Development Plan - Leeds School of Business



Executive Summary

“Consumers across the country have made it clear that they’re ready for online grocery shopping. They see it as a way to save time and simplify their lives.”

- Vic Orler, Partner, Andersen Consulting

Four hundred and forty-six billion dollars were spent on groceries in the United States in 1998. The average American makes 2.2 trips to the store each week. Conservatively estimated at a half-hour per trip, the average person spends over 57 hours, (2 days, 9 hours, and 7 minutes) in the store each year. A study conducted by Andersen Consulting in late 1997, found that 41 percent of Americans "hate grocery shopping" and 42 percent are interested in ordering groceries from home. Another study conducted by the University of Michigan, asked people to rank 22 household tasks in terms of enjoyment. Grocery shopping ranked next to last. With the number of dual-income households rising, Americans are finding themselves with less free time. Consequently, the value placed on their free time continues to skyrocket. The management of sees a tremendous opportunity in a growing market that is expected to reach $460 billion in 1999.

The Internet grocery market has grown from zero in 1993 to approximately $4 billion (one percent of the total grocery industry) in 1998. Despite this tremendous growth, the few players operating in the online grocery marketplace are unprofitable and do not adequately meet consumer needs. Now is the right time for .

will leverage the Internet and technology to provide a service which allows its customers to outsource their mundane weekly tasks. The strategy is to establish a beachhead in the online grocery marketspace to develop a weekly channel into the home. Over time, will earn the trust of its customers and partner with them in their quest to add value to their lives. By providing online grocery service will eliminate the most time-consuming of its customers’ weekly tasks and own the weekly channel into the home. The fact that ’s customers will come to its site intending to make weekly purchases provides enormous potential for to offer other products and services.

Marketing

eMarketer estimates that by 2002, sales of online groceries will total $7 billion and Andersen Consulting projects online grocery sales to reach $85 billion by 2006. Industry experts estimate that one percent of all grocery consumers currently use personal computers to do their shopping, and that twelve to fifteen percent will do so by 2005. Shoppers with access to the Web at home or at work spend more dollars per shopping trip than shoppers who do not have access to the Web. Consumers who shop online are likely to be more loyal to their electronic supermarkets and spend more time per “visit.”

plans to model the branding strategies of Yahoo! and . This strategy is designed to reach the target with a impression multiple times everyday. will spend $2.1 million during the first year of operations in order to build the brand in Denver. will use a combination of traditional vehicles such as outdoor advertising, newspaper, radio, and direct marketing as well as grassroots efforts such as promotions, community sponsorships, and local media partnerships to build brand awareness and increase frequency of use.

Competition

faces two main categories of competitors. The first includes conventional grocery stores, such as Lucky’s and Safeway. Currently ’s potential customers are shopping in these conventional stores. To entice consumers out of their conventional grocery stores, will differentiate itself from these competitors in three ways: 1) convenience of shopping on the Internet from home or work, 2) significant time savings (estimated at 70 to 90 minutes depending on previous habits), and 3) choice of delivery to home or work, or pickup from one of the Customer Convenience Centers (CCC’s).

The second category includes existing online grocery services such as Peapod, Streamline, and Shoplink. These companies will not be immediate competitors for in because they do not offer services in the Denver Metropolitan area. However, as expands into other markets beginning Year 2, it will differentiate itself from other online grocers in two major areas: 1) time savings and ease of use and 2) customer service. plans to expand into 16 markets over the course of five years.

Operations

has designed a business model which provides maximum flexibility. The company will use a central warehouse as a hub and conveniently located retail storefronts as spokes. The spokes will serve a dual purpose; they will provide convenient locations for customers to pick up their orders and will also act as forward staging areas for delivery. This operational model is supported by a flexible information technology (IT) infrastructure which allows to easily integrate new services and respond quickly to customer needs. By combining the hub and spoke model with a flexible IT infrastructure, will serve customers’ grocery needs today and numerous other mundane tasks in the future.

Management

The core management of has been working together successfully for over two years on multiple time-sensitive projects. The members of the founding team have been carefully selected for their commitment to teamwork, desire to work together, and ability to accomplish tasks at Internet speed. The five MBA’s responsible for business management of bring 42 years of experience in such diverse areas as marketing, finance, operations, sales, distribution, project management, corporate training, human resource management, and technical consulting.

In February of 1999, the company accomplished the critical milestone of adding necessary electronic commerce expertise to the team. The technical team brings 31 years of experience in e-commerce, system architecture, object oriented and Internet technologies, electronic cataloguing, search engine technology, Web design, and human factor design. The exceptionally high quality of the technical team creates tremendous strategic advantage for . (Please refer to Appendix A for detailed information about the management team.)

is very excited about the fit and resulting synergies created by the meshing of the management and technical teams. The individuals involved in the company combine to fit the profile of a team committed to creating and defending a competitive advantage for the long term.

Advisory Board

The management team of is fortunate to have a seasoned advisory board with diverse experience to help guide the company through the startup process. (Please refer to Appendix B for detailed information about the advisory board.)

The board members are as follows:

Timothy R. Schiewe President and Chief Executive Officer,

Caryn Ellison Chief Executive Officer, ZAND Herbal Formulas

Former Chief Financial Officer of Alfalfa's Markets

Sanford Keziah President, Kindred/Keziah, LLC

James H. Thomas Manager, e-business Solutions, IBM Corporation

Financial Summary

's revenue model uses a conservative customer conversion rate of less than one percent of the target market for Year 1. The company recognizes that the market in the Denver Metro area is immature and will take some time to educate and grow. Summary revenue and net income numbers for the first five years of operations are:

| |YEAR |1 | |2 | |3 | |4 | |5 |

| |REVENUE |$20,007,106 | |$43,221,763 | | $130,578,383 | | $264,841,748 | | $544,469,699 |

| |NET INCOME |$(2,305,926) | |$(2,155,428) | |$5,003,652 | |$14,904,701 | |$ 35,387,282 |

Offering

seeks a total of $8 million in outside investment in three rounds. Round one will consist of a $2 million offering in exchange for 22% of the company. Round two will consist of a $3.5 million offering in exchange for 12% of the company. Round three will consist of a $2.5 million offering in exchange for 2% of the company. The total ownership for outside investors after round three will be 36 percent. This offering will provide start-up capital for Year 0 and working capital for the first two years.

Exit

Exit for outside investors will take place in Year 5 through IPO or merger/acquisition. The company is valued at $574 million at the end of Year 5. The outside investors ownership stake of 36 percent will provide a return of $193 million. This provides an IRR of 110%, 80% and 50% for rounds one, two, and three respectively.

Partners

The management team of is committed to finding individuals or a firm that is interested in developing a partnership. Potential partners will be expected to provide management expertise, investment experience in the Internet space, numerous business contacts, and capital. The management team is deeply committed to making this company successful; while they are committed to leadership, they are not necessarily committed to being in charge.

Marketing

Industry Overview

E-Commerce

Current

Internet commerce reached $7.8 billion in 1998. Businesses in virtually every sector of the economy are using the Internet to cut the cost of purchasing, manage supplier relationships, streamline logistics and inventory, and reach customers more effectively. A major driver in the trend toward Internet commerce is that consumers are finding themselves more time-starved and are looking for ways to increase their free time. As the percentage of women in the workforce increases, families are finding themselves struggling to balance work and family. Internet commerce allows them to reduce the time involved with tasks such as errands and shopping, thus allowing them more time for work and family.

