Name your problem at Priceline

Gas, grocery shutdown just latest woe for site

William Shatner's offbeat commercials for Priceline.com took the site where no online auctioneer had gone before, but the company's stock has fallen from a high of $165 to less than $6 per share - a cautionary tale for would-be electronic retailers, say analysts.

In the past month, Norwalk, Conn.-based Priceline.com Inc. has found itself kicked out of the Better Business Bureau of Connecticut for a failure to respond to customer complaints and under investigation by Connecticut's attorney general. The investigation is exploring whether Priceline has fully and accurately disclosed product terms, prices and conditions.

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Priceline's Gas, Grocery Licensee To Shut Down

WebHouse Club, a licensee of Priceline.com Inc. offering name-your-price service for gasoline and groceries, said last week it will go out of business in 90 days.

The Greenwich, Conn.-based company said it didn't anticipate being able to raise the necessary capital to keep its business going and achieve profitability. Its $70 million in cash reserves and working capital will be "more than sufficient to satisfy all obligations to customers, employees and suppliers," WebHouse Club said in a statement.

Customer service at WebHouse Club will remain fully operational until the company shuts down, the statement said. All customers with unredeemed gas and grocery purchases will receive a full refund of any prepaid amount and extra money to cover the estimated savings for gas and groceries.

WebHouse Club served 2 million grocery and gasoline customers, 7,200 grocery stores, 6,000 gas stations and about 125 consumer packaged goods manufacturers.

Rob Leathern, an analyst at Jupiter Communications Inc. in New York, said Wall Street hasn't been very tolerant of allowing start-up online businesses to build from their core.

"It didn't offer a value proposition to consumers and manufacturers," said Rob Rubin, an analyst at Forrester Research Inc. in Cambridge, Mass. Consumers would save money initially but save less the more they used WebHouse Club, he said. Manufacturers didn't buy into the service because consumers were purchasing products based on price, not brand, Rubin said.

WebHouse Club didn't return calls by press time.

The bad news continued for Priceline. Another affiliate, Perfect YardSale Inc., has ceased operations. Perfect YardSale offered used merchandise to consumers at Priceline's Web site.
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In the past four months, Priceline's stock has fallen from $40 per share to $5.81 on the Nasdaq ticker, as of last Thursday. That same day, Priceline announced it was shutting down its grocery and gasoline sales operations.

Analysts fault the company for thinking low prices and glitzy packaging alone would pave the way to profitability.

Approximately 70% of Priceline's business comes from the sale of airline tickets. Airlines sell their difficult-to-move seats via Priceline at rates below their usual published fares. Yet Priceline often requires travelers to make multiple connections or fly at undesirable times to achieve those savings.

Customers must also agree to buy a ticket at a given price before they know the airline or time of departure.

"In the process, it's almost become a nefarious brand name," said Henry Harteveldt, an analyst at Forrester Research Inc. in Cambridge, Mass.

He said Priceline's focus on letting customers name their own price has neglected customer service. "You have to support what you sell, and Priceline's been weak in that area," Harteveldt said.

Krista Pappas, an analyst at Gomez Advisors Inc. in Lincoln, Mass., said Priceline may have capitalized on the first wave of Internet commerce, but it failed to keep up with the pace of innovation.

"New business models have come along, and now Priceline's sort of dated," she said. "You don't live long on the cutting edge these days."

One of those business models is San Francisco-based Hotwire.com, a beta site due to launch by month's end.

Hotwire is owned by many of the airlines that have been selling via Priceline. Harteveldt said he believes those airlines will gradually reduce the number of seats they make available to Priceline, leaving it struggling to deliver products to its customers.

Priceline spokesman Brian Ek said the company still intends to expand into new markets, including business-to-business auctions and insurance. He also said the company believes it can retain a strong customer base because people surfing the Web for tickets will always stop at Priceline to see if it can beat their best price.

"Ultimately, what's going to carry the day is going to be brand, and who's got the brand?" Ek said.

Yet Fay Landes, an analyst at New York-based Sanford C. Bernstein & Co., said she thinks that Priceline's business model has it skating on very thin margins. "How are they ever going to make money off of cheapskates?" she asked.

Priceline went public in April of last year, and its stock was trading at $165 per share within a month. The company built its name on innovation and consumer-driven pricing. Yet, Harteveldt said, "their time in the sun is over."

He said Priceline can right itself and chart a course to profitability, but "the ongoing livelihood of the company is going to depend on the business decisions they make" over the next year

Heath Terry, an analyst at Credit Suisse First Boston in San Francisco, said Priceline needs to redefine objectives when it makes quarterly earnings public Nov. 2.

"Investors need to know that management has plans. Are they going to focus on travel, or are they looking to expand?" he said. "But they'll need to see something more than what's there at the moment."

Copyright © 2000 IDG Communications, Inc.

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