Aliso Viejo-based WhyRunOut.com, an online home-delivery service for groceries and others items, is treading cautiously in a bid to avoid the pitfalls that have tripped up other dot-coms.
The privately held company is stretching every dollar of about $5 million in funding it’s received from private investors since 1999, says Chief Executive Dan Frahm. Unlike rival HomeGrocer and its San Francisco-based parent WebVan Group Inc., WhyRunOut hasn’t invested in big warehouses or flashy TV ads. Instead, the company has relied on word of mouth and an alliance with Colton-based Stater Bros. Markets.
“The more sustainable of an approach you have, the better your chances are of getting funded,” Frahm said. “We think we have that kind of answer. Some days, we sit around here and talk to each other like we have the second coming of Fed Ex.”
Boasting aside, Frahm comes across as the opposite of many showy Internet entrepreneurs. His hair is tinged gray while the company’s headquarters is downright spartan. Frahm said he hasn’t gotten caught up in the spending euphoria that’s haunted other online hopefuls. Instead, he said he runs “an old-fashioned business” built to make a buck.
“Everything we do here is to make another dollar,” Frahm said. “We expect to be profitable within the next six months.”
But Frahm’s sensible tack may not be enough for WhyRunOut.com. The company is looking to expand into new areas and is hoping to attract more funding. Trouble is, just about everyone in WhyRunOut’s business is lurching.
“Without demonstrating they have a profitable model, it’s going to be very difficult to get funding,” said Tony Cherbak, a retail analyst with Deloitte & Touche’s Costa Mesa office.
WebVan, which operates in OC, is burning through its cash and tweaking its strategy. SanDiegoGrocer.com, the first foray in a planned 25-city rollout by upstart American Grocer Inc., recently folded. And Camarillo-based PDQuick.com Inc., an online deliverer of groceries and prepared foods serving parts of OC and Los Angeles, recently tabled its national expansion plans in a bid to stretch out $35 million from its last round of funding.
New York-based Kozmo.com Inc., WhyRunOut’s competitor in parts of San Diego and Los Angeles, also has seen its own share of trouble. Backed by Amazon.com Inc., Kozmo, an online store that delivers movies, snacks and other items, received $30 million from private investors in December. But last year the company laid off employees and cancelled its planned initial public offering.
But Frahm said he is confident that his business model will work. WhyRunOut offers same-day home delivery of groceries, dry cleaning and prepared meals. The company is based in 1,500 square feet of no-frills office space in Aliso Viejo. It started with four employees running a phone and fax delivery service from local retailers in 1999.
Since then, WhyRunOut has launched its Web site and grown to 80 employees and 20 delivery vans, mainly because of a deal it struck last April with Stater Bros., which operates 155 stores in Southern California, including 30 in OC.
The supermarket chain pays WhyRunOut an undisclosed fee to deliver groceries from 15 of its stores to customers in South County, northern San Diego and other parts of the Southland. The deal gives WhyRunOut access to about 2.5 million households, Frahm says.
Frahm said he sees the Stater Bros. pact growing. If it does, he said he’ll add more workers and expand his van count to 60 by the end of 2001. Plus, WhyRunOut is looking to partner with other types of retailers,it currently has 10 in OC, including a dry cleaner and sellers of coffee and prepared meals. The company also picks up packages and drops them off for customers at United Parcel Service Inc. sites.
WhyRunOut is looking to move into other regions. The company wants to hit the Bay area by the end of the first quarter, Frahm said, and later Phoenix and the Pacific Northwest.
But Frahm is quick to point out how WhyRunOut is not like troubled rival WebVan, which delivers groceries and other household items. For one, he said, WhyRunOut does not handle distribution. WebVan’s HomeGrocer has a warehouse in Fullerton and another facility in Irvine. WhyRunOut flirted with the warehouse idea, Frahm said, but instead opted to shop retail stores and deliver products to homes.
Still, Frahm said his company has indirectly benefited from HomeGrocer’s heavy marketing.
“They did such a great job advertising they kind of paved the way for home delivery service for us,” he said.