The fact that there are more access options available than ever before is also driving consumers onto the Internet. Decreasing costs of access further reduce barriers to Internet use. TV top units such as WebTV cost less than $250 and Internet-ready PCs are being sold for under $1,000. TV top unit sales are expected to reach 8 million by 2002 and Bill Gates has stated that he expects non-PC devices to overtake the number of PCs sold within ten years. Currently it is estimated that 40 percent of all households have a computer at home. Of those households, 72 percent have a modem, 31 percent have an online or Internet service, 31 percent use email and five percent use the Internet for shopping. Industry experts report that Internet users spend 2.5-9.8 hours online per week.

In a 1998 study conducted by Ernst and Young, 76 percent of respondents indicated that their companies either were selling or planning to sell through the Web (a 210 percent increase over 1997). Consumers are recognizing the cost savings and convenience of purchasing online and the online experience has become more enjoyable. In 1998, more than half (51 percent) of online shoppers made purchases online on at least five occasions, up 300 percent over 1997.

Projected

As the Internet matures and consumers continue to gain confidence in this medium, purchases (in terms of frequency and dollars) will increase. eMarketer estimates that there will be 64 million Internet users in the United States by 2002, an average annual growth rate of 53 percent. Some make much bolder predictions. Nicholas Negraponte projects one billion users worldwide by 2000. Household Internet user projections vary by source.

|U.S. Internet User Households (in millions) |1999 |2000 |

|Jupiter |33.0 |36.5 |

|Forrester |31.0 |33.0 |

|New Century Communications |26.8 |29.4 |

|eMarketer |17.6 |23.4 |

The momentum created by companies increasing communications and commerce options on the Web has not gone unnoticed by consumers. Projections for e-commerce revenues vary greatly.

|E-Commerce Projections (in billions) |1999 |2000 |

|eMarketer |$6.1 |$10 |

|Forrester |$3.9 |$6.6 |

|Multi Media Research Group |NA |$6.5 |

|Jupiter |NA |$7.3 |

|Cowles/Simba |NA |$4.3 |

|IDC |NA |$117 |

In late March 1999, The Red Herring released a new perspective on the growth of internet access, the number of households that shop online and total online retail sales.

| |1999 |2000 |2001 |2002 |2003 |

|# of U.S. Households with Internet Access (millions) |33.5 |38.3 |43.5 |48.6 |52.8 |

|# of U.S. Households that shop online (millions) |13.1 |17.7 |23.1 |30.3 |40.3 |

|Total online retail sales (billions) |$18.1 |$33 |$52.2 |$76.3 |$108 |

General Grocery

Current

The Food Marketing Institute (FMI) estimates that in 1998 total grocery sales in the United States were $446 billion. The large scale grocery and supermarket chains have been slow to react to the online grocery expansion. This hesitation is primarily due to high costs and lack of expertise. Several of the large supermarket chains have created Web sites although the primary purpose of these sites is to provide information (specials) and coupons to consumers who are then directed to local supermarkets.

Projected

In a retail survey conducted by Ernst and Young, 71 percent of grocers said their companies have a Web site and 18 percent said they plan to have one in the next year. Furthermore, 67 percent said they plan to offer products to consumers on their Web sites. In 1998, 16 percent of grocers said that they expect a significant portion (11-30 percent) of their revenues in 2000 will come from online sales. However, a source from the top grocery retailer in the industry reports that grocery stores are currently not promoting online ordering because the costs to retailers are too high. Furthermore, many grocery stores which already offer Web site ordering are currently reducing the number of products available online to discourage online ordering.

Online Grocery

Current

As of July 1998, approximately 75,000 homes were purchasing groceries on the Net, representing a

$5 billion business. According to FMI, seven percent of shoppers said that their store offered grocery ordering by fax or Internet in 1997. Less than one percent said they used this service one time per month or more. In 1998, 35 percent of shoppers whose stores offered fax or Internet ordering said they used it one time per month or more. Of those shoppers who said their store did not offer fax or Internet ordering, 11 percent said they would use it one time per month or more if it were available.

FMI also found that shoppers with access to the Web at home or at work spend $96 per week on groceries versus $79 for those who do not have access to the Web. According to FMI, online grocery shoppers are more educated, have higher household incomes, and are more likely to live in the suburbs than conventional grocery store shoppers. Furthermore, online grocery shoppers are relatively less satisfied with their primary supermarket than those who do not shop online. Consumers who shop online are likely to be more loyal to their electronic supermarkets, spend more time per “visit,” and take greater advantage of coupons and premiums than traditional bricks and mortar consumers.

Projected

Consumers are ready to reduce the 47 minutes that it takes the average family to stock up on the week’s groceries (plus time spent driving and the hassle of plodding up and down the aisles). The Food Marketing Department of St. Joseph’s University in Philadelphia found that two-thirds of adults actively dislike shopping for food and over one-third of grocery shoppers are willing to pay a fee for the convenience of home shopping.

Industry experts estimate that one percent of all grocery consumers currently use personal computers to do their shopping, and that 12 to 15 percent will do so by 2005. Andersen Consulting estimates that the number of U.S. households using online services to buy food and other household goods and services will grow to 15 to 20 million by 2007. eMarketer suggests that online groceries will achieve a penetration rate of up to 20 percent of U.S. households by 2007. Jupiter Communications suggests that only a small percentage of the population needs to convert to online shopping in order to make the industry a profitable venture. The projected size of the online grocery market varies by source and time frame:

|(In billions) |2000 |2001 |2002 |2003 |2004 |2005 |2006 |2007 |2008 |2009 |

|eMarketer |$2.4 | |$7 | | | | | | | |

|Forbes | | | | | | | | | |$60+ |

|Andersen | | | | | | | |$85 | | |

|Forrester | | |$7 |$10.8 | | | | | | |

|Jupiter | |$2.2 | |$3.5 | | | | | | |

|Yankee Group |$6 | | | | | | | | | |

|HBS | |$12 | | | | | | | | |

Competition

faces two main categories of competitors. The first is comprised of conventional grocery stores such as Kroger, Safeway, Vons, Lucky, and Albertson’s. Conventional grocery stores are attempting to make the shopping experience more convenient by adding services such as banking and photo processing. They are also trying to make the shopping experience more enjoyable by offering food samples, better lighting, wider aisles, special carts for children, and more attractive layouts. ’s potential customers are currently shopping in these stores because of habit and the lack of other options.

The second category of competition for includes existing online grocery services. These services can be divided into three categories based upon their distribution: national, regional and local. 's competition will vary by market depending on the presence of online grocers. Please refer to Appendix C for profiles of primary competitors.

Target

Consumer Groceries

During its first three to five year of business, will target age 25 to 44, educated, dual-income households (HH) who are Internet users. This target displays the following demographics and psychographics:

Demographics Psychographics

- Age 25-44 - Interested in saving time on mundane tasks

- Two adults in HH working full or part time - Comfortable making transactions over the Internet

- One adult in HH with a Bachelors degree or higher - Sent for information on product advertised on Internet in past

- With or without children in the household 30 days

- Used an Internet service in past 30 days - Sent for product advertised on Internet in past 30 days

- Married, living together, roommates - Printed ad or article from the Internet in past 30 days

- Household income $60,000 + - Made travel plans on the Internet in past 30 days

- Access to the Internet at home or at work

- Media habits: magazines, newspapers, noticers

of outdoor advertising

By focusing marketing efforts on this target during the first three to five years of business, :

1) Concentrates on a target that knows how to conduct transactions online

• This target is already making Internet transactions and is familiar with the benefits of transacting online. Thus the only behavior change must address is how consumers shop for groceries.

