully developed and grew their business years before the Web made the Net popular. They are now using the Net to facilitate this relationship with their growing customer base, and to capitalize on the economic capabilities of the Net.

As it expands, Peapod is burning cash, $6.3 million in operating activities in FY 1997, up from $4.5 million in 1996 and $5.5 million in 1995, but reported $54 million in cash and cash equivalents at the end of 1997, primarily due to proceeds from its June, 1997 IPO sale of 4 million shares at $16/share. In its 1997 10-K, filed in March, 1998, Peapod reported $2 million interest income on that invested cash.

According to its 10-K, Peapod's investment in expansion is paying off in increased sales. Membership increased from 12,500 in at the end of 1995 to 33,300 in 1996 and 71,500 at year end 1997. And the members are ordering goods: individual orders rose from 124 thousand (1995) to 201 thousand (1996) and 397 thousand (1997). Dollar value of groceries sold increased from $12 million in 1995 to $22 million in 1996 to $43 million in 1997.

Profit, however, may lie in the future, but is not here yet. Peapod's 1997 Income Statement filed with its 10-K reveals Operating Loss of $6.6 million in 1995, $10 million in 1996 nad $14.9 million in 1997. A look at Peapod's report of its 1997 financial results is revealing: its grocery revenues exactly equal the cost of goods sold, year after year. Peapod sells groceries at its cost. It appears that its business model is to make money on the marketing and delivery service, the access to the community that it is building, and perhaps on the system that it develops to do so.

Update 6/22/98: On April 28, 1998, PPOD reported quarterly earnings and a change in the way it booked product discounts. Previously, such discounts were recorded as fee revenues. Beginning in the first quarter of 1998, discounts will be recorded as a reduction in the cost of goods sold, as do other Net retailers. In first quarter 1998, this resulted in a 6% reduction in cost of goods sold.

Grocer or ECommerce Application Developer?
In September, 1997, it signed a letter of intent to license Coles Myer Ltd. to utilize its proprietary online shopping, fulfillment and content targeting system to introduce an online grocery shopping and delivery service in Australia. Coles Meyer, according to a Peapod press release, is Australia's largest retailer, operating 1800 stores including grocery, department, apparel, toys, liquor, takeout food, office stationery and brand-name discount stores.

Brand Name Grocer or Brand Distributor?
G. Bos, in his research paper at http://www.innovell.com/supermarkets/ says:
"It is not difficult to argue that many skills needed for a successful Virtual Supermarket are currently not present in most traditional supermarket organisations. * * * It therefore seems rather unwise to try to develop the needed skills within the supermarket organization."

"In addition * * * there is the question on the number of companies to outsource to. One option is to outsource * * * all Virtual Supermarket activities to a company like Peapod. Another option is to use specialized companies that perform only one or several functions. The advantage of having just one company to outsource to is that the transaction cost are lower, the disadvantages are the dependence and the fact that specialized companies might perform better due to their specialization.* * *"

If one outsources all the activities one basically becomes a brand distributor, a business where Nike and several fashion companies have done most of the pioneering work. Being able to use brand distribution as a source of revenue is often regarded as a highly desirable marketing goal * * *." -- Bos, op cit.

In a November 13, 1977 press release, Peapod announced its incorporation of Microsoft technology into its WinSurfer(TM) application controls and its Scalable Remote Framework or SURF(TM) which was used to develop it. That release quoted Todd Weatherby, Manager of Product Industries at Microsoft: "Peapod is at the forefront in the development of electronic commerce applications, and we are glad that Microsoft technology is part of their development."

Peapod's 10-K for FY 1997 reported that revenues from fees paid by members and retail partners increased from $3 million in 1995 to $6 million in 1996 and $14 million in 1997. Together with fees for interactive marketing services, fees already exceed 25% of Peapod's total revenues.

In March, 1998, Peapod announced a strategic alliance with Exel Logistics to design and operate warehouses that Exel will acquire, configure and operate for Peapod in multiple metropolitan markets in the future. Peapod's President Andrew Parkinson, describing Exel as "one of the world's largest logistic companies, with particular expertise in the consumer goods supply chain," said that "Exel offers Peapod substantial resources that should allow us to implement cost-effective, high quality fulfillment centers." Exel's President Bruce Edwards, said that "We believe that the consumer direct grocery channel will garner a significant share of the grocery market in the years ahead, and that Peapod will continue to lead the channel's growth." Exel Logistics is part of NFC plc (AMEX: NFC), an international logistics service based in the United Kingdom.

In August, 1998, Peapod announced that once the warehouses are operational in 4th quarter '98, it would launch a national delivery service of high-margin specialty packs of dry groceries and household items targeted at special occasions such as new babies, college "relief packages" and the like. The "Peapod Packages" service will drop-ship items from third-party suppliers or the same warehouse facilities used for the local metropolitan deliveries.

