SKOKIE, Ill. -- Peapod, the on-line grocer based here, said last week it achieved its first-ever operating profitability in March in its Chicago market, three months ahead of schedule.
The company also said it is making "considerable progress" toward achieving operating profitability in its Long Island, N.Y., and Connecticut markets by midyear.
"We are confident Peapod can become the first Internet grocer to build a sustainable, profitable business," Marc van Gelder, president and chief executive officer, said. "With everything we have learned in the past months and the positive reaction from our customers, we are confident we are moving in the right direction.
"We expect current positive trends to strengthen in subsequent quarters, and we are focused on achieving operating profitability in our current markets before we expand into new markets."
Although he did not say when Peapod expects to achieve operating profitability in Boston and Washington, he said the company hopes to expand late this year or early in 2002.
Van Gelder made his remarks in a conference call with analysts following the release of first-quarter financial results, which showed sales up 0.7% to $24.9 million and a net loss of $15.5 million. Excluding five markets that Peapod has exited since last September, the company said sales were up 42%, "reflecting the benefits of increased marketing in Chicago and alignment with Ahold in all of Peapod's markets."
Netherlands-based Ahold acquired majority control of Peapod a year ago and currently owns a 58% stake in the company. The five markets that Peapod left since September are Austin, Texas; Houston; Dallas; Columbus, Ohio; and San Francisco.
Van Gelder said Peapod was able to achieve an operating profit in Chicago by improving several key metrics over the past six months, including:
Gross profit per order rose to $47, up $14.25 from $32.75 last October, due to increases in average order size and higher product margins. Andrew Parkinson, chief financial officer, said the company's average order size rose 8% to $120 -- and exceeded $135 in Chicago during March -- compared with $111 a year ago, while gross margins rose to 32%, compared with 22% a year ago and 26% in the fourth quarter.
Van Gelder said the introduction of on-line coupons helped boost the average order size, with 31% of customers using the coupons.
Operating costs dropped $10 per order to $44, compared with $54 a year ago, due to increased efficiencies from Peapod's proprietary Smart Flow yield-management routing technology, which was implemented in Chicago during the quarter and which increased the number of stops per route to 16, compared with 10 before.
According to Parkinson, overall orders for the company were flat during the quarter but rose 37% in continuing markets to 196,000, compared with 143,000 a year ago.
He also said the increase in sales reflected temporary reductions in delivery and membership fees, which fell 72% to $428,000 during the quarter, compared with $1.5 million a year ago. However, he said Peapod began increasing its fee structure during the first quarter "to reflect the changing competitive environment and what consumers are willing to pay for convenience, and we see more upside in this area as competition continues to consolidate, so you can expect to see increased fees later in the year."
Van Gelder said Peapod raised minimum delivery fees in Chicago from 75 cents as of October to $1, which contributed to the boost in gross profit per order. With Peapod charging fees that average $5 per order in Washington, Connecticut and Long Island, "We see a lot of upside in Chicago," he said.
Parkinson said the McLane warehouse management system that was installed in one Boston-area facility in February has resulted in increased receiving and picking efficiency, and will be rolled out to all other facilities this year.
