Two of the nation's largest online grocers announced Monday plans to combine in an attempt to accelerate their expansion plans and compete more effectively with bricks-and-mortar supermarket chains.
Foster City, Calif.-based Webvan Group Inc. agreed to buy rival HomeGrocer.com Inc., which entered the Los Angeles market in January, for about $1.2 billion in stock. The deal would allow Webvan, which operates in only three U.S. markets--Sacramento, San Francisco and Atlanta--to move into six more areas immediately and expand to 15 locations in the next year, at half the cost originally estimated, officials say.
After the deal closes in the fourth quarter, HomeGrocer would abandon its giant peach logo, and convert to the Webvan name. In converting to the Webvan system, HomeGrocer's delivery windows would shorten to 30 minutes and its fees would probably come down, says Webvan Chief Financial Officer Robert H. Swan. As it enters new markets, it would also adopt Webvan's model of delivering from larger, automated warehouses, rather than smaller facilities spread throughout markets.
Besides Los Angeles, Kirkland, Wash.-based HomeGrocer delivers in Dallas, Orange County, Portland, Seattle and San Diego. HomeGrocer Chairwoman and Chief Executive Mary Alice Taylor, who is stepping down after the deal is complete, says the merger was critical because it gives the combined company the advantage of more cash and less competition, helping it to build market share and compete against traditional supermarkets.
"What this merger means is we spend the marketing dollars to attract the customer from one source [supermarkets] instead of competing against each other," she said.
The merger would turn up the pressure on other online grocers such as Peapod Inc., analysts say, and its increased share could force supermarket chains that have only been dabbling in online grocery retailing to accelerate their plans.
"Webvan and HomeGrocer combined are a far larger threat to Kroger and Safeway than they are separately," says Ken Cassar, an analyst with Jupiter Communications.
However, Cassar and others don't think most retailers are exactly shaking in their boots.
Online grocery sales now account for less than 1% of the $450-billion grocery business, and even if they rise to $17 billion by 2004 as e-commerce firms expect, they would still make up just 3% of all sales.