• will establish a customer base faster and subsequently show a profit more quickly. Given the increasing usage penetration of the Internet, expects the target to spontaneously increase as more people go online. will evaluate its target each year and make necessary adaptations.

2) Concentrates on a target that provides volume

• Households with a minimum of two adults purchase more groceries than single resident households.

3) Concentrates on a target with need

• This target is willing to pay for convenience because of their busy lives and higher level income.

Advertisers

will target Web advertisers to purchase sponsorship opportunities. will focus its advertising sales efforts on a variety of category spenders who are looking to reach the consumer grocery target. Specific companies include Procter & Gamble, Clorox, Visa, General Motors, Baby Gap, Ann Taylor, Dockers, Microsoft, and AT&T.

Market Research

Market research was conducted among the defined target to accomplish four objectives: 1) better understand the target’s online history and capability, 2) determine the willingness of consumers to purchase groceries online, 3) determine whether purchasing perishables would be a barrier, and 4) understand consumer preferences related to online shopping for operational purposes. Eighty-five percent of respondents have access to the Internet at home and at work and have also made a purchase on the Internet. Eighty-five percent of respondents visit their grocery store once or twice per week spending an average of $50-$150 each week. Forty-eight percent of respondents would pay a two to five percent premium to avoid going to the grocery store, with 31 percent saying they would pay five percent. Fifty-six percent of respondents said they would purchase groceries on the Internet. Of those respondents, 67 percent said they would also purchase perishables (meat, dairy and produce) on the Internet. Seventy-six percent of respondents said they would like their groceries delivered to their home.

Marketing Strategy

Product

Consumer Groceries

will offer a wide range of grocery products, including fresh produce, prepared foods, health and beauty aids, and other grocery items. will add value to its customers’ lives by allowing them to spend less time completing mundane daily tasks like grocery shopping and more time enjoying their lives.

will be the first regional service and only full-service online grocer in most markets. In other markets, will be second to market in terms of regional or local players. Additionally, expects the entrance of competitors in the cities where it is the first to market as the online grocery market grows. Therefore, it is critical that differentiate itself from its current and future competitors in order to claim and protect the leading position in each market. will differentiate itself from its competitors in two major ways.

• Time Savings and Ease: On average, people spend 47 minutes per week grocery shopping in conventional grocery stores. Peapod, currently the largest Internet grocer, reports that its average customer visit lasts 35 to 40 minutes. By using , shopping time can be reduced to 10 to 20 minutes. Customers who place the same weekly order can reduce their shopping time to two minutes or less. Additionally, the Web site will be fresh, clean, and simple so that the shopping experience is not only fast but easy for consumers to use.

• Customer Service: will be the only online service that has a real world location (Customer Convenience Center) that consumers can visit. This unique model offers several advantages over the competition. First, consumers will enjoy the option of picking up their groceries at a convenient location or having their groceries delivered. Currently, online services only offer delivery. Second, consumers will be able to establish a human connection with through visits to their Customer Convenience Center. will build a corporate culture that emphasizes the importance of relationships between the employees of each CCC and their respective customers. Finally, the existence of CCC’s allows for same hour response to mistakes versus competitors who currently take one to three days to remedy their mistakes. ’s Web site will provide top-level customer service, offering a personal touch similar to Yahoo!’s “My Yahoo!” in order to build a relationship with its customers. (Please refer to Appendix D for a perceptual map of the grocery marketspace.)

Future products and services

Once has established a strong customer base and proficient operations with groceries, the company will expand into additional services and products. With consumers coming to weekly to purchase groceries, will seize the opportunity to eliminate other mundane tasks such as dry cleaning and video rental. (Please refer to Appendix E for a list of future services under consideration.)

Sponsorships

will also offer sponsorship advertising to consumer product Web advertisers. By providing sponsorships instead of traditional banner advertising, will be able to: 1) reduce the downloading time associated with large numbers of logos and advertisements, 2) avoid alienating customers who are tired of the advertising clutter on the Internet, and 3) take advantage of the increasing amount of Web spending by advertisers. eMarketer estimates that $3.8 billion will be spent on Web advertising in 2000 and $8 billion in 2002. Sponsorship opportunities will be available for various elements of the Web site including: specials of the day and the shopping cart.

Place

will follow a market rollout plan in 16 designated market areas (DMA) during its first five years, concentrating primarily on the western region of the United States. These 16 DMAs contain a high concentration of the target, are among the top 20 cities for age 25+ individuals with bachelor degrees or higher, and are cities with the highest concentration of Internet users.

Price

will price products two to five percent higher than conventional grocery stores. Market research indicates that consumers are willing to pay a premium in return for the convenience of not having to go to the grocery store. will offer a 100 percent satisfaction guarantee on all merchandise. There will be an extra $4.95 charge for delivery. A 2 to 5 percent premium, 100 percent satisfaction guarantee, and $4.95 delivery charge are consistent with other online grocers. will not charge membership fees or per order fees, both of which are perceived negatives of other online grocery sites.

Promotion

Marketing Communication

Following the successful promotion strategy of Internet brands such as Yahoo! and Amazon, will create a strategy that provides a ubiquitous presence. The goal behind the strategy is to create a visual branding of seen by the target in every aspect of their life. As proven by the success of Yahoo! and Amazon, it is necessary to allocate a significant amount of money in order to build awareness of the brand and cut through the e-commerce clutter. Recently Peapod has seen a drop in its membership which industry analysts attribute to cutbacks in marketing.

Marketing communication will begin eight weeks prior to the launch in each city. Most of the pre-launch communication will employ a “teaser” strategy to build excitement and curiosity. This strategy has been very successful for several companies including Levi Strauss’ launch of Dockers. Levi Strauss plastered cities with outdoor and print executions with two words, “Nice Pants,” to create curiosity and excitement two months before they launched the highly successful brand.

Following the launch, marketing will remain at high levels through Year 3 in each city in order to build a high level of awareness. Prior to Year 4, an evaluation and measurement of ’s awareness and usage will be conducted to determine marketing communication levels for Years 4 and 5. This plan assumes that significant brand awareness will be created in the first three years thus allowing marketing communication levels to be more moderate during Years 4 and 5.

Following is a list of the executional vehicles will evaluate for each city. Specific marketing communication programs will vary by city in order to cater to each city’s dynamics. Please refer to Appendix F for details on each vehicle and Appendix G for the Years 1 to 3 Denver Metro marketing plan.

• Local Outdoor

• Stock Giveaway

• Direct Mail

• Local Newspaper

• Local Radio

• Community Sponsorships

• Flyers

• Merchandising

• Web site Banner Advertising

• Corporate Partnerships

• Special Promotions

• Public Relations

• Branding

Positioning

Benefit Statement

Support Statement

eliminates the mundane tasks in your life such as grocery shopping.

