PEAPOD WILL SHUT DC IN CALIFORNIA NEXT MONTH

DAVID GHITELMAN

CHICAGO -- Peapod here said last week it will close its San Francisco-area distribution center to focus on pursuing its "clicks-and-bricks" partnership with Ahold USA, Chantilly, Va. Last year, Ahold became Peapod's majority shareholder.

In a conference call with investment analysts, Marc van Gelder, Peapod president and chief executive officer, said he was closing the company's San Francisco operations, which opened in 1993, "with regrets, but this is not a strategic market for us. We will have an orchestrated wind down and close March 11." He added that Peapod has 100 San Francisco employees.

Van Gelder said Peapod is on track to be profitable in Chicago and one East Coast market by the end of the year.

Supply and service agreements with Ahold are now in place in all markets in which Peapod will continue to operate, the company said. In Chicago, as previously reported, Peapod has ended its supplier agreement with Jewel-Osco, a division of Albertson's, Boise, Idaho, and has begun procuring dry goods and health and beauty aids from a Cleveland distribution center operated by Tops Market, an Ahold operating company based in Buffalo, N.Y.

Van Gelder said the order size in Chicago is now more than $125. He said this year the gross margin on Chicago orders should reach 32%. On a $125 order, that means the company would receive $45, which -- after deducting $27 in fulfillment costs, $5 in customer service costs, and $8 in overhead costs -- would give Peapod a $5 profit on an average-size order.

"I feel good about the mathematics," said van Gelder.

In other markets, Peapod said it is working with Stop & Shop Supermarkets, Quincy, Mass., to serve Boston, Long Island, N.Y., and Fairfield County, Conn. It is also working with Giant Food, Landover, Md., to serve the Washington metro area.

"We saw especially strong demand in Washington and Connecticut," two markets the company entered this year, Van Gelder said.

He also noted the company was benefiting from "the shakeout of the industry. The demise of Streamline and Shopline helped us."

Van Gelder said Peapod's increasing delivery fees to cover actual delivery costs has been successful. "We have a new pricing philosophy," he explained. "Every customer has to contribute."

He added that Peapod will not enter any new markets until it has achieved its goal of profitability in Chicago and one East Coast market. He said that Peapod currently expects to achieve profitability on a companywide basis by 2003.

The company also said it will need to complete a financing "in the near future" to continue operations. Peapod said it has $14.7 million available in cash or cash equivalents, as well as a $20 million credit facility with Ahold it has not yet used. However, the company said it will need approximately $50 million for the rest of 2001.

Peapod said it is in discussions with Ahold about an increase in the credit facility and additional financing, although there are no written commitments in place.

"I feel we are in a very good position," van Gelder said. "Ahold has been very supportive. They are great people with a grocer mentality, focused on the bottomline."

Peapod said last week its sales for the fourth quarter and year ended Dec. 30 rose 10.7% and 27.6%, respectively, even though the company closed four markets (Dallas, Houston, Austin, Texas, and Columbus, Ohio) in mid-September. Excluding these closed markets, Peapod said sales were up 45% for the quarter.

The company had a net loss of $23.8 million for the quarter and $56.8 million for the year. Loss per share was $1.41 for the quarter and $6.48 for the year, although the company said it anticipates a smaller loss per share this year, in the range of $3.40 to $3.60.