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In Focus: Peapod
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February 22, 2001: 2:37 p.m. ET
Jupiter Research senior retail analyst on Peapod's quarterly results
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NEW YORK (CNNfn) - Peapod Inc., the No. 2 U.S. online grocer, said Wednesday it lost $23.8 million, or $1.33 per share, in the final three months of 2000, more than doubling the previous year's loss of $9.1 million, or 50 cents per share.
Ken Cassar, senior retail analyst at Jupiter Research, spoke Thursday on CNNfn's In Focus on Peapod (PPOD: Research, Estimates)'s earnings release.
In Focus airs daily on CNNfn's network at 12:10 p.m. The following includes comments made both during the show and in the pre-show interview.
CNNfn: Peapod posted a net loss for the fourth quarter of 2000 of $1.33 per share, down from a net loss of 50 cents per share for the same period in 1999. What happened?
Cassar: Peapod is in an extraordinarily tough business and it's going through radical changes. They were an independent company and now they're owned by Royal Ahold, a large brick and mortar, so they've had to do changes to the way they do business.
 They've switched wholesalers and they're now appending their warehouse to existing Ahold properties, and that has a cost, but in the long run it may drive savings. That will presumably give them greater buying power so they can improve margins.
Whenever a company goes through such radical changes, it will cost them money, but the value of their partnership with Ahold cannot be underestimated. Peapod's competitors are largely internet pure plays, like Webvan, and Homeruns.com and Netgrocer -- none of them are owned by large brick-and-mortar stores. In the end, the brick and mortars will be the winners because they have the deep pockets and the brand names.
Webvan openly admits they have to prove their model this year and that will be a big challenge. Many consumers don't enjoy the brick-and-mortar shopping experience but it's one that's ingrained and many feel it's a necessary evil.
CNNfn: Peapod is hoping to become profitable in Chicago and in one of their East Coast markets by mid-2001. Will they be able to do that?
Cassar: Profitability has been illusive in the online grocery space. The big problem in the brick-and-mortar grocery model is one with thin margins -- they make about 1 percent on net sales. It's a very efficient model where the consumer takes on a lot of the labor -- they drive to the store and pick up the groceries and do all the work -- and yet these companies barely break even.
The online player has to incur a lot of the same costs, in addition to picking the products off the shelf and delivering it to consumers. At the end of the day, prices may have to be substantially higher for online grocery sellers, and it's not clear whether consumers will pay the higher price.
CNNfn: Peapod had $14.7 million in cash and $20 million in credit from Ahold as of Dec. 31, with cash needs for the remainder of 2001 now projected at $50 million. What options do they have to raise the additional cash they'll need this year, if additional monies don't materialize from Ahold?
Cassar: If Ahold isn't going to fund them, I'd be amazed if anyone else would. I would've said that maybe Webvan buys them and values the Ahold partnership that comes with it, but Webvan is not in a position to make such an investment.
Peapod will probably disappear if Ahold doesn't provide them with the additional cash. It may be in Ahold's best interest to fund Peapod because going forward, some piece of the grocery business will move online, and even if it's a tiny percentage, it's big dollars – 1 percent of the United States online market is about $4 .5 billion. However, it will take some time to hit that 1 percent, and even if one company captures that, that doesn't presume profitability. It's a tough economic model.
 CNNfn: PPOD is trading close to its 52-week low. What would need to happen for the stock price to rise?
Cassar: It will take a lot for it to come up. Investors are going to need to see moves toward profitability. Investors have no evidence that online groceries can be done profitably, and we may well need to see support across the board from the internet retail sector, which is not there today.
CNNfn: What's your outlook for the online grocers?
Cassar: It's going to be tough. Two years from now I wouldn't be surprised if we see further consolidation in the online grocer space. It's going to take a long time before it's a profitable business. The company that has the wherewithal to keep plugging away and can convince consumers to pay premiums for grocery delivery will be at an advantage over its competitors. Click-and-mortar retailers that make investments and continue to see it through will have an advantage.
There's 3 universes of businesses:
1. Online only -- they'll struggle and may go out of business.
2. Brick and mortar with no website -- the model has proven itself and we'll continue to see that market exist and go through good and bad times. However, the big brick-and-mortar players can't wait -- they need to make the investment and learn, for when the market catches up to them.
3. Brick and mortar plus Web site -- long term, that will be the future of retail and the future of the grocery business, but it won't happen overnight.
-- as reported by Carmina Perez. 
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