• The average shopper spends approximately 60 to 90 minutes per week grocery shopping. This number accounts only for in-store time and does not include driving or parking time. projects that customers can complete their weekly shopping in 10 to 20 minutes.

Operations

will be the only online grocer that controls the flow of the entire food channel from the manufacturer or food broker to the end consumer. This distribution equity is a primary competitive advantage of the business model. will utilize a hub and spoke model to bridge the distribution gap between the manufacturer or food broker and the end consumer. This model was selected because it is scalable within markets and easy to replicate in new markets. Ownership of the hub operations will allow to reduce costs and control the quality of order fulfillment. The presence of spokes (termed "Consumer Convenience Centers" or "CCC's") will enable to reduce delivery costs and offer more options to the customer. Future competitive advantages will be realized by developing core competencies in order fulfillment and delivery efficiencies provided by the CCC's. will invest heavily in the technology and logistics infrastructure to maintain this competitive advantage.

When customers arrive at the Web site, they will choose their items, select payment options, and submit their orders over the Internet. They will also elect to have their orders delivered or made available for pickup within 24-hours at a conveniently located CCC.

The Hub

The fulfillment end of the operations will take place in ’s centralized distribution warehouse. The hub will be a 50,000 square foot warehouse which will house the inventory and corporate headquarters. will warehouse over 20,000 items including dry groceries, frozen food, produce, meats, bakery, general merchandise, and health and beauty aids (HABA).

The dynamic warehouse will be divided into three operational zones: 1) aisles with shelving to store dry groceries, 2) a large walk-in freezer for frozen foods, and 3) a climate-controlled room for storing fresh produce and other perishables. The warehouse will utilize gravity flow shelving for fast moving, high volume items since this type of shelving facilitates product rotation, restocking, and product picking. The slower moving, lower volume items will be stored on static shelves.

Customer orders will be compiled at the warehouse at specified intervals (every 1, 2, 4, or 6 hours depending on demand). The individual orders will be divided into lists by zone within the warehouse. The lists will contain the picking order and product location of items within each zone to facilitate the picking process. Employees within each zone will select and pack portions of each order. Products will move through the warehouse zones in tote bins on a series of conveyors. Completed orders will pass through a quality control check point where they will be tagged, scanned, and loaded onto trucks for delivery to the CCC's.

Customer Convenience Centers

Customers who elect to pick up their orders will do so at a Customer Convenience Center. The CCC's are 2,000 square foot retail locations that will be strategically located in high density and high traffic corridors. The CCC's will be equipped with walk-in freezers and climate-controlled rooms to store orders until they are ready to be picked up or delivered. will be the only online grocer that provides locations for customer pickup. Customers will be able to pick up their orders in two ways: through the walk-in storefront or the drive-through window located on the side of the CCC. Payment can be made at the CCC and a employee will load groceries into customers' vehicles.

will begin operations with six CCC's in the Denver Metro area. Each CCC will process all pick up and delivery orders within a specified geographic area of operation. Utilizing a small fleet of vans, delivery drivers can ensure a positive customer experience. Customer Convenience Centers will be added as needed to accommodate demand and capacity.

From an operational standpoint, the CCC will serve as a forward distribution point for delivery. The CCC's create two primary efficiencies in operations. First, delivering from the CCC reduces the time required for deliveries (as compared to delivering orders from the hub) and thus increases delivery capacity. Deliveries are made within neighborhood zones; drivers complete short routes before returning to the CCC to pickup the next group of orders in the delivery queue. Second, consolidating all pick up and delivery orders at the hub creates efficiencies in transportation costs and logistics to the CCC's. All orders for a given area are transported to the CCC in one truckload. This results in a greater operating margin due to reduced transportation costs per order.

Information Technology

is predominantly a distribution business with an Internet purchasing focus. To gain quick entry into the market and maintain a strategic advantage over competitors, the business will use a mix of purchased and internally developed software. Systems determined to be core competencies of will be developed internally. All other systems will be purchased and may need to be customized to support the business model. These systems will be selected based on cost, amount of customization required, and ease of customization and administration.

Buy versus Build Analysis

distinguishes between those systems deemed strategic to the business and those systems that are less strategic and more operational. The Internet ordering capability is ’s key advantage. This is the area in which the company will gain a clear advantage over its competition. Other areas of strategic advantage are the warehouse and delivery components. will successfully manage its margins and achieve high levels of customer service through efficient purchasing, storage, inventory management, picking, and delivery systems.

Because the electronic commerce industry is immature, the availability of Internet solutions is limited. New technologies will be leveraged to build a state of the art Internet ordering solution. Customer ordering efficiency will be a primary goal of this system and a key differentiator from competitors. Solutions for the operations area, on the other hand, are mature, commonly available, and attractively priced. Thus, will take advantage of the knowledge of established packaged solutions.

A division has been made between those solutions that will be bought and those that will be built The graphic on the following page depicts the Buy versus Build model for .

[pic]

Build Implementation Plan

Phased Web site Development Plan

Product development will be rolled out over three phases in order to minimize risk and reduce time to market. The first phase will include the following core features: online catalog with text, category and list-based searching, customer shopping templates for weekly reorders, order experience metrics tracking, email order confirmation, and integration with the ERP system. The first phase is estimated to take four months to build after which will be ready to go live.

Later phases will include: recipe management and recipe order integration, meal planning, demographic buying pattern analysis, electronic coupon, and sponsorships. Follow-on phases will be delivered on four month cycles and will include non-critical fixes to earlier releases. Emergency fixes will be accommodated immediately.

Product Data Development Plan

Based on prior experience with product data development, manual construction of core product data will be developed at a rate of 2,500 products per month per product data engineer. Core product data development is defined as collecting universal product codes (UPC’s), manufacturer name, short description, long description, unit of measure, cost, and price. Images and searchable attributes (such as nutritional content and ingredients) are not included in core development.

The CIO will be responsible for generating software requirements to aid in the product data authoring process and hiring temporary employees to complete product data development. Initial development of 20,000 items is estimated to take three person months. The first release of product data will only include core information.

Initial product attribute data development efforts are expected to take the same amount of time as core data development. Picture data development cost and effort will be dependent upon the quality of images available from the manufacturer or supplier. Ongoing product data development efforts will be cyclical and based on manufacturer and supplier catalog release timetables. estimates that this will occur as frequently as once per quarter and as infrequently as once per year. Electronic catalog data will be synchronized with manufacturer and supplier product catalogs.

Buy Implementation Plan

Packaged software solutions that support most, if not all, functions of a business are commonly referred to as Enterprise Resource Planning (ERP) systems. Many of these systems are designed to support manufacturing environments. The focus of ’s search will be on packages that are specifically designed to support distribution systems and, if possible, systems that have a food or grocery focus. The purchased package will support all aspects of ’s business that fall outside of the functionality as illustrated above. Once purchased, the package will be configured to support ’s specific business needs and will be integrated with the Web-based ordering system.

Contingency Plan

The management of considers the following to be the most significant threats facing the company over the next five years. Below are those risks and the corresponding contingency plans.

Financial Risks

Unable to meet revenue projections

Proactive measures

• is committed to an ongoing strategy to evaluate its marketing program effectiveness and reallocate expenditures to most effective areas.

Reactive measures

• If needed, the marketing budget will be increased to a level necessary to meet projected revenues.

Last Resort

• Delay roll-out into future markets.

