PRICELINE'S WEBHOUSE WILL ABRUPTLY CLOSE ITS SHOP

JON SPRINGER

GREENWICH, Conn. -- Priceline.com's WebHouse Club grocery affiliate here said it would close last week, less than a year after promising its Internet-based "name your own price" strategy would revolutionize the grocery business.

While analysts suggested the company ran into trouble because manufacturers were unwilling to subsidize the discounts WebHouse Club offered shoppers, company founder Jay Walker told SN the decision to close was "strictly a matter of funding." A number of supermarket chains that have added the service in the last year told SN they were disappointed but that WebHouse had yet to provide significant sales increases.

"This was not a manufacturer support issue, it wasn't a retailer support issue, and it was definitely not a consumer support issue," Walker told SN. "This was, plain and simple, a funding issue."

WebHouse Club said it would wind down its operations over the next 90 days and refund customers for any unredeemed gasoline or groceries they had purchased through the service.

Walker, who earlier this year sold some of his own shares in Priceline to raise money to fund WebHouse, said the company felt it was unlikely to be able to raise the capital needed to fund operations and achieve profitability. The company has $50 million in cash reserves and $20 million in additional working capital, which Walker said would be more than sufficient to satisfy its obligations to customers, employees and suppliers.

Along with the unwillingness of manufacturers to subsidize discounts, analysts told SN the service suffered from appearing infrastructure-heavy and expensive to operate.

"I think there was resistance by brands to give up control of pricing," Tim Albright, analyst, Salomon Smith Barney, New York, told SN. "They must have figured they didn't want to add another layer of spending onto their promotional budgets. I think it became something of a waiting game between Priceline and the brands, and the brands won."

Albright added that WebHouse's reluctance to reveal its brand partners made the issue of its relationship "fuzzy."

Walker, however, described good relationships with brands, saying the company had 125 suppliers signed up as of last week.

Before its abrupt closing, WebHouse Club was speeding toward a nationwide supermarket presence, having signed up around 7,200 stores. Retailers told SN they liked the service as an offering but were uncertain of its impact.

"It was a service our customers had asked for, but it was simply too early to tell whether it would have been a success," Gary Rhodes, spokesman, Kroger Co., Cincinnati, told SN. At Gristede's and Sloan's stores in New York, one of the earliest chains to offer the Priceline service, purchases made through WebHouse Club accounted for around 3% of the all transactions, said John Catsimatidis, president and chief executive officer of Gristede's New York-based parent, Red Apple. Most of those transactions, he suspects, came from the chain's regular customers.

"It didn't cost us anything to be a part of it," Catsimatidis told SN. "And I think they did the honorable thing by bowing out when they did, before they totally ran out of money and it became a problem for us. But I think [closing the service] shows that the Internet is not a realistic business to be in, at least for the next five years. It's a license to lose money."

Other retailers were reluctant to say that Priceline's failure would sour them on offering other Internet-based initiatives or services.

Spokesman Alan Tempest of Genuardi's Family Markets, Norristown, Pa., told SN there would be "some inconvenience to our customers used to using Priceline," but also said that customer-base using Priceline was minor and comprised of existing customers.

Jenny Enochson, spokeswoman, Albertson's, Boise, Idaho, likewise told SN the removal of Priceline from its Acme and Jewel divisions would have "no impact on sales."

Walker told SN that supermarkets were "very satisfied with the service and disappointed that we can longer offer it."

Priceline.com stock closed at $5.81 the day the news broke late last week, down 38% and more than $3 below its previous 52-week low. Considered by many to be a bellwether Internet stock, Priceline traded as high as $104.25 during the 52-week period.