Peapod-Streamline Deal Points to Online Grocers' Ongoing Retreat

They planned to take the nation by storm, but a year later the only storm challenges their stocks.
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Just a year or so ago, online grocers pinned up maps on their conference room walls and plotted how they would take over the U.S. grocery market, major metropolitan market by major metropolitan market.

That strategy now seems as laughable as the idea that

Battlefield Earth

would rule the summer box office. Since the spring's Internet stock debacle, online grocers have struggled, trying to figure out how to expand and turn a profit without much capital.

Webvan

(WBVN)

bought

HomeGrocer

, in the process reducing its capital needs by 50% and getting a cash infusion. European grocer

Royal Ahold

(AHO)

bought a majority stake in

Peapod

(PPOD)

, saving it from far less pleasant "strategic alternatives." And Thursday, Peapod said it bought some of the operations of another rival,

Streamline

(SLNE)

, for $12 million and is getting out of two other markets.

National domination? How late-1990s. Peapod is now focusing on markets already served by Ahold supermarkets -- roughly the Eastern Seaboard from upstate New York to Atlanta (its UPS delivery service, Peapod Packages, delivers dry goods nationwide), including the Washington, D.C., and Chicago operations it bought from Streamline. By focusing on areas with an Ahold presence, it can cross market with the bricks-and-mortar stores and also get goods at a 6% cheaper price, says Peapod President and CEO Marc van Gelder. "We're a click-and-mortar operation," says van Gelder, tossing out the only phrase that will get e-tailers any attention on Wall Street these days. Peapod is pulling out of Texas and Ohio markets, where it offered the much lampooned "pick and pack" distribution model. From now on, it's all centralized distribution centers, all the time.

Meantime, Streamline will narrow its focus to Boston and northern New Jersey, which are both densely populated and rich in disposable income. It won't go into Minneapolis, as it had previously planned. "Just a short time ago, rapid national expansion was the focus and expectation for companies in our industry," said Timothy DeMello, founder and chairman of Streamline, in a statement. "Clearly, it has now become apparent that these companies must first prove unit center profitability," he said.

And that's the heart of it -- that P word. Streamline says it will reach profitability next year. "This is helping us build a profitable business," says Peapod's van Gelder. "The key for us is focusing on profitability." Peapod has "plans in place" to reach profitability but hasn't announced a date yet. "Our models are very encouraging," says van Gelder.

Click and mortar, profitability: Peapod and Streamline talk the talk, all right. If only investors would be convinced that there's anything to this grocery delivery thing. Even in their leaner, meaner, keener states, these shares aren't doing too well. Webvan shares trade at $4.13, down from a 52-week high of $34. Peapod shares trade at $2. Streamline shares trade under a buck. Meantime,

Kozmo

, which bicycles Jujubes and movie rentals to lazy urbanites, has shelved its IPO and laid off workers.

At least focusing on local markets is a more promising strategy than attempting to cover the nation within a few years. And hey! It's already been used -- by those businesses with real profits called supermarkets. Remember them?