Lower margins due to higher than expected cost of goods

Proactive measures

• Engage in ongoing analysis of cost of goods versus pricing.

• Engage in ongoing development of partnerships with suppliers.

Reactive measures

• Shift marketing focus to existing higher margin products and services.

• Introduce new higher margin products and services (e.g., dry cleaning) more quickly.

Last resort

• Raise prices.

Risk of Entry by Competitors

Conventional grocers enter the online space

Proactive measures

• Engage in ongoing analysis of conventional grocery industry to anticipate entry.

• Exceed customers expectations to create a fiercely loyal customer base.

• Become indispensable to customers by performing all of their mundane tasks.

Reactive measures

• Focus marketing communication on the differences between ’s product and service offerings and offerings by major retailers.

• Increase marketing promotions targeted to users who are not 100 percent committed to (i.e., consumers who are not using the service for 90 to 100 percent of their shopping needs).

• Revert to the introduction (launch) marketing campaign (high levels and heavy promotions).

Last resorts

• Merge with or be acquired by a major grocery retailer looking for access to the marketplace.

Online grocers enter ’s existing or future markets

(This is not considered a risk.)

• Conduct business as usual.

• Continue to execute the best service in order to retain customer loyalty and prevent switching

• Competition may actually provide benefits such as:

• an increase in the total amount of marketing dollars promoting online shopping; and

• an incentive to avoid complacency.

Information Technology Risks

Delayed delivery of software

• ’s development schedule is conservative. However, in the case of an unforeseen delay will:

• hire additional development resources where prudent; and

• outsource development to local technology consulting companies or use contract programmers. All outsourced and contracted development will be managed by the CTO to ensure consistency with established development standards and design criteria.

Culture

takes the culture within its organization very seriously. The company recognizes that customer and employee loyalty must be cultivated from within the organization and takes time to create. Many companies operate with fairly high levels of organizational inconsistency where the everyday actions of employees belie the stated goals of the company. This does not happen at . Official procedures are flexible to allow for changes based on input from employees. Employees who violate “official procedures” in order to serve a customer better or streamline an operational process are recognized and rewarded. Strategy meetings are open to all employees and management has made a commitment to work at least one day each month in a hub or spoke. (Please refer to Appendix I for an organizational chart.)

Teamwork is encouraged and expected of all employees of . Employees whose suggestions are implemented are recognized and rewarded. Incentives are distributed organization-wide and are based on workplace cooperation. For example, hub employees are bonused as a team. The error-free packing of part of an order by one employee at the hub does not benefit the customer if another employee omits an item from the same order.

The goal of ’s hiring practice is to put a local face on our business. seeks stand-out students from local high schools and colleges as well as members of the community for its staff. Customers are served by neighbors and friends. recruits for upper-level positions within the organization.

Financial Summary

anticipates revenues of $20,007,106 in the first year of operations, (Year 1), primarily as a result of targeted and aggressive marketing (See Appendix J). Including the pre-opening expenses, marketing and promotion will approximate 11 percent of Year 1 revenue. The loss for the first year is expected to be $2.3 million and is primarily a result of fixed expenses spread over a relatively small but growing base of revenue. However, anticipates the first monthly positive net income in November, 2000, the 11th month of operation. (See Monthly Financial Statements, page 25) The net loss for Year 2 is a result of moving into the second market and is marked by the increase in operating expenses from $3.4 million, to $7.3 million. (Please see Appendix K.) Sustainable profitability is achieved in Year 3.

Revenues are expected to grow to over $540 million in five years due to three primary factors. The first is the dramatic growth in the internet as a means of e-commerce which translates into an increasing base of target customers (households). (Please see Appendix L.) The second is expansion into new markets. anticipates annually doubling the number of markets to 16 by the end of Year 5. (Please see Appendix M). The third factor driving growth is the increasing customer base due to successful marketing and execution. anticipates that the customer conversion rate within each market will grow from one percent of target households to five percent by Year 5.

One key variable to the success of is the growth of the online grocery industry. Currently, one percent of all grocery sales are online and this number is expected to grow to ten percent over the next five years according to Andersen Consulting. This equates to $43.6 billion in 1999 dollars. Also key to ’s profitability is generating a high number of repeat customers. At an average order of $123, total orders are expected to be 162,659 in Year 1. This sales volume is roughly equivalent to 2,700 customers (less than one percent of the target households) purchasing 100 percent of their groceries at .

The Valuation

The value of was calculated using the entity method of discounting cash flows. The terminal value for is based on the present value of expected future cash flows starting in Year 6, using a 9.8 percent long term growth rate, and an 18 percent long-term required rate of return. The explicit forecast period is discounted at the same long-term required rate of return. The complete valuation and present values of the future cash flows for each year can be found in Appendix N.

The Offering

is seeking a total of $8 million in outside investment in three rounds. Round one will consist of a $2 million offering for 22 percent of the company at the beginning of Year 0, to fund Web site and IT development costs, a pilot program, and other opening costs. Round two will consist of a $3.5 million offering for 12 percent of the company at the beginning of Year 1 to provide working capital for full deployment within the Denver market. Round three will consist of a $2.5 million offering for 2 percent of the company at the beginning of Year 2 to provide funds for capital expenditures and working capital for expansion into additional markets. (See appendix N Valuation )

Exit for Investors

The exit for outside investors will take place at the end of Year 5 through IPO or merger/acquisition. The value at this stage is estimated at $574 million and is calculated by adding the present value of expected future cash flows to the excess cash available at the end of Year 5. Outside investors’ share of the company is 36 percent, which equates to approximately $193 million. This will provide an annualized IRR of 110 percent for the Round 1 investors, 80 percent for the Round 2 investors, and 50 percent for the Round 3 investors. Total ROI for Round 1 investors is 6,230 percent, 1,790 percent for Round 2 investors, and 406 percent for Round 3 investors. (Please see Appendix N Valuation)

Pro Forma Financial Statements

Appendix A – Management Team

|Charles Wicht |Chief Executive Officer |

Charles Wicht is a class of 1999 MBA candidate focusing in Entrepreneurship and Finance at the Graduate School of Business at the University of Colorado at Boulder. Most recently, Charles worked as a financial analyst at IBM in Boulder. Charles has ten years of diverse work experience in such areas as technical consulting, project management, management consulting, sales, and entrepreneurship. Charles is a graduate of San Diego State University with a Bachelor of Science degree in Mechanical Engineering.

|Dave Sheanin |Vice President, Culture and Human Resources |

Dave Sheanin is a class of 1999 MBA candidate focusing in Entrepreneurship and Organizational Management at the Graduate School of Business at the University of Colorado at Boulder. Dave currently sits on the board of directors and acts as controller and business manager for an information management firm contracted with the U.S. Government. Dave has three years of experience as the executive director of an educational firm in Boulder and six years of experience as a corporate trainer. Dave is a graduate of the University of California, Irvine with a Bachelor of Arts degree in Psychology.

|Scott Kohla |Chief Operations Officer |

Scott Kohla is a class of 1999 MBA candidate focusing in Entrepreneurship and Innovation/Technology at the Graduate School of Business at the University of Colorado at Boulder. He received his bachelor’s degree in Mathematics from Vanderbilt University in 1988. Scott has over nine years of experience at a beer wholesale distributor in Florida. In those nine years, he has worked in product management, sales, marketing, operations, and logistics. As a National Accounts Manager for four years, he was responsible for the sales and distribution to supermarket and grocery store chains. Scott recently started his own consulting business, Entrepreneurial Solutions, with three of his classmates.

