HOME-ING IN NATIONALLY

JON SPRINGER

KIRKLAND, Wash. -- Dan Murphy, who joined HomeGrocer.com a year ago after a career in traditional supermarket retail, says his former colleagues may be in for some surprises this year.

"If I were still with a supermarket company and didn't know much about [HomeGrocer], I'd probably sit back and wait and see what happens," Murphy, a former executive with A&P and Wakefern Corp., and now vice president of merchandising for HomeGrocer.com, told SN recently.

"Knowing what I know now," he added, "I'd be scared to death."

Focused on a national footprint, well-connected with financial and promotional partners and, according to Murphy, "obsessed" with customer service, HomeGrocer.com might sneak up on some but should be a well-known name before long.

The three-year-old company expects to be operating in five cities by this month and as many as 15 by this time next year. The fast-paced rollout will allow HomeGrocer to build market share earlier, and be available in more cities, than dot-com competitors including Peapod, Streamline and Webvan.

"I think it's very important to have first-mover advantage," Murphy said. "Not only to be the first in the market, which we will be in a lot of places, but the first company that's truly national in scope. That gives us more clout with our supply partners and national consumer-product companies."

HomeGrocer was founded by Terry Drayton, a former bottled-water executive, and Ken Deering, a consultant, in British Columbia in 1997. It launched its first Web store in Seattle in July of 1998.

HomeGrocer fulfills orders for groceries, home-office supplies, books, video games and movies through central warehouses that average about 100,000 square feet, in Seattle, Portland, Los Angeles and beginning this month, San Diego and Dallas. Customers can select next-day home delivery of items within a 90-minute window of their choosing. According to the company, it received orders from 55,000 different households in 1999, with 64% from repeat customers. Its average order size was $99.

Those numbers have impressed analysts, but they've come at a price -- HomeGrocer reported a deficit of $93.3 million as of Jan. 1 and warned investors in its prospectus that losses in 2000 "will be significantly greater than in recent years." The expenses will go toward hiring new employees (between 4,000 and 5,000 this year), building new warehouses and equipment, and marketing expenses.

HomeGrocer said it would spend about $4 million to $7 million to build each new warehouse, and would spend $5 million to $8 million promoting each one. Separately, HomeGrocer struck a $60 million, five-year agreement with America Online, Vienna, Va., and a $10 million promotional agreement with Amazon.com, Seattle. Those strategic relationships position HomeGrocer prominently on two of the most heavily trafficked Web sites.

Amazon is the largest shareholder of HomeGrocer, which went public in March. Though its initial public offering came at time when business-to-consumer e-tailers had fallen out of favor with investors, analysts said the company raised enough money to fund its expansion through the end of this year.

Like competitor Webvan, HomeGrocer projects its warehouses can reach the break-even point in 12 to 15 months. For analysts, that will prove to be a critical point.

"We like HomeGrocer's business model a little better than we do Webvan because it involves lower capital costs and it's a little more targeted, but the same issues that apply to Webvan apply to everyone," said Barry Stouffer, securities analyst for J.C. Bradford & Co., Nashville, Tenn. "They have to prove it works."

Tom Courtney, of Banc of America Securities, San Francisco, likes HomeGrocer in part because it offers groceries at a comparable price to traditional grocery stores. Its "direct" relationship with customers can be deepened over time, which would allow the company to expand its offerings to include additional products and services. "This is an entirely new and value-added shopping experience and one we believe will take share over time," Courtney wrote in a recent report.

Murphy said HomeGrocer is pursuing customer service "relentlessly," resulting in a 99% on-time delivery rate.

It is its know-how in the areas of delivery and technology that gives HomeGrocer an edge over brick-and-mortar stores, he added.

"Albertson's has tried their dot-com store here in Seattle, but to me that's a half-hearted attempt," he said. "Their core competency will always be brick-and-mortar stores and they do that well. But they're not in the food business, the technology business and the delivery business -- we're the only one in all three."

HomeGrocer.com

Web address: www.homegrocer.com

Headquarters: Kirkland, Wash.

Areas served: Seattle; Portland, Ore.; Los Angeles.

Delivery options: Next-day delivery in 90-minute time slots. Volume: $21.6 million (1999).

Expansion plans: San Diego, Dallas (May 2000); Washington, Chicago, southeastern Connecticut/Westchester County, N.Y., Atlanta, four to six other markets by year-end 2000. Stock: HOMG, Nasdaq

Major investors: Amazon.com, Hummer Winblad Venture Partners, Kleiner Perkins Caulfield & Byers.

Key executives: Mary Alice Taylor, chairman and chief executive officer; J. Terrence Drayton, co-founder, president and director; Daniel R. Lee, senior vice president and chief financial officer; Ken Deering, co-founder, vice president of storefront; Rex Carter, senior vice president of systems development and technology.