Update 6/22/98: A 6/17/98 Investor's Business Daily story "Some Web Grocers Shelved; Others Await a Turnaround" by Pete Barlas reported the shutting down of Web grocers OnCart and Busy Bee Grocery Delivery Service. One reason? The cost of paying retail for goods and weak demand. The possible solution? Buy wholesale in large volume and warehouse the goods centrally. The IBD article points to Peapod as one Web grocer doing exactly that, with its partnership with Excel Logistics. COO John Waldren was quoted as saying that Peapod's volume was just too large for hand picking from retail shelves, driving them toward a more automated warehouse method. The article pointed to continuing business consultant forecasts for dramatic growth in the market for Web grocers, to $6.6 billion in '02, from $28 million in 1996.
A similar story in the Washington Post for June 20 pointed to the closure of Maxwell's, an Annapolis-based local grocery home delivery service, following Gourmet Aisle, All Things Delivered, Shoppers Express and Shopping Alternatives. the Post said: "Industry executives say these businesses failed largely because the entrepreneurs who started them underestimated the start-up cost and the logistical nightmare of running them, while overestimating shoppers' need for the service and the desire of supermarkets to become partners in such ventures."
But the Wasington Post had hopeful words for Peapod:"Among the possible candidates for success, industry experts say, is Peapod, a Chicago-based company that went public last year and has a war chest worth millions, even as it loses millions. Peapod, which operates in a handful of markets, is opening its own warehouses and ordering directly from wholesalers to become a real electronic grocery store. "I think they're taking the right steps -- they're driving the cost out of the business," said Vivian Kuan, an analyst with J.P. Morgan & Co. in New York."

Update 7/22/98: Peapod announced expansion into New York City Metro area, conducting shopping and delivery operations from a dedicated warehouse facility. Service will initially target households in Long Island beginning in fourth quarter '98. In early '99, a second warehouse will open for North New Jersey customers. Future plans target New York City, Westchester County and Connecticut. The services will be offered in an alliance with Giant Food Stores and its affiliate Edward's Food Stores, which will provide the warehouse facilities, product procurement and inventory management. Peapod reported that the arrangement with Giant/Edward's includes an option to expand the relationship into the Philadelphia and Baltimore/Washington D.C. markets.

Update 7/30/98: Peapod reported net product sales of $14.4 million for the second quarter, up 42% from $10.2 million a year ago. Membership growth of 42% to 104,000 was also reported, while orders grew to 128,600, up 33% from a year ago. Total costs and expenses, exclusive of cost of goods sold, rose only 21% from a year ago, indicating increasing economies of scale. Cost of goods sold rose at the same rate of product sales.
Operating loss totalled $5.2 million for the quarter. With other income, the net loss was $4.5 million, or 26 cents per share, a penny better than analysts' consensus expectations.
Peapod also recorded its first licensing revenues from the installation and license of its software to Coles-Myer, Ltd., Australia's largest retailer and one of its largest supermarket operators.
Shares outstanding continued to increase, reaching an average of 16.9 million compared to 13.5 million for the second quarter of 1997.
Cash and short-term investments were $47.4 million, about $2.80/share.

Peapod is the subject of an active message thread on Silicon Investor, and is often mentioned in another dedicated to ECommerce generally. Check there for breaking news and views.

This focus page will be archived at nnarc-ppod.html and may be edited in the future. Check in at Net Nuggets from time to time. The information contained herein is believed to come from reliable sources, but no warranty of accuracy is expressed or implied. The author purchased shares in Peapod in July, 1998.

Doug Simpson
doug.simpson@snet.net
8/5/98

The Grocery Revolution:
The New Focus on the Consumer
by Barbara E. Kahn, Leigh McAlister

The World on Time:
The 11 Management Principles That Made Fedex an Overnight Sensation
by James C. Wetherbe

Peapod, Inc.
...Home Page
..."How It Works"
...Corporate Info

Competition:
NetGrocer

Virtual Supermarkets: The WebSite
G. Bos' site Includes:
...The largest list of Virtual Supermarkets (43 Shops in 13 countries)
..."The Challenges of New Media": Strategy Consequences of Virtual Supermarkets
...Bibliography: Virtual Supermarket/Digital Economy/ Business Strategy/Society & Digital Media".

A Few Articles Mentioning Peapod:

"The Future of Electronic Shopping"
. . . Wired Issue 4.01 - January 1996

"Rival Online Grocers Save a Trip to the Store"
. . . Computer News Daily (NYTS) - July 1997

"The Progressive Grocer"
. . . Wired Issue 5.09 - September 1997

"Online Shopping is Beginning to Register"
. . . The Ottawa Citizen Online, March 19, 1998

Silicon Investor Discussion Forum:
...Peapod (PPOD)
...e-Commerce the Next 100 Months......

Yahoo Finance:
...Profile
...Research
...News
...Messages

Free Edgar (SEC Filings)

Some More Books from Amazon.Com:

How to Become a Successful Financial Consultant:
How to Make a Living Investing Other People's Money
by Jim H. Ainsworth

Best Practices for Financial Advisors (Bloomberg Professional Library)
by Mary Rowland, Michael R. Bloomberg

Creating the Virtual Store : Taking Your Web Site from Browsing to Buying
by Magdalena Yesil

How to Buy Technology Stocks
by Michael Gianturco

More about
Coles-Myer, Ltd.
(NYSE: CM):

Company Web Site

Yahoo Profile

Yahoo Messages

9/23/97
Press Release about letter of intent to license Peapod system and gain exclusive rights in Australia and New Zealand.