PEAPOD HOPES TO SPROUT AGAIN

JON SPRINGER

CHICAGO -- If reports of Peapod's death were greatly exaggerated, the cliched headlines detailing its struggles were even more so.

"I read every bad pun you could think of," Andrew Parkinson, Peapod's chairman and chief executive officer, told SN recently. "Every day it was 'Peapod gets shelled' or 'Peapod snaps' or something."

Parkinson was speaking of a month-long stretch this spring during which his company lost its CEO, $120 million in financing and half its stock value in rapid succession. After teetering on the brink of insolvency, Peapod found a new majority owner in mid-April when Dutch supermarket operator Ahold agreed to take 51% of the company for $73 million. The deal, if approved, paves the way for Peapod and Ahold to roll out mini-distribution centers in Ahold supermarkets on the East Coast, and, Parkinson maintained, is a better overall solution for the company than the initial investment ever was.

"Now," he said, "maybe we'll see 'Peapod sprouts again."'

Founded by Parkinson and his brother Thomas in 1989, Peapod is equal parts pioneer and survivor.

It is one of the oldest e-tailers in any consumer goods category, selling its first products in a test of proprietary software in 1990. It was also one of the first companies to expand into new markets, and today serves more geographic markets (eight) and boasts more customers (around 110,00) than any of its next-day grocery delivery competitors, according to Peapod.

Peapod accomplished its expansion by partnering with supermarkets in local markets. Initially, the company fulfilled orders by sending shoppers to pick orders directly off store shelves. While the strategy allowed for skeptical home shoppers to receive orders from a store they trusted, the extra link Peapod added to the supply chain proved costly, inefficient and labor intensive.

In 1998, Peapod said it would switch to a dedicated warehouse model, a strategy that newer competitors such as HomeGrocer.com, Kirkland, Wash., were already espousing.

New distribution centers in Chicago and San Francisco had begun to generate favorable results for Peapod and win over analysts. Though Peapod lost $28.5 million in fiscal 1999, its margins (25.4%), average order size ($117) and number of customers (111,000) also reached all-time highs. A lease for a Dallas-based distribution center to be rolled out through a strategic partnership with The McLane Group, Temple, Texas, would further improve operations there, and would be the model for future warehouses, tentatively set for two per quarter. The company was awaiting the finalization of a $120 million financing package to pay for it all.

"The stage is now set for Peapod to take the bull by the horns," wrote Southwest Securities analyst Arvind Bhatia in a report dated Feb. 24. "2000 will be the year we expect the company to achieve significant growth."

But the plan unraveled just weeks later. CEO Bill Malloy, who joined the company in September, resigned due to exhaustion and the investors, which included Apollo Management, Yucaipa Cos., Pequot Capital Management, GRP II and Rallye S.A., pulled out. News that Peapod had just $3 million in cash -- and was typically spending $5 million per quarter -- sent its stock into a freefall.

The crash came just as analysts and media began predicting an "e-commerce shakeout," which would finally subject unprofitable and high-spending virtual retailers to the same fiscal demands placed on their brick-and-mortar counterparts. Though most analysts following Peapod were careful to point out the Malloy situation was company specific, it was tempting to see Peapod's troubles as a metaphor for the Internet economy in general. "[Peapod] is representative not just of Internet grocers, but of all Internet stocks that are losing money and need capital," Barry Stouffer, an analyst at J.C. Bradford, Nashville, Tenn., told SN. "It highlights the issue that this business takes capital to execute and if you can't get capital, you're going to go away."

But it was good timing also that led to Peapod's eventual partnership with Ahold, officials from both companies said. The two had worked together at Ahold's Stop & Shop and Edward's chains in Boston and Long Island, N.Y., respectively, and the experience led Ahold to develop a "fast-pick" strategy it is ready to roll out in 50 of its Stop & Shop, Edward's and Giant (Washington, D.C. area) stores.

Peapod will provide the technical expertise, Web presence and marketing know-how to the project, Ahold spokesman Hans Gobes told SN. Ahold will provide 7,000-8,000 square feet of mezzanine storage space at selected stores that will serve as mini distribution centers. It would also provide expansion opportunities outside the U.S. for Peapod.

"It was a timely move for both of us," said Gobes, whose company agreed to pay $3.75 per share for stock that traded as high as $16.375 four months earlier. "We had planned to make a considerable investment to get our e-commerce business off the ground anyway."

Parkinson, who stepped in for Malloy after Malloy's resignation, said the partnership with Ahold does not stray from its centralized distribution strategy.

"The fast-pick centers don't change our philosophy," Parkinson said. "They offer all the benefits of centralized distribution. The only difference is the size and sku count."

Parkinson said Peapod would likely continue building warehouses and operating its e-commerce business in areas where Ahold doesn't have a store presence. But its priority now appears to be fast-pick centers at Ahold stores.

"I think they'll have to go with a two-pronged strategy, where they will exploit their partnership with Ahold and use the warehouses in areas where they don't have stores," Ellen Baras, an analyst for William Blair, Chicago, told SN. "A plus in my opinion is that it puts Ahold at the forefront of combatting companies like Webvan. Because if Webvan is successful at doing what they do, they'll take away business from companies like Ahold. This gives [Ahold] a tool against that."

Though hastily assembled, Peapod's arrangement with Ahold probably puts Peapod on firmer ground than it has ever been, said George Dahlman, an analyst at U.S. Bancorp Piper Jaffray, Minneapolis.

"I think Malloy leaving was a blow to the company, and I don't believe that this was the game plan all along," Dahlman told SN."But in light of that situation, Andrew Parkinson seems to have crafted a pretty good plan. Peapod's always been bordering on the edge financially. For the first time it looks like there's some security in their survival."

Parkinson himself acknowledges there was serendipity in the Ahold deal, but then again, his company is a survivor.

"Things were bizarre, but I think in the end they worked out for the best," he said. "We couldn't be happier than to be partnering with Ahold."

Peapod

Web address: www.peapod.com

Headquarters: Chicago

Areas served: Chicago; San Francisco/San Jose, Calif.; Columbus, Ohio; Boston; Houston, Dallas and Austin, Texas; Long Island, N.Y.

Delivery options: Next-day delivery in designated time slots. Unattended delivery available in some markets. UPS delivery any

where in the U.S. for a fee.

Volume: $73.1 million (1999).

Expansion plans: Lease signed for Dallas distribution center; "fast-pick" centers in 50 Ahold-owned stores (pending approval of deal).

Stock: PPOD Nasdaq

Major investors: Ahold (pending shareholder approval); The Tribune Co.

Key executives: Andrew Parkinson, founder, chairman and chief executive officer; Thomas Parkinson, senior vice president and chief technology officer; Michael P. Brennan, senior vice president of marketing product management.