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  • Will Amazon Fresh Go the Way of Webvan? 0 comments
    Mar 29, 2011 11:40 PM | about stocks: AMZN, ATVI, WDC, SWY, AAPL
    As a San Francisco resident from 1999 to 2006, I recall, with fondness, one of the biggest dot-com busts of all-time -- Webvan. The company blew its venture capital and IPO money on everything from television spots during the Oscars to a $1 billion warehouse and more than 100 swanky Herman Miller Aeron chairs. To make matters worse, former CEO George Shaheen walked away with a golden parachute that pays him $375,000 a year for the rest of his life.

    Oddly, if you type the URL today, you discover that Webvan is "part of the family." Despite my love for all things Jeff Bezos, I cannot figure out why he would want Amazon associated in anyway whatsoever with Webvan. Granted, I have been unable to figure out all of the details regarding the association, but it at least presents as curious, if not strange. As Amazon pilots its Amazon Fresh concept throughout the Seattle area, Webvan is the last thing it should want to pop into the minds of investors.

    On the company's most recent earnings call, Amazon CFO Thomas Szkutak had very little to say about the Fresh pilot:
    [Amazon Fresh] is a test that we've been conducting. We're pleased with how the test is going. But again, it's a test and we'll continue to see how that goes and see if we invest further on that test. Again, we do a number of tests in different parts of our business and that happens to be one of them. We have a great team that's working on it, but you'll have to stay tuned to see if we do more there.

    Purposely vague, if you ask me. Amazon Fresh essentially mirrors the Webvan concept. You go to a website and fill your virtual shopping cart with the same groceries you find at the supermarket. One major difference -- you can also get "non-perishable" items such as video games, movies, and flash drives delivered to your doorstep from the likes of Activision (NASDAQ:ATVI), Home Box Office, and Western Digital (NASDAQ:WDC). You can even snag a $49.99 iPod Shuffle. That's because Fresh gives users access to a significant chunk of Amazon's non-grocery distribution center. For now, you can only use the service if you live in Amazon's backyard of the Seattle metro.

    There's another major difference between Webvan and Amazon -- Amazon tends not to spend copious amounts of money on things it doesn't need. Because we have little to go on at this point, I thought it would be, if nothing else, a fun and potentially informative exercise to look back at one of Webvan's last SEC filings to see what we might be able to expect from Amazon's latest test ground for another frontal assault on the competition.

    For the quarter ended March 31, 2001, Webvan actually generated more than $77.2M in revenue, up from just north of $16.2M in the same year-ago quarter. Getting money in the door was never much of a problem for Webvan. Dousing the persistent flame in its pocket proved to be an entirely different story. It cost Webvan about $55.5M to produce that $77.2M in revenue. Add to that a reasonable $16M in "sales and marketing" expenses, a potentially not-so-reasonable $88M in "general and administrative" expenses, and a
    $74M restructuring charge, largely tied to the closure of its Dallas operation, and you account for the company's staggering losses. Webvan was drunk on dot-com bubble punch, spent with the euphoric zest of a teenager with Daddy's credit card, and seemingly paid little attention to how it grew, let it alone methodically managed its growth.

    The above-referenced March 2001 sales figures come from operations in the San Francisco Bay Area, Southern California, Chicago, Dallas, Atlanta, and the Pacific Northwest. The previous March 2000 quarter only counted revenues from the San Francisco Bay Area, making it less of a growth story and more a bleeding red story.

    Because Amazon, understandably so, won't tell us exactly how it's going, we can't make comparisons between Webvan's numbers and Fresh's early Seattle operations. I don't know many people in Seattle, but of those I do know, all have heard of the endeavor, one actually uses it, and a few know of people who use or have used it. If you conduct a search for Amazon Fresh, you end up with some hits that take you to websites with posts of people petitioning Amazon to expand Fresh to their zip code. Being a fan of research methods and statistics, however, I am not huge on anecdotes serving as the foundation of a sample.

    Making a generous assumption, let's say that Amazon realizes $50M in sales in the Seattle area by the time it feels confident to expand to another market. Fifty million dollars represents a mere fraction of the company's $18.7 billion in North American sales in 2010. If, however, Amazon sees this or a similar level of success in Seattle, it could gradually expand to major North American markets like San Francisco, Manhattan, Toronto, and other places with the type of critical mass that makes home delivery feasible and potentially profitable.

    In the process, Amazon will likely take out companies, such as the New York area's FreshDirect, that operate similar services. Others, such as Safeway's (NYSE:SWY) fledgling offering through its Vons' brand will likely just give up and concentrate on their core business. For Amazon, however, it's not about focusing on a core; instead, it's about hooking people in your platform. Much like iTunes music downloads are to Apple, a modestly profitable, but not bottom-line changing grocery delivery service could help further build the brand and drive consumers to Amazon's more financially-prolific offerings.

    Disclosure: I am long AAPL.
    Themes: Internet, retail Stocks: AMZN, ATVI, WDC, SWY, AAPL
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