OAKLAND, Calif. – Less than two months after the early June launch of its Web site, Internet grocer Webvan Group Inc. raised $275 million by selling a 6.48% stake of its business to three institutional investors – a deal that placed the value of the company at more than $4 billion.
Webvan founder and Chief Executive Louis Borders, who also is co-founder of the Borders bookstore chain, decided to invest heavily in infrastructure to compete with a host of existing on-line grocers and to widen the industry’s traditionally razor-thin profit margins. The challenge for Webvan to turn a profit any time soon is daunting: Media research company Jupiter Communications reports that consumers are expected to spend $3.5 billion in on-line grocery shopping by 2002, representing less than 1% of the total grocery market in the United States.
Still, Webvan wants to tap what it believes is a growing number of consumers – professionals who lack the time to grocery shop, those who must drive miles to find a particular gourmet item and those who are homebound – who will enjoy the convenience of a virtual on-line supermarket. Webvan, which will offer a wide variety of groceries and wines, has not revealed its delivery fees as yet; however, it is expected to be somewhat comparable to HomeGrocer.com’s $9.95 fees for orders less than $75, Peadpod Inc.’s $5 to $7 delivery fee or NetGrocer’s fee of 7% to 10% of a total sale.
For a nascent e-commerce site, Webvan’s estimated $4 billion price tag is phenomenal, and the company plans to continue growing. By comparison, veteran Winn-Dixie Stores Inc. operates more than 1,100 brick and mortar grocery stores and is valued at $6 billion. Webvan has not been shy about gaining a firm toehold in the marketplace and is trying to aggressively elbow its way to the top. The company, which currently operates a 330,000 square-foot warehouse in Oakland, paid Bechtel Group $1 billion in June to build 26 warehouses across the country. By promising features such as free delivery for orders above $50 and a delivery time of less than one hour for orders of 25 items or less, Borders expects Webvan eventually to earn $300 million per warehouse in annual revenue, an extraordinary margin of profit for the industry.
It was Webvan’s business strategy that helped the company attract $125 million from SOFTBANK Corp., $100 million from funds affiliated with Goldman Sachs Group Inc. and as much as $50 million from Sequoia Capital in the company’s latest round of financing.
Earlier this year, Webvan raised $122 million from an investment syndicate that included Knight Ridder, CBS Corp., Yahoo!, LVMH and Benchmark Capital and initial investments from SOFTBANK and Sequoia.
Webvan filed for an initial public offering August 9, and plans to sell as much as $345 million of its stock. Goldman Sachs & Co. will act as lead underwriter for the offering. Donaldson Lufkin & Jenrette, Merrill Lynch & Co., BancBoston Robert Stephens, Bear Stearns & Co., Deutshe Banc Alex.Brown and Thomas Weisel Partners L.L.C., will serve as co-underwriters. The company said it would use proceeds from the offering to build warehouses and fund expected operating losses. All shares will be sold by the company.
Despite Webvan’s ambitions to bump Peapod from its slot as the nation’s largest on-line grocer, Peapod does not feel threatened by the looming competition. In its 10-year existence, publicly traded Peapod has gradually built a customer base of more than 100,000 households in eight markets across the U.S.
Webvan’s $1 billion investment in Bechtel Group bodes well for the on-line grocer business because “people recognize that smart money is coming into a space where Peapod has performed extremely well,” said Daniel Rabinowitz, chief financial officer of the Internet grocer, who also cautioned that pouring large amounts of capital into a project does not necessarily guarantee success.
Other Webvan competitors include HomeGrocer.com, which Amazon.com bought a 35% stake in for $42.5 million in May, NetGrocer and ShopLink Inc., which received $12 million from Soros Private Equity Partners L.L.C. in March.
“In a space that is a few years away from maturation, we have chosen a low capital investment model,” said ShopLink Vice President Tim Guen. “All the money that Webvan is investing illustrates to the general public that there is a different strategy at work here.”
There are some, however, who still question the viability of this sector. “The story is a fairy tale story, and it will be interesting to see how well they can execute,” said Evelyn Black Dykema, an Internet analyst at Boston-based Forrester Research Inc. “We don’t know how well they will do in cost and functionality.”
Executives at Webvan did not return phone calls by press time.