WEBVAN TARGETS FOUR NEW MARKETS FOR DCS

DAVID GHITELMAN

FOSTER CITY, Calif. -- Webvan Group here said last week it has chosen the next four market areas it will try to penetrate: Chicago, Dallas, Seattle and Washington, D.C.

Currently, the on-line grocer's service is available only in the San Francisco Bay area. As reported, the company has said it plans to begin operations in the Atlanta area next spring.

Webvan said it signed leases last week to build distribution centers to serve as hubs for its operations in the four new market areas.

These highly automated centers are intended to play a key part in the company's strategy. "Webvan's state-of-the-art inventory-management system, automated distribution centers and fleet of custom delivery vans allow the company to greatly reduce traditional retail costs, passing significant savings on to the consumer," the company said in a published statement.

Industry analysts, however, said the automated centers could be either the key to the company's success or its Achilles' heel.

If demand for Web-based grocery-delivery systems increases quickly, they said, Webvan will be there first with the ability to handle high volumes. But if the demand grows slowly, Webvan will not have the volume it needs to justify these high-tech warehouses.

The distribution centers announced last week will be modeled after Webvan's 330,000-square-foot facility in Oakland, Calif., which opened in June. A similar center is scheduled to open in the Atlanta metro area next spring.

"The signing of these leases marks an important step in Webvan's corporate strategy and evolution into national coverage," said George Shaheen, Webvan president and chief executive officer.

In July, Webvan and Bechtel Group, San Francisco, announced a strategic alliance to develop a distribution and delivery infrastructure in 26 U.S. markets over the next three years.

The centers announced last week will be located in Carol Stream, Ill. (serving Chicago); Grapevine, Texas (serving Dallas); Kent, Wash. (serving Seattle); and Springfield, Va. (serving Washington).

Terms of the leases and a timeline for construction or market launches have not been disclosed.

Helping to pay for the centers will be the $375 million the company raised in its initial public offering last month, when it sold 25 million shares of stock at $15 each.

According to financial results released last week, the company had net sales of $3.8 million in the three months ended Sept. 30. Webvan only started delivery groceries in May, and that was on an experimental basis until the Oakland warehouse opened.

Analysts told SN the company faces many challenges in achieving its goal of operating in 26 cities within three years.

"It is not a given that Webvan's model is going to work," said Barry Stouffer, retail analyst at J.C. Bradford & Co., Nashville, Tenn. "They have spent a lot of money automating the picking process, and as a result their break-even point is a lot higher than Peapod, Streamline.com and other Web grocers."

Andrew Wolf, retail analyst at Scott & Stringfellow, Richmond, Va., offered a similar perspective. For Webvan to succeed, he said, "there has to be sufficient demand for a high-fixed-cost, highly automated distribution system. Even if the pro-forma economics work out, there has to be large and rapid demand.

"If growth comes at a moderated pace over time, that plays more into the hands of companies with lower break-even situations," such as, according to Wolf, the Web-based operations of Hannaford Bros., Scarborough, Maine.