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Analysts once raised red flags warning that online convenience stores and Internet grocers could grow to be the next big threat to brick-and-mortar retailers. A year later, however, it's the online retailers that are scrambling for survival.
Just two weeks after online convenience store Kozmo.com closed its doors, Camarillo, Calif.-based PDQuick, a leading Internet grocer, said it would shut down its operations by the end of June. "We are definitely closing," said Yvonne Austin, a PDQuick customer service manager, following a company meeting. An exact closing date was not given.
In addition to PDQuick, San Francisco-based Webvan, another online grocer, said it would reduce operations, slash expenses and exit once promising markets.
Last June, PDQuick announced aggressive expansion plans to move into 30 new cities and changed its name from Pink Dot. At the time, the Internet grocer obtained $20 million in financing from investors including Thomas Lee Internet Partners and GE Capital Group. The cash infusion, however, was not enough to keep the company afloat.
PDQuick is hardly alone in its failure. Webvan, the online company that promised to change c-store and grocery shopping, overestimated consumers' desire to order food over the Internet. Now, with huge costs for warehouses and trucks all over the country, Webvan is hunting for more money and more time in its effort to stay in business.
Others couldn't hold on as long. Web-only grocers such as Urbanfetch.com, HomeGrocer, Streamline.com and Shoplink have already shut down. Only one company worth noting remains in business without controversy, Chicago-based Peapod. But even Peapod is far from making money, said Prudential Securities analyst Mark Rowen.
So what went wrong with the dot-com retailers? Companies such as Webvan drastically miscalculated the market, according to analysts. "Online groceries satisfy a niche market, but it's clear that it's not for the masses. That's where Webvan's fallacy came in. They thought it was something for everyone," said Ellen Baras, an analyst with San Francisco-based William Blair and Co.
With the latest cuts, Webvan now has enough cash — $115 million as of March 31 — to make it through the end of this year, CEO Robert Swan said. Swan took over for George Shaheen, Webvan's former president and CEO, who resigned in April.
Previously, Webvan had warned investors that the company might need to raise an additional $5 million to $15 million to make it through the year. The company still needs at least $25 million to stay in business next year, Swan claimed. Webvan has hired Goldman Sachs & Co. to explore its financing alternatives, which include the possibility of borrowing the money from several of its existing investors.
Peapod survived primarily by partnering with brick-and-mortar grocery giant Royal Ahold, a Dutch company that operates East Coast supermarket Stop & Shop and Giant Foods, as well as c-store chains Golden Gallon and Wilson Farms Neighborhood Stores. Ahold acquired a controlling stake in Peapod last year and has given the online grocer access to funding, purchasing power and brand-name offline stores, which promote Peapod.
PDQuick took the opposite approach. The company operated 16 brick-and-mortar stores in the Los Angeles area and has delivered groceries ordered by telephone since 1987. But last year, PDQuick pinned its hopes of national expansion on the Internet.
In order for online grocers to rebound and turn a profit, the companies should explore alliances with profitable grocery chains, said Erlina Hendarwan, a consumer analyst with New York-based Datamonitor. "Major potential exists for joint ventures between other online service providers and brick-and-mortar grocers, which will further reduce overall costs and improve customer service," she said.