Peapod, Inc. (Nasdaq: PPOD) has announced that it will acquire fellow online grocer Streamline.com’s Chicago and Washington, D.C. assets and operations, ending weeks of speculation about the fate of the struggling company.
Streamline (Nasdaq: SLNE) said just last month that an infusion of cash or strategic partnership would be necessary to keep it from being forced into bankruptcy.
The acquisition also signals a major market shift for Peapod, which will abruptly cease local operations in Columbus, Ohio; and in Austin, Houston and Dallas, Texas. Peapod said it will pull out of those markets by the end of next week.
Cash for Streamline
Under the terms of the deal, Peapod will pay $12 million (US$) for Streamline’s Chicago and Washington, D.C. operations and assets, which include centralized distribution centers and customer lists. Streamline founder and Chairman Timothy A. DeMello said the move will allow his company to focus on growing in its core market, the Northeast United States.
DeMello said the company still believes it can achieve profitability in the region by early next year.
“Just a short time ago, rapid national expansion was the focus and expectation for companies in our industry,” DeMello said. “Clearly, it has now become apparent that these companies must first prove unit center profitability. The capital provided by the divestiture of these markets will allow us to prove the profitability of our business model, which we plan to demonstrate by next year.”
For Peapod, Room To Grow
Peapod President and CEO Mark van Gelder said the move makes strategic sense for his company because the East Coast is where Peapod has grown most rapidly. Peapod had planned to move into the Baltimore market sometime next year, but will now be able to begin service there before the end of 2000, he added.
The Chicago facility being bought, meanwhile, will allow room for expansion in Peapod’s home market.
“This acquisition will speed our time-to-market entry in the Baltimore-Washington market and provide state-of-the-art facilities, including expansion space for our Chicago operations,” Van Gelder said.
The acquisition should also help Peapod achieve profitability faster, he added.
Profits Within Reach?
In fact, some analysts have said that Streamline could become the first online grocer to move into profitable territory, at least in some of its markets.
Gregg Griesemer, an analyst with AG Edward & Sons, Inc., told the E-Commerce Times that Chicago is one of Streamline’s top markets, where orders approach the $130 average — the magic number that many believe the company needs to reach in order to turn a profit. Streamline picked up its Chicago operations last year when it acquired the assets of Scotty’s Home Delivery.
Griesemer also believes that Streamline has a more solid business model than some other online grocers because it focuses on high-end markets and limits its delivery schedule. Still, he said he had hoped that Streamline would form a partnership with a brick-and-mortar grocer, which would have allowed it the same benefits that Peapod received back in May when it was bought by Royal Ahold, whose U.S. holdings include Stop & Shop, a dominant supermarket player in the Northeast.
The online home grocery business has seen rapid consolidation in recent months. In addition to Peapod’s own acquisition by Royal Ahold, Webvan has bought out rival HomeGrocer.com.
Shares of Streamline were unchanged at $1 in early trading Thursday morning, up a bit from the company’s 52-week low of 50 cents reached just last month, but well below its historic high of $14.
Peapod was trading at $2, also a fraction above its historic low and well under its yearly high of $16.