Free Food from Priceline.com

Yesterday, I worried that it’s going to be tough for most Internet firms to make profits. And that one day, this could lead the stock market to tank, touching off a vicious cycle of gloom and depressed sales and lay-offs and bankruptcies, leading to even more gloom and even lower stock prices.

(When it begins to hit bottom — when GREED begins to peek out amidst the rubble, but FEAR still clearly holds the upper hand — that would be a good time for a big tax cut. Not now, when the economy is booming.)

I’m absolutely not predicting this will happen. But anyone who believes that it can’t is . . . young.

So let’s take a moment to talk about priceline.com, a fabulously successful (though money-losing) company whose stock is actually down two-thirds from its $165 high this year. At $55 recently, the market still values Priceline at $8 billion. Is it a bargain?

You probably know Priceline from the cheap airline tickets and hotel rooms it can get you. Back to them in a minute. First: free food.

Jack Moubayed: “When I first heard about Priceline moving into the grocery scene, I thought ‘just another wannabe dot-com.’ However, last week, at the super market check out, I was handed a Priceline coupon, so I went home and logged onto their website (webhouse.priceline.com) and tried it out. I was so impressed with the savings that I e-mailed them congratulating them for this wonderful idea. Here’s how it works:

1. Buy your groceries as if you are buying anything online.
2. Pay for the groceries with your credit/debit card online.
3. Print out the shopping list provided by Priceline
4. Go to the nearest participating supermarket (D’Agostino, The Food Emporium, Foodtown, Grand Union, Gristede’s, King Kullen, Pathmark (only in Westchester), ShopRite, Stop & Shop, Super Foodmart, Waldbaum’s) and fill your shopping cart with the items on your Priceline shopping list.
5. Go to check out, swipe your Priceline card (not your credit/debit card), and you’re done! You already paid for the items online.

“I would like to mention here that I paid $27.24 online for my Priceline items and at the supermarket checkout, the receipt read $71.45. [The receipt read $71.45, but Jack never gave the supermarket a penny. His payment of $27.24 had been made, to Priceline, on-line.] That’s $44.21 savings on every supermarket trip.”

Wait. If Millionaire Mike’s experience is any guide, it’s even better than that. (Mike is not his real name, but he is a millionaire.)

“It is unbelievable,” Mike told me, back from the store for the third time this day. “You go in with your list — which you don’t actually have to have, but you bring it to remind you — and you put the things you picked in your cart. You can also put in some other things you want to buy that you hadn’t thought of . . . and if the store doesn’t have exactly what you wanted, or the size you wanted, you can put in a different size or brand.”

“Oh,” I chirped. “So the cash register is smart enough to add the extra stuff to your order and charge you for it separately?”

“NO!” said Millionaire Mike, giddy. “It rings up whatever you bought, and you walk out with a receipt and the stuff you picked off the shelves. But you don’t pay the supermarket anything.”

“Oh,” I said. “So the extra stuff and the changes are added to what Priceline already charged your credit card?”

“NO!” said Millionaire Mike. “You only pay what you paid on line. Don’t you see? No one at the store checks what you walk out with against the list of what you paid for!”

“Oh,” I said. “You mean you just stole a lot of extra stuff.”

Millionaire Mike paused (basically an honest guy).

“Yes,” he said. “And no one even checks! It is unbelievable!”

And so it is.

Even if Millionaire Mike is wrong, and he somehow finds the extra purchases on his Visa card after all, the prices are, according to Jack (who stole nothing), unbelievable.

For now.

But this is a dot.com model that seems loopiest of all.

The airline and hotel stuff I understand. If an airplane seat is empty, the revenue it could have generated is lost forever. If it’s filled, it costs the airline an extra $10 in fuel and peanuts. Anything beyond that is profit. Much the same with hotel rooms (substitute soap and shampoo for peanuts). So priceline.com’s model can work there: If you would not otherwise have flown, and it sells you the $500 ticket for $180, everybody wins. The airline makes $170 it would not have made otherwise, which it can split with priceline.com; the economy is more efficient because fewer seats go empty.

Likewise with the dot-com models that cut out the middleman. One day, books will be delivered straight from the publisher (and in some cases, straight from the author) to your computer. That saves paper, printing, binding, shipping, warehousing, retailing, and your trip to the store. So there’s another model where there’s room to cut prices and everybody wins. The economy is more efficient because it costs far, far less to get a book from the author’s brain to your eyeballs.

But groceries?

I will eagerly buy groceries on-line for the convenience of it, if they’re delivered. I’m happy to pay for that. But where would the economic savings come from? Nothing about the process Jack and Millionaire Mike describe is more efficient. The products cost the same to make and package and ship and warehouse and stock and check out.

So is Heinz suddenly going to accept half-price for its ketchup? Maybe for a week, but permanently? Is Safeway going to start losing billions of dollars by destroying their relatively modest margins?

I can see how, long-term, conceivably, 5% or 10% could be squeezed out of profit margins and marketing budgets to somehow pass on that much saving — maybe. (Actually, I can’t see it, but let’s assume it.) But will Millionaire Mike take the time to go on-line and shop this way, then go to the market and do a treasure hunt, all to save 10%?

It certainly makes sense to take your free money while it’s being offered. But how long can this last? How will Priceline make huge profits from Jack’s $27.24 purchase in order to justify its still-huge stock price? Surely Priceline will have to pay the store something for Jack’s ketchup, and the store will have to pay Heinz something.

When you cut the bill from $71.45 to $27.24, how does that leave room for Heinz, Safeway, and Priceline all to make money?

Which brings us back to the larger question, of Internet profits and stock prices, not just Priceline’s.

Microsoft is a hugely profitable company because, for all practical purposes, it has a monopoly. Everybody runs Windows. Nobody even knows or much cares what it costs. But how is Amazon going to make huge profits? You can buy what it sells anywhere. Price competition is fierce. Yes, it does a great job. And yes, it may even make a profit one day. But huge profits? Tell me again why it’s currently worth more than twice as much as Federal Express?

And the same for the hundreds of dot.coms that plan to make a fortune selling advertising. Everyone plans to make a fortune selling advertising. The competition to sell advertising is likely to get fiercer and fiercer. Can the prices stay high? Can everybody win?

I sure hope so.

Tomorrow: Free Food of a Different Kind