Peapod Nears End

Confirming what has already been reported by company auditors, failing online grocer Peapod, Inc. has acknowledged in its annual report that “limited capital resources” make its viability as an independent concern “uncertain.”

Peapod “probably runs out in a week or two,” said Barry Stouffer, who follows the company for J.C. Bradford & Co. The company lost a promised $120 million (US$) in financing two weeks ago, after its president and chief executive resigned due to health reasons.

“They were basically insolvent at that point,” said Stouffer.

Looking for a Buyer

“Because of its limited resources, the viability of Peapod is dependent upon its ability to quickly raise sufficient capital to meet its cash requirements,” the company said in its annual report filed Thursday with the Securities and Exchange Commission (SEC).

Peapod has been looking for a buyer or a cash infusion. “I’d be surprised if they were able to sell the whole company for more than the current share price,” said Stouffer. Peapod shares were at 2 29/32 in Friday morning trading, down 11/32. Even if the company gets financing — probably in the form of a competitor or investor buying a stake — “most likely they would still end up downsizing and focusing on a couple of core cities,” he said.

Potential buyers or investors could be “brick-and-mortar” companies, other online grocers or outside investors that are interested in the company’s logistics, said Stouffer. A suitor has yet to come forward.

Online Grocers Struggling

On the whole, online grocers have had trouble gaining acceptance on Wall Street and with consumers. HomeGrocer.com, Inc. (Nasdaq: HOMG), Streamline.com (Nasdaq: SLNE) and Webvan Group, Inc. (Nasdaq: WBVN) have all seen their stock prices tumble amid skepticism about the idea of buying groceries on the Web.

J.C. Bradford’s Stouffer says it is too soon to write off the idea. “I don’t think anybody’s been in the business long enough to get to a point where their volume is high enough to show that this model could work,” he said in an interview with the E-Commerce Times.

“What we’ve seen is a rather rapid ramp-up in customer orders and different facilities, but we haven’t seen anybody get to the level where they have enough business to show a profit,” he added.

Profits on the Horizon

One or more of the companies is likely to see some black ink in six to twelve months, said Stouffer. Webvan, he said, is telling the Street that its San Francisco operations should break even by September.

The problem for these companies, according to Stouffer, is that they have not become large enough to keep costs under control. “If they’re able to get to scale, then the costs of fulfillment will fall into line and they’ll be able to show nice profits. The wild card is, can they get to the scale?”

So, is the group in for a round of consolidation? Not necessarily, said Stouffer. “There’s room for more than one brand,” he said. “A lot of how this industry plays out is dependent upon capital markets and the ability to get financing.”