Webvan Delays Entry Into 3 Major Markets

Just weeks after its acquisition of rival HomeGrocer.com, struggling Webvan Group said it will delay expansion in three major Northeast areas, a telling sign, analysts say, that the company hasn’t yet found a way to make its food delivery operations profitable.

Webvan also said Monday that founder Louis Borders, who also started the Borders Books chain, has been replaced as chairman by Chief Executive George Shaheen. Borders will continue to function as a director of the company.

Analysts say the expansion delay buys the company some time to retool its operations and prove to Wall Street that it can turn a profit after almost a year and a half of quarterly losses. Until that time, analysts say, the company will have a hard time attracting any additional investment.

Investors have grown increasingly skeptical of Webvan’s profit potential. The company’s stock, at $25 a share last November, closed Monday at $2.97, up 6 cents.

“The fact that they have postponed [development of] these big warehouses will help them conserve cash,” says Mark Rowen, a Prudential Securities analyst. “This buys them more time to get a model for profitability and get the economics in order.”

Webvan will delay openings in Washington and Bergen, N.J., and put off the transfer of HomeGrocer.com operations in Renton, Wash., to a Webvan warehouse in Kent, Wash. These locations were originally intended to open by year’s end or early next year.

The company had said it has enough cash on hand to continue operating until the middle of next year. But industry analysts say the company appears to be burning through cash faster than expected.

Although company officials declined to comment on its spending, Webvan officials have said that the focus for the next few quarters will be on conserving capital and reining in expenses.

“While a year ago, it might have seemed as if the financial markets would have allowed them to lose money for some time, they don’t have the ability to go back to the market for financing now,” says Ken Cassar, an e-tailing analyst with Jupiter Communications. Now, he says e-commerce companies are having to prove they can grow on retained earnings, rather than outside investment.”

To make the system work, Rowen says, it might be necessary for Webvan to add delivery charges for orders under $50, a move that could narrow its potential market.

Others say it will have to look to advertisers for more advertising money, and most importantly, it will have to partner with other companies to provide delivery of non-grocery items such as books, dry cleaning and even clothing, such as the deals Urbanfetch cut with Armani Exchange to deliver clothing in New York and Kosmo.com cut with Krispy Kreme to deliver doughnuts along with food and movies.

“Essentially the online grocery model is a very appealing Trojan horse,” Cassar said. “If they can get their packages into homes on a regular basis, then they have the opportunity to include other packages in that box.”

Its best chance for survival is to roll out more services and products for which affluent customers are willing to pay extra, analysts say, not trying to be everyone’s online grocer.

Jupiter estimates that online grocers will account for just 1% of the grocery business by 2003, with $7.5 billion in sales.