|Staci Maher |Vice President, Marketing |

Staci Maher is a class of 1999 MBA candidate focusing in Entrepreneurship and Finance at the Graduate School of Business at the University of Colorado at Boulder. Staci has eight years of experience in advertising and marketing having worked for Foote, Cone and Belding, DDB Needham and Sterling-Rice Group. During those eight years, Staci worked with clients such as Clorox, Pacific Bell, Alberto Culver, and Teledyne Water Pik in various capacities including media planning, account management, strategic positioning and brand consulting. Staci graduated from the University of California at Los Angeles with a Bachelor of Arts in Political Science and Business.

|Chris Lautemann |Chief Financial Officer |

Chris Lautemann is a class of 1999 MBA candidate concentrating in Finance, Entrepreneurship, and Real Estate at the Graduate School of Business at the University of Colorado at Boulder. Chris has three plus years of finance experience involving both corporate finance and mergers and acquisitions. In addition, recent work experience includes marketing exposure with a leading advertising agency. Chris graduated from North Carolina State University with a Bachelor of Arts in Economics.

|Tim Wolters |Chief Technical Officer |

Tim Wolters is currently the Technical Architect of Electronic Commerce Systems at Corporate Express, Inc., a $4.5 billion supplier of non-production goods for corporate customers. He recently headed the efforts of Requisite Technology, Inc. (a business to business ecommerce startup) to build Web-based cataloging technology, scalable to 100,00+ products and thousands of users. Tim Wolters has developed business sector software for over twelve years in such diverse areas as electronic commerce, component technology, telephone system provisioning, telephony equipment load balancing, workforce dispatching, time management, sales force automation, and hotel reservations.

|Brad Warkins |Chief Information Officer |

Brad Warkins is currently Director of Electronic Commerce for Corporate Express, Inc., a $4.5 billion supplier of non-production goods for corporate customers. The site he manages generates approximately $1.5 million in weekly revenue. His previous experience includes 6 1/2 years with Andersen Consulting, where he was a Manager specializing in Products, Distribution and Logistics.

|Donna Tellam |Director of Product Management |

Donna Tellam has a bachelor’s degree in technical journalism with an emphasis in public relations, and currently holds a position with Corporate Express as a User Interface Engineer.. She has worked in the technology industry for over ten years as a human factors engineer and software user interface designer striving to make software easier to use. She has also worked in the industry as a technical writer, Web-site developer, graphic illustrator, and document designer. Her work has spanned various areas of technology, including networking systems, telecommunications, customer service applications, computer-based training, and electronic commerce.

Appendix B – Advisory Board Members

Timothy R. Schiewe – President and Chief Executive Officer,

Mr. Schiewe is President and Chief Executive Officer since co-founding the company in 1993. He has over 20 years of experience in the banking industry, including 10 years with Bank of America. He served Bank of America as Assistant Chief Auditor responsible for the human resource function for 450 employees and a $27 million annual budget, which he routinely met within $100,000. In 1987, Mr. Schiewe left Bank of America to found MAP Products, Inc., a developer of audit and banking compliance software. In November of 1990, MAP Products was sold for approximately $3 million to Information Handling Services (IHS) of Englewood, Colorado. Mr. Schiewe was retained as a consultant to IHS to market The Banking Library (TBL) product for IHS, achieving annual revenues of over $6 million in 1996. The product was then used as a prototype for successful introduction in other industries such as law, engineering, and medical. In November of 1995, Mr. Schiewe’s non-compete agreement with IHS expired, at which time he co-founded InfoMaster (InfoMaster changed its name in July 1998 to ). relies on Mr. Scheiwe for advice regarding the e-commerce industry, strategy, investor relations, start-up management.

Caryn Ellison, Chief Executive Officer, ZAND Herbal Formulas

Caryn Ellison, Chief Executive Officer of ZAND Herbal Formulas, has been in the natural products industry for over 15 years. As the Vice President of Finance and Chief Financial Officer of Alfalfa's Markets from 1992 to 1996, Caryn played an integral role in Alfalfa's merger with Wild Oats, creating the nation's second largest natural foods supermarket chain. Formerly, Caryn held the positions of Vice President of Finance and Chief Financial Officer of Celestial Seasonings, Inc., working for the company from 1983 to 1992. She was a management partner in the leveraged buyout of Celestial from Kraft Foods, to return the company to private ownership. In 1995, Caryn received the Business Pacesetter Award in recognition of her business and civic contributions. She has previously served on several non-profit boards and is currently a member of the board of directors of Rudi's Bakery. relies on Ms. Ellison for advice regarding the food/grocery industry, financing, cost management, and start-up management.

Sanford Keziah, President, Kindred/Keziah, LLC

Sanford Keziah is president and co-founder Kindred/Keziah, LLC, a strategic consulting firm based in Boulder, Colorado, which specializes in evaluating and developing brand positioning strategies. Sanford Keziah began his career in New York City at DMB&B Worldwide where he worked as an Account Manager on the M&M Mars account. During the birth of the Account Planning discipline in the U.S., Sanford became one of the original Account Planners at DDB Needham/NY. There, his strategic direction on the NEC Computer account led to the “Faces” campaign which was instrumental in transforming the computer category. He also worked on the Olympus Cameras account and did projects for Amtrak. His final position prior to founding Kindred/Keziah was as Senior Account Planner for Diet Coke at Lowe & Partners/SMS, where he worked on projects for Digital Computers, Bausch & Lomb and Sony. relies on Mr. Keziah for advice regarding strategic brand management, advertising, and market penetration strategies.

James H. Thomas, Manager, e-business Solutions, IBM Corporation

Twenty-five years IBM experience providing services support, marketing and consulting services to IBM customers. An experienced designer of services solutions and a successful project manager with fifteen years people-management experience. Management responsibility for the development and deployment of complex e-business services for large strategic outsourcing customers in the US. Utilizing leading technology and IBM’s network computing framework, custom solutions are developed for customers that Web-enable their existing information technology resources and create business value by reengineering business to business and business to consumer processes. Prior to managing e-business solutions, was Project Executive for Johnson&Johnson Project, IBM Global Services. Managed a worldwide $200M strategic outsourcing contract that included network management, server management, systems management controls, desktop services and helpdesk services for 35,000 employees in 30 Johnson&Johnson operating companies. Was responsible for contract initiation, due diligence, operational and cultural transition and steady state operations. relies on Mr. Thomas for advice regarding e-business solutions, enterprise resource planning, database and software development.

Appendix C – Profile of Primary Online Competitors

Peapod (NASDAQ: PPOD) was founded in 1990 and primarily serves Chicago and surrounding areas. Peapod also serves the San Francisco/San Jose, Boston, Long Island, Dallas, Houston, Austin and Columbus markets. Peapod offers home delivery, however, customers must be home to receive the items. Customers can order up to 14 days in advance, and there are only limited same day orders. Peapod allows payment by credit card, check, or debit card. Peapod has two shopping plans. The first is the Basic Plan, for which there is no membership fee; however, customers must pay $15 per order (in Skokie area). The second is the Value Plan, for which there is a membership fee of $4.95 per month, and customers must pay $4.95 per delivery plus 5 percent of the grocery total per order. Peapod now has 98,000 customers spending an average $100 per order. Initially, Peapod established exclusive regional partnerships with grocery stores like Safeway and Kroger where once orders were placed on the Peapod Web site, Peapod employees traveled to these existing stores and picked up the ordered items. Peapod is now rolling out a centralized warehouse-based model nationwide.

