With GreatFood, Hambrecht Serves Up Another Niche IPO

GreatFood.com, an online specialty food retailer, is the latest in W.R. Hambrecht's line of niche initial public offerings.
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First it was purveyors of wine. Then came providers of high-brow essays and gossip. Now it's smoked-duck sellers. Bill Hambrecht is sticking with his niche-IPO approach.

GreatFood.com

, an online specialty food retailer whose products range from gourmet salsa to fresh lobsters to baby-back ribs, is slated to be taken public this week by

W.R. Hambrecht

, Bill Hambrecht's 18-month-old firm.

The online food business is one of the fastest-growing areas of e-commerce. Annual food and beverage sales on the Net will top $513 million by year's end and reach $5 billion by 2002, according to Massachusetts-based

Forrester Research

.

But GreatFood.com occupies a tiny part of the online food delivery landscape. Only 4 years old, GreatFood.com had revenue of $168,000 in the first quarter of 1999 and losses of $826,000. That kind of financial performance is par for the course for most Web companies. As a specialty store, GreatFood.com is relatively alone on the Web -- its closest rivals are

Dean & Deluca

and

Hickory Farms

. With modest ambitions, GreatFood.com has nowhere near the financial clout of the giant Net grocer,

Webvan

, a private company that just announced a $1 billion initiative to set up markets in more than two dozen regions. GreatFood.com officials were unavailable for comment, citing the company's quiet period.

The small size does have certain advantages. "There really aren't many direct competitors to the company," says

Edgar Online

analyst Tom Taulli.

Still, GreatFood.com's share from the online pie may turn out to be only crumbs. The company offers 3,400 products but relies on 67 suppliers for distribution. Last year, some of GreatFood.com's suppliers couldn't keep up with the holiday demand, resulting in unhappy customers. "It's small and very new," says Jennifer McBrien, an analyst with

Renaissance Capital

in Greenwich, Conn. "They have a lot of kinks to work out."

But then so does Bill Hambrecht's "open IPO" system, where investors bid privately, saying how many shares they want and at what price. In the Dutch-auction system, the highest bidders win and pay the price of the lowest winning bid to cover the number of shares in the offering. In theory, the result is a more fairly priced stock driven by supply and demand. W.R. Hambrecht takes a 3% to 5% commission, compared with 7% by investment bankers.

Advocates say that the system could revolutionize the IPO process. This could lead to reduced investment banking fees and would put an end to the huge jump in opening-day prices. Hambrecht's system is geared toward long-term investors who will hold the stock rather than traders.

"The Dutch-auction system is about trying to keep the fast money -- the flipper mentality -- out of these issues," says David Menlow, president of the

IPO Financial Network

.

So far, W.R. Hambrecht has been successful in raising capital for two niche companies,

Ravenswood Winery

(RVWD)

and

Salon.com

(SALN)

. But by Internet IPO standards, these two IPOs fizzled out without a spark.

Ravenswood Winery, a California company which had a $3 million net income for the nine months ended March 31, raised $10.5 million when it went public in April. The share price has barely budged since opening at 10 1/2, briefly rallying to 11 1/18 before quickly falling back to its opening level.

Salon.com, the San Francisco-based Internet magazine, had losses of $6.5 million last year on revenue of $2.9 million. W.R. Hambrecht raised $25 million when it took Salon public in June, but the stock, which had an offering price of 10 1/2, closed its first day at 10. News that Salon.com had inked a deal with online ticket-seller

Culturefinder.com

, propelled the stock to as high as 15 1/8 in mid-July, but it has since headed south and is now trading below its issue price.

"The Dutch auction is very innovative, but it's so new that a lot of big companies would still rather go with the big firms," says Edgar Online's Taulli. It could be that only small companies would prefer this method, but, says Renaissance Capital's McBrien, "it's hard to make generalizations about the type of company that goes public with a Dutch auction."

But it could also be a case of Hambrecht is a place of last refuge for firms that find few or no takers. Todd Hagen, Salon.com's CFO, says the company did a "full bake-off of traditional investment banks and untraditional methodology" before choosing Hambrecht. So did Ravenswood, but the company quickly decided on Hambrecht since CEO Reed Foster has had a long relationship with Bill Hambrecht.

And a niche market is where Hambrecht can find success. The company says it has six more deals in the pipeline. "We're happy with the results of the first two underwritings," says a Hambrecht spokesman. So is Hagen. "From a business perspective, it was maximizing the cash for us and putting stock in long-term shareholders," he says.

Sure, but part of going public is having a flashy debut. After all, the IPO is all about branding, says Taulli. "It's psychological," he argues. "When your IPO has a big first day, everyone's excited, everyone writes about it and you get on the map."