Online grocery start-up valued at more than $4bn in two months

An online grocer and drugstore start-up, which opened its doors only two months ago, has just sold a 6.4 per cent or $275 million stake in the company, valuing it in excess of $4 billion.

Privately held Webvan, which sells fruits, vegetables, over the counter drugs and other groceries over the Internet in the San Francisco and Bay area, has raised a total of about $400 million in financing, but said it would use the $275 million to help fund national expansion. Analysts estimate that it already services about 15,000 customers.

The transaction follows a $1 billion order from Bechtel Group to build highly automated warehouses in 26 new markets over the next two years. Bechtel develops and manages capital projects and facilities, including Hong Kong's new airport.

Chris Mannella, Webvan's vice president of marketing, claimed that the firm’s highly automated facility would enable it to save more than 10 per cent on the costs incurred by online rivals.

"The size of our distribution centers and our recent funding will allow us to push through a higher volume of groceries and deliver benefits to a larger number of clients," he said.

But according to research from Jupiter Communications, the online grocery market is likely to grow to only $3.5 billion in 2002 from $350 million in 1999 - less than one per cent of the total US market.

Webvan, which was set up in 1998, claims that its prices are up to five per cent less than local grocery stores and that delivery is free for orders of $50 or more. It expects to open its second warehouse in Atlanta early next year.