Netgrocer, located in New York, serves the entire nation by delivering items via Federal Express. The delivery rates are $2.99 for orders up to $50 and $4.99 for orders over $50, with additional fees of $.99 per 10 pounds. Netgrocer sells only non-perishables and does not offer same day service. It does, however, guarantee a delivery date of 1 to 4 business days, and although there are no membership fees, the service requires that customers pay with a credit card. Netgrocer is the most immediate competitor for since it delivers within the Denver Metro area. However, it only has approximately 5,300 SKUs of products, which is close to one-fourth of ’s selection.

Streamline, Inc., located in Westwood, MA, offers pick-up and delivery of groceries as well as other consumer goods such as videos and dry cleaning. Deliveries are dropped off in a service box (refrigerator, freezer, and shelving) which is installed by Streamline in a customer’s garage or basement. Streamline employees gain access to the service box via a special code that opens the customer’s garage door. Streamline purchases goods directly from wholesalers and then places the items in warehouses in order to maintain control of inventory items and costs. There is a monthly membership fee of $30. Streamline has financial backing from Nordstrom and General Electric Equity Capital Group.

Smart Shopper, located in Boulder, CO, has partnered with local grocery stores such as Leevers and Wild Oats. It picks up items from these stores and delivers them to customers within the community. This service has been in existence for several years but it has gained a negligible portion of the local market share. It does not employ aggressive marketing strategies.

Farm & Home, located in Englewood, CO, delivers prepared meals and grocery items to shoppers’ homes. Currently Farm & Home Foods delivers throughout the greater Denver/ Colorado Springs and Phoenix / Tucson areas. Once a customer orders, first delivery is made in approximately 7 to 10 days. Reorders are often delivered in less time. The service includes meal planning, reordering, recipe and cooking tips. Orders can be placed over the Internet or telephone, and there is no minimum order. The service has been in existence for approximately 12 years and, like Smart Shopper, does not market aggressively and has not gained a significant amount of market share.

Whole Foods (NASDAQ: WFMI), based in Austin, TX, will launch an online service in late spring of 1999. It is hoping that its rapidly expanding retail presence will help its online service become a major player in the organic and natural-foods niche. Whole Foods will initially offer non-perishable items shipped to all 50 states from a central distribution center. Whole Foods plans to offer 6,000 items growing to 10,000 items soon after its launch. Whole Foods plans to offer more than 20,000 content pages related to natural foods.

Appendix D – Perceptual Map of Grocery Marketspace

Appendix E – Future Services Under Consideration

• Meals

• Dry cleaning/alterations

• Photo processing

• Video rental/return

• Florists

• Concert tickets

• Professional sports tickets

• Symphony/theatre tickets

• Ski tickets/passes

• Gift baskets/balloons/cards

• Personal shopping

• Rentals (bikes, skis, etc.)

• Pickup/drop off (car repairs, etc.)

• Drug prescriptions filled

• Wine/beer

• Shoe repair

• Dining recommendations/ reservations

Appendix F – Marketing Communication Vehicle Details

Local Outdoor

To build a visual awareness and capitalize on the target’s tendency to be heavy noticers of outdoor advertising, local outdoor will be a major vehicle for . Specific outdoor venues will include bulletins, posters, the outside of buses, bus shelters, buildings, malls, and Suburban-City transportation (e.g. San Francisco’s BART).

Stock Giveaway[1]

On “opening day” a direct e-mailing will be sent to 10,000 people meeting target specifications offering free stock shares of . This type of promotion has provided great success in generating awareness for companies such as Yahoo! and Travelzoo. Details of this promotion are:

• Direct e-mail recipients to go to ’s Web site and register for 2 shares of stock

• Capture some demographic information when consumers register for the shares

• Motivate recipients to forward the email to friends and relatives with an additional share of stock for referrals

• Continue promotion until total shares dedicated for users is exhausted

• Encourage customers to use service now with a sign that says “how about trying us now and receiving a 10% discount?”

• Include billboard “don’t forget to add me to your favorites”

Direct Mailing

E-mail and post office mailings will be used to increase awareness, build frequency and communicate promotions and specials. In order to avoid alienating consumers who are sensitive to junk e-mails, will not send unsolicited e-mails. Initial mass mailings will be through the postal service and requests for more information will be e-mailed.

Community Sponsorships

Banners and sponsorships of professional teams, local teams and community events will be evaluated in each city. The primary objective is to build a relationship with each city and promote an image that is part of the local community.

Local Newspaper

Advertising will be executed in each city’s top one or two newspapers.

Local Radio

Radio advertisements will be heard during AM and PM Drive Monday – Friday when the target is commuting to and from work.

Flyers

Flyers will be used primarily to build excitement prior to and several months after the launch. In each city, flyers will be distributed in areas frequented by the target such as child care centers, schools, shopping center parking lots, offices, healthclubs, sporting events, and community events.

Merchandising

In order to provide top-of-mind awareness in the home and in the kitchen, magnets will be created with the name and logo for consumer’s refrigerators. These magnets will be distributed at ’s spokes, child care centers, offices and community events (e.g. 10K runs, festivals, etc).

Public Relations

Press releases will be sent to local media (TV, radio, print) in each city prior to and after the launch. These releases will include details regarding the business, products and services offered, the mission of as well as the story. Recognizing the successful partnership between The Rosie O’Donnell show and E-Bay, will also pursue community service and charity programs in partnership with local media (e.g., morning news shows) to make meaningful contributions to worthy local causes and build awareness through mentions on the local media.

Corporate Partnerships

Sponsorships with major companies in each city will be established. In return for access to company employees, will provide a service that will allow employees to spend more time at their job given the absence of having to go to the grocery store on the way home. will offer free delivery to employees at the company which will not only save consumers $4.95 per order but also allow more efficiencies in delivery costs.

Special Promotions

will use a variety of promotions to both increase brand awareness as well as frequency of use. These promotions include:

1) Giveaways

• In order to create a customer user base quickly, $25 gift certificates will be given away during the third month of operation in each city.

• Waiting until the third month of operation to execute this promotion allows enough time to perfect operations in each city before receiving an unusual volume of orders.

2) Referral Bonus Program

• Customers who refer to a new customer will receive a coupon for $20 off a future order.

3) Loyal Shopper Awards

• Frequently will execute promotions where a customer will receive 5-10 percent off their next order of choice after spending $250 in one month.

Branding

will use its own assets and business tools to increase awareness and create a ubiquitous presence within each market. The URL and logo will be plastered on bags, tote boxes, trucks, spokes, hubs, receipts, and all other interface with the consumer.

Targeted Web site Banner Ads

Several industry analysts say that if you want your Web site to be noticed by customers among the thousands of Web sites out there, you must advertise with banner ads. However, Web users view 425.6 banners per month and only click on 3.78 banners according to CyberAtlas. A study by Inteco Corporation found consumers rate banner ads as the least irritating types of online advertisements. Currently, online advertising only accounts for less than one percent of total advertising spending. Initially, will evaluate targeted sites with a strong presence in each city and sites that deliver extensive information on the particular city (e.g. Citysearch). As expands its geographical presence, it will evaluate using sites such as Excite, Yahoo!, and Amazon.

