Out to Lunch? Webvan/HomeGrocer Deal Doesn't Deliver All the Answers

Back in 1913, McCall's magazine published an article entitled "Dinners by Parcel Post" detailing a grand new idea: shipping food by mail to arrive directly at the doors of consumers.

Sound familiar? It should. Companies -- most recently the online grocers -- have been trying to figure out how to sell food directly to households ever since. Unfortunately, they've found it incredibly difficult, if not impossible, to make money doing so. And that means that while Webvan's(WBVN Quote) planned purchase of HomeGrocer.com(HOMG Quote) may give the company some extra breathing room, it does little to address what critics call the fundamental problems of the industry. That concern seemed to be shared by investors today; Webvan's shares fell more than 15% to 7 3/8, while HomeGrocer's shares fell 14% to 7. (TSC also wrote a story about the deal earlier Monday.)

At the heart of all the criticism about Webvan, HomeGrocer and other contenders like Peapod(PPOD Quote) is that the grocery business is mature and has very thin margins -- on the face of it, not exactly a fount of opportunity for new entrants. Online grocers said that they could boost margins by removing the storefront from the equation, then taking orders over the Web, automating packing to some degree and delivering to consumers' homes in a set time window. ...