Web Grocer’s Got His Hands Full, Sacks Aside
Like Dan Quayle, the Anaheim Angels and lottery players, entrepreneur Dan Frahm faces daunting odds.
His Aliso Viejo-based Whyrunout.com, a year-old online grocer, has lost $500,000 and there’s no hefty cash infusion in sight.
He’ll also be facing stiff competition in Orange County, a market that Whyrunout had to itself until recently. One competitor has moved into the territory and two others have their sights set on Orange County. All have deeper pockets than Frahm’s business.
Despite all that, Frahm, a boyish-looking 38-year-old with degrees from Harvard and UCLA but no previous grocery experience, says he remains confident that Whyrunout will flourish.
“We’re in a huge market that’s growing,” he said. “I think we can carve out a sustainable, profitable business.”
Admittedly, the online grocery industry is in its infancy. This year, consumers are expected to spend an estimated $350 million for groceries ordered online--barely a blip in the $450-billion industry. But by 2007, Americans will spend as much as $85 billion for online groceries and related goods, according to a study last year by Andersen Consulting.
In its first year, Whyrunout has delivered goods to 850 customers in Orange County, doubling its customer base and revenues every 60 days.
But it has been a costly endeavor. Frahm figures the company’s advertising and marketing budget alone works out to about $600 per customer.
The 40-employee company takes orders over the Web and by fax and phone. Whyrunout now fills orders at a local Vons but hopes to build a $1-million warehouse in Orange County by early next year. That would allow Whyrunout to process orders more quickly, control inventory better and cut costs by buying directly from wholesalers, said George Dahlman, an analyst at U.S. Bancorp Piper Jaffray.
The company recently expanded into San Diego County, where it has 150 customers.
Whyrunout’s attempts to create a loyal customer base are equally high-tech. It tracks the customers’ buying habits and reminds them via e-mail when they’re about to run out of milk, diapers and other frequently purchased goods. More important, Whyrunout makes home deliveries of video rentals, dry cleaning and film processing, which have higher profit margins than grocery items.
But Whyrunout, like many upstarts, figures it will need lots of money to survive.
Frahm started the company with $1 million, including $100,000 in cash he had received from selling a software firm in 1987. Family, friends and private investors supplied the rest. But he has burned through much of it.
Now, he’ll be banging on the doors of venture capitalists in an effort to line up more financing. “If we don’t raise more money by the end of the year, we’ll be out of business,” said Frahm, who said he hopes to attract $8 million in venture money within the next few months.
Raising that funding could be difficult.
Venture capitalists may have already anointed competitors HomeGrocer.com of Bellevue, Wash., and 2-year-old Webvan Group Inc. as the online grocers of the future, investing $75 million and $400 million, respectively, in the companies. “Capital will only back a few players,” HomeGrocer chief executive Terry Drayton said.
Both HomeGrocer and Webvan are believed to have designs on the Orange County market. Earlier this month, Pink Dot, a privately held Los Angeles-based grocery delivery service that takes orders over the phone and Internet, opened an outlet in Santa Ana that delivers to Santa Ana and parts of Garden Grove, Orange and Tustin.
Given the financial constraints and intense competition, perhaps Frahm should consider selling Whyrunout, one expert said. “If they have a good understanding of the local market, along with a good customer base and decent management, they stand a decent chance of being acquired,” said Tim DeMello, founder of Streamline.com Inc., a publicly traded online grocer based in Westwood, Mass.
Frahm begs to differ. “There’s room for dozens of players,” he said. “We’re not doing this because we hope to get snapped up.”
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Marc Ballon covers small business and entrepreneurial issues for The Times. He can be reached at (714) 966-7439 and at marc.ballon@latimes.com.
