Webvan Financing Brings Web Grocers Home

Less than two months after the June 2 launch of its Web site, Internet grocer Webvan Group Inc. raised $275 million by selling a 6.48% stake to three institutional investors – a deal that values the company at more than $4 billion. By comparison, Winn-Dixie Stores Inc. operates more than 1,100 brick-and-mortar grocery stores and is valued at $6 billion.

The challenge for Webvan to turn a profit any time soon is daunting. Jupiter Communications reports that $3.5 billion will be spent on online grocery shopping by 2002, representing less than 1% of the total grocery market in the United States. Webvan founder and Chief Executive Louis Borders, co-founder of the Borders bookstore chain, has decided to heavily invest in infrastructure to compete with incumbent online grocers and widen the industry’s traditionally razor-thin profit margins.

Last month, Webvan, which currently operates a 330,000 square-foot warehouse in Oakland, paid $1 billion to Bechtel Group to build 26 warehouses across the country. By promising features like 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 to eventually earn $300 million per warehouse in annual revenue.

That earnings expectation helped attract $125 million from Softbank Corp., $100 million from funds affiliated with Goldman Sachs Group Inc., and up to $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. Goldman Sachs is also advising the company on a possible public offering later this year.

“This investment bodes well for our industry because people recognize that smart money is coming into a space where Peapod has performed extremely well,” said Daniel Rabinowitz, chief financial officer of Internet grocer Peapod Inc. “However, people look at the capital that is invested in the facility and try to bridge what they are seeing with the reality of the channel itself.”

Publicly traded Peapod has gradually built a customer base of more than 100,000 households in eight markets since its incorporation in 1989. Other incumbent competitors of Webvan 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 LLC in March (PEW March 29, p. 9).

“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.”

One Internet analyst questioned the viability of predictions in the 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 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.