But WhyRunOut needs more funding to expand. The company is talking with undisclosed grocery chains, as well as venture capitalists about backing its expansion, Frahm said. Given the dot-com downturn and a lousy market for technology stocks, getting additional funding won’t be easy.
“People say, ‘Oh, if this is going to be anything like the WebVan or Home Grocer we don’t want anything to do with it,'” Frahm said. “That’s been a little bit of a problem, and we haven’t been out there long enough to distinguish ourselves.”
WhyRunOut may have to prove success,and profitability,in one market before it can grow to others, said Seth Geiger, vice president of Los Angeles-based Bizrate.com, a business-to-consumer marketplace and comparison shopping service.
“There’s money out there, and not having taken on a warehouse or distribution center will certainly increase their attractiveness to venture capitalists,” Geiger said. “But ultimately the success of this business is going to be determined by their ability to start and cultivate relationships with people who are relying on the service and the quality and depth of the retail partners they develop.”
To make the business model work, Frahm said WhyRunOut collects revenue from both ends: consumers and retailers.
Consumers pay a flat $4.99 delivery fee to get groceries from Stater Bros. (online prices are the same as those in the store). They also choose a one-hour delivery window, and are charged an extra $1 for additional deliveries from retailers that WhyRunOut works with. Customers pay by credit card or check upon delivery.
The biggest expenses are born by WhyRunOut’s retail partners, which pay the company an undisclosed fee for use of the vans, delivery services and its Web site.
“Retailers pay the bulk of it,” Frahm said. “But they’re willing to pay for new customers that they could not have gotten any other way. In a sense, we’re sort of an advertising vehicle.”
WhyRunOut sets up a small office in Stater Bros. stores and fills orders by picking from the shelves with its own employees, called pickers.
Frahm said it costs WhyRunOut about $25,000 to set up each office, including staff training, computers and vans. The company breaks even on the set-up expenses in six to nine months, he said. Smaller retail partners like Irvine-based Specialty Coffee Services prep their own orders and WhyRunOut makes deliveries.
Robert Rubin, an analyst at Cambridge, Mass.-based market researcher Forrester Research Inc., is skeptical of the business model having watched online grocer Peapod Inc. of Chicago, which had a similar strategy, nearly fold before being acquired by Dutch grocer Royal Ahold.
He said the jury is still out on the viability of manual in-store picking, which ups the risk of injuring produce as more hands touch it. And the process can be less efficient since grocery stores are not set up to be shopped quickly by online delivery businesses, he said.
The big grocery chains may squeeze out middle men such as WhyRunOut, Rubin said. Safeway Inc. and Albertson’s Inc. are testing prototypes of devices that let customers scan items in their homes as they discard them so they can be automatically reordered and delivered.
“The big grocery chains are going to do it themselves,” Rubin said. “I just can’t imagine them paying a third party to interact with their customers. How does Stater Bros. control the quality of the delivery person and the transaction?”
Repeat customers make about 75% of WhyRunOut’s orders each month, Frahm said. The company is targeting busy suburban families with average orders of $90 to $100. Frahm declined to disclose the number of orders delivered monthly.
In OC, where there are a lot of time-starved people who want convenience, analysts have agreed business models like WhyRunOut and WebVan make sense,in theory.
Customization will be the key, Rubin said. Customers need short delivery windows, personalized shopping lists (which WhyRunOut offers) and scheduled unattended deliveries for times when customers aren’t home. So far, WhyRunOut offers just unattended dry cleaning picks ups and drop offs. Online customers also need automatic reordering, Rubin said, which WhyRunOut has yet to delve into. WebVan already offers many of these services.
Frahm and most analysts agree that there’s never been any doubt that customers like and want home delivery services once they’ve signed up. The doubt, Frahm said, “has been how you serve them profitably.”
“We think we have developed here in OC a model that will work anywhere, even if it’s on a small scale,” he said. “We don’t have to have to do 10,000 deliveries a day to pay off a warehouse to make this work.” n