Appendix G – Denver Metro Marketing Plan

Appendix H – Company Timeline

Appendix I – Organizational Chart

Appendix J – Year One Revenue Projection Model

Appendix K – Annual Expenses

Appendix L – Key Financial Assumptions

| |Year 1 |Year 2 |Year 3 |Year 4 |Year 5 |

|Markets |1 |2 |4 |8 |16 |

|# of hubs |1 |2 |4 |8 |16 |

|# of spokes @ 6 per |6 |12 |24 |48 |96 |

|COGS |78% |77% |75% |71% |70% |

|Marketing % Sales |9% |8% |7% |6% |5% |

Income Statement

Revenue - derives revenue for each market based on capturing an increasing percentage of target households. Target households are defined as those with two or more persons, educated, dual income, between the ages of 25-44, having used the internet during the past 30 days. Customer conversion rates for the five years start at 1 percent of Target households and increase by 1 percent each year to 5 percent by year 5. No inflation for revenues. $123 per order on average. $4.95 charge per delivery. 5 percent average premium charge.

Gross Margin/COGS - Gross margin is targeted at 22 percent of Grocery Revenue. It is expected that the gross margin will increase to 30 percent as buying power increases. Gross margin reflects the markup to the consumer, credit card fees, and shrinkage. The margin is calculated on Grocery Revenue before premium charges (5 percent) and delivery fees ($5 per order). Traditional grocery stores can expect a gross margin of 25 to 30 percent including warehousing and occupancy costs (typically 5 to 8 percent). Safeway's most recent financial statements reflect 28 percent with Whole Foods at 33 percent. 's numbers do not reflect the warehousing and occupancy costs.

Operating Expense - Rent at hub is $10 per sf, gross, with 3% annual growth @ 50,000 sf. Rent at spoke is $25 per sf, with 3 percent annual growth @ 1,750 per CCC. Van and truck leases are expected to cost $550 and $700 per month. Hub and Spoke labor was forecasted using an average number of orders per hour. It is projected that labor costs as a percentage of sales within each market will decrease from 9 percent to 5 percent over five years due to increased operational efficiencies. Orders per labor hour within each market are projected to increase from .8 to 1.54 over 5 years.

Administrative and General Expense - Rent is $10 per sf, gross with 3% annual growth (hub space) @ 10,000 sf.

Marketing Expense - It is expected that each market will require $300,000 in pre opening expenses including promotions and give-aways. In addition to the pre-opening costs, the marketing budget as a percentage of sales is projected to decline within each market from 9 percent to 5 percent of sales by the fifth year of operation.

Information Systems - Expenses include IT salaries for CTO, CIO, Director of Technical Systems, Director of Product Management, DB Administer, ERP Developer, Middleware developer, Interface Developer, Data Input, and temporary staff. Also included is leasing costs for IT equipment.

Depreciation - 7 years, straight line

Payroll Taxes & Benefits – 30 percent

Balance Sheet

Minimum Required Cash - $100,000 during year 0, $250,000 during year 1, and $500,000 thereafter.

A/R – 1percent of annual sales.

Inventory - 20 days of annual sales, Years 1 and 2 higher due to revenue ramp. Equates to 18.25 turns. 1997 Industry average for warehouses was 18.63 turns per Food Marketing Institute. This includes HABA turns of 5.1 times.

Equipment - Capex is estimated at $687,130 for the Denver market and $636,000 per market thereafter. 3% growth

A/P - 30 days

Valuation

IPO - End of year 5. Valuation of $574MM = terminal value ($518MM) + excess cash Yr. 5 ($56MM). R=18%, g=9.8%.

Appendix M – Revenue Model and Capital Expenditures

Appendix N – Valuation

Business Plan

Principals

Charles Wicht, Chief Executive Officer

Dave Sheanin, Vice President, Culture and Human Resources

Scott Kohla, Chief Operations Officer

Staci Maher, Vice President, Marketing

Christopher Lautemann, Chief Financial Officer

Tim Wolters, Chief Technology Officer

Brad Warkins, Chief Information Officer

Donna Tellam, Director of Product Management

Advisory Committee

Timothy Schiewe, CEO, netLibrary

Sanford Keziah, President, Kindred/Keziah

James Thomas, West Coast Director of e-Business, IBM

Caryn Ellison, CEO, Zand Herbal Formulas

Legal Counsel

Cooley Godward, LLC

March 24, 1999

Table of Contents

Executive Summary 1

Marketing 5

Industry Overview 5

E-Commerce 5

General Grocery 6

Online Grocery 7

Competition 8

Target 8

Consumer Groceries 8

Advertisers 9

Market Research 9

Marketing Strategy 10

Product 10

Place 11

Price 11

Promotion 12

Positioning 13

Operations 14

The Hub 14

Customer Convenience Centers 15

Information Technology 16

Buy versus Build Analysis 16

Build Implementation Plan 17

Phased Web site Development Plan 17

Product Data Development Plan 17

Buy Implementation Plan 18

Contingency Plan 19

Financial Risks 19

Risk of Entry by Competitors 19

Information Technology Risks 20

Culture 21

Financial Summary 22

The Valuation 23

The Offering 23

Exit for Investors 23

Pro Forma Financial Statements 24

Appendix A – Management Team 26

Appendix B – Advisory Board Members 28

Appendix C – Profile of Primary Online Competitors 29

Appendix D – Perceptual Map of Grocery Marketspace 30

Appendix E – Future Services Under Consideration 30

Appendix F – Marketing Communication Vehicle Details 31

Appendix G – Denver Metro Marketing Plan 33

Appendix H – Company Timeline 34

Appendix I – Organizational Chart 35

Appendix J – Year One Revenue Projection Model 36

Appendix K – Annual Expenses 37

Appendix L – Key Financial Assumptions 38

Appendix M – Revenue Model and Capital Expenditures 39

Appendix N – Valuation 40

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[1] Currently there has been some press on the SEC cracking down on this kind of promotion. Attention will be paid to future regulation regarding this promotion.

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ONLINE GROCERS

In October 1997, Charles Wicht finally had enough. After an hour and a half of searching for his regular grocery list at his regular grocery store (which had just been “redesigned”), he arrives at the checkout counter and is greeted by the cheerful checker. “Did you find everything okay?” “You must be joking,” he thought. There had to be a better way. That afternoon the idea for (then called ) was born. Dave Sheanin joined Chuck in February 1998, to work on a feasibility study of the business concept. A distinct work ethic developed very quickly: hard work, lots of laughs, pointed feedback, and no egos. This work ethic has become the foundation of the culture of today. Please refer to Appendix H for a timeline of critical events in the formation and future of .

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Low

PREMIUM GROCERS



40

39

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allows you to spend more time doing the things you like to do with family, with friends, or by yourself.

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This Business Plan is CONFIDENTIAL. The reader agrees to hold all aspects of this plan in the strictest confidence. The use of any materials contained herein without the expressed written consent of the officers of is prohibited.

CONVENTIONAL GROCERS

High

High

Low

Service

Time Savings

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