Ahold will invest an additional $119.3 million in US online grocer Peapod. The announcement highlights the rocky status of the online grocery sector, following high profile closures such as Webvan. However much funding it provides, Ahold will not see returns from Peapod unless it has a viable business model and disciplined management. Closer integration between Peapod and Ahold’s supermarkets will be vital.
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Dutch supermarket operator Royal Ahold has announced it will invest an additional $119.3 million in its US online grocer Peapod over the next two years. The investment follows Ahold’s $35 million offer to buy out Peapod’s minority shareholders last month. According to an independent bank, the capital should help Peapod to break even by Q3 2003 – it takes Ahold’s total investment in Peapod to more than $198.8 million.
But is Peapod really worth that much? Royal Ahold invested $1.09 billion in its US operations excluding Peapod in 2000, on total sales of $1.34 billion. In 2000, Peapod’s total sales were $73 million, or approximately 5.4% cent of Ahold’s total US sales. The planned investment would amount to $56.65 million per year, or 5.4% of total 2000 US investment. However, 
Peapod’s overall operating loss was $29 million for 2000, making the perfect math a little less than perfect.
Ahold has brought Peapod brand recognition, ordering synergies and substantial financial investments. But without solid management and a disciplined approach to the faltering online grocery sector, Peapod might still be a losing proposition for its parent company. Webvan, the high-profile online grocery that crashed in early July, burned through more than $1 billion in funding in less than two years, a testament to the perils of being overfunded and undermanaged.
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Ahold would be wise to ensure that the additional funding is not being used to fund a failing business model. In the eGrocery sector at present, the key to success seems to be integrating online and offline operations and picking stock from stores rather than expensive warehouses. As a major supermarket operator, Ahold should ensure such integration takes place.
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To view related research reports, please follow the links below:- Online Grocery in the US 2001 – Profitability at the virtual checkout |
