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From...

Is pizza-by-modem a necessary innovation?

May 27, 1998
Web posted at: 12:30 PM EDT


by Spencer Ante

(IDG) -- In "The Net," that forgettable 1995 movie about a lonely programmer whose identity is erased, Sandra Bullock orders a pizza via her computer. Tim Glass enjoys describing this scene, because it was the genesis of Cybermeals, his online takeout and delivery business.

Three years after the movie came out, Glass wants to satisfy millions of computer users nationwide with a real-life meal-delivery system. Since December Cybermeals has committed more than $50 million to secure exclusive placement on Excite, Yahoo, Lycos and America Online and has signed up 13,000 restaurants to offer menus on its Web site. Glass believes he has the tools to transform the way America eats, all with a few strokes of the keyboard.

"We really see ourselves as the meal channel of the future," says Glass, the company's president. "We think that by 2003 or 2005, we should be in a very good position to dominate the space." Cybermeals, he says, is doing nothing less than "creating a new industry."

But is this an industry worth creating? After all, few things are as easy as phoning up the local pizza parlor or Chinese restaurant. The Cybermeals ordering system is far more cumbersome for consumers, as well as more expensive for restaurants because they must give up a cut of their sales.

Either 39-year-old Glass is a visionary who knows it's crucial to invest heavily today to build the brand of tomorrow, or else he's a perfect example of Internet mania getting in the way of common sense.

Glass has made a career out of turning ideas into businesses. He went to work straight out of high school; in 1986 he cofounded EVAX Technologies, a company that developed a vapor-extraction method to clean up toxic waste sites. In 1991 he founded Remediation Capital, which helped companies outsource environmental activities. The same year he met Brian Cupps, a software developer and entrepreneur, and together they launched Streamline Software, which makes computer-aided dispatch and records-management applications used by police departments.

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After watching The Net, Glass rounded up partners Cupps and Ford Smith, founder of Petsmart, a successful chain of pet supply stores. The trio founded a company called CyberSlice in May 1996 and started taking pizza orders later that year. Deeming CyberSlice a successful experiment, the founders incorporated it into the launch of Cybermeals in June 1997.

Glass is banking on a lot more than Hollywood fantasy. Last year, U.S. consumers spent $207 billion on meals prepared by restaurants, according to the research firm Technomic. And 51 percent of restaurant meals were sold for takeout and delivery, says NPD Group. Last year was the first time U.S. restaurants sold more takeout than eat-in meals. What's more, supermarket sales of "home meal replacement" foods fancy terminology for takeout totaled $12.4 billion in 1996 and are expected to reach $21.9 billion in 2002, according to Find/SVP.

Cybermeals worked quietly most of last year. Cupps modified his law-enforcement software to develop an online-ordering process that translates a customer's order into a voice message. Cybermeals also integrated its restaurant database with geopositioning software that pinpoints all the restaurants within a customer's area.

The company grew from 20 employees a year ago to 150 today. It expects to reach 250 by year-end.

Last December Cybermeals got aggressive. It committed $20 million to a four-year deal to be AOL's exclusive online restaurant-ordering service. In rapid succession, it struck a $16 million deal with Lycos, committed $15.5 million to Excite and forked over an undisclosed amount to Yahoo. Glass says the deals will guarantee the company a whopping 25 billion ad impressions over the next four years, with 4.5 billion impressions in the first year alone.

Even in today's build-and-spend environment, the rapid pace of the company's marketing deals and staffing growth is extraordinary. Cybermeals expects to generate $15 million in revenue this year, which is not nearly enough to cover the costs associated with such accelerated growth.

Cybermeals has 20 to 25 private investors, who have invested $10 million to date. Glass expects to close another round of private equity investment in the next 60 days to help fund the marketing push. The company's deals with portal sites involved "significant payments" up front, says Glass, although he declines to be more specific. Cybermeals will make quarterly payments throughout the remainder of the deals. If the services fail to deliver enough impressions, Glass says, Cybermeals will lower its payment structure.

At the same time it's staking claim to key Internet gateways, Cybermeals is ramping up its restaurant database, a process that has gone slower than anticipated. Though the company previously announced that it would have 25,000 restaurants signed up by the end of last year, Glass now says he hopes to reach that figure by the end of this year.

A recent deal with A&P should help. The arrangement makes A&P the first grocery chain to offer online ordering of prepared meals from its delis and bakeries. Cybermeals will integrate the chain's 700 units into its service and create Web sites for the chain's operations, which include A&P, Farmer Jack, Food Emporium, Super Fresh, Kohl's and Waldbaum's. Cybermeals, which will be paid a $300,000 fee for this development work, is in discussions with other major grocery chains to develop similar partnerships.

Cybermeals plans to make the bulk of its revenue by skimming a 3 percent to 5 percent commission off each food transaction done over its system. Glass says the company will generate other revenue streams by selling the consumer data it captures to food service companies and by licensing its technology to European vendors and other foreign operations. Though many restaurants in Cybermeals' database didn't pay anything up front, new entrants are being charged a $300 to $500 setup fee.

Restaurateurs say they're satisfied with Cybermeals, but they aren't exactly singing its praises. In the early days of interactive TV, marketers and retailers bought into experiments to learn the business; one gets the feeling that restaurants look at Cybermeals as a learning experience but not quite the killer app they've been looking for.

"We've been satisfied with the results," says Tom Kish, VP of information systems for Papa John's, the nation's fourth-largest pizza chain with more than 1,600 restaurants. The chain tested the service for three months in Charlotte, N.C., and Austin, Texas. "I really look at this as being the future," says Kish, who says Papa John's is in the final stages of negotiating a national contract with Cybermeals. "It's a little early before anybody's going to see outstanding transaction volumes."

But restaurant owners complain about Cybermeals' voice-ordering system, which converts a customer's typed-in order into a voice that spells out the customer's name, area code and street name in excruciating character-by-character fashion. Cybermeals executives are quick to note that they plan to roll out a new system that will send a customer's order directly to a restaurant's point-of-sale ordering system.

For the small food joints that make up much of Cybermeals' restaurant database, the system hasn't exactly been a cash cow. In San Francisco, Serrano's pizza parlor gets only a couple of orders a week from Cybermeals, according to owner George Correa. But he says he'll stick with the service, if only because it puts his restaurant's name in front of potential customers.

For these mom-and-pop operations, the value is in the online presence they gain, not the order-taking ability.

Large national or regional restaurateurs that have already made significant technological investments will benefit the most from participating in online food-ordering services, says Jupiter Communications analyst Nicole Vanderbilt. Rather than use the Web as an ordering channel, restaurants will drive more walk-in business by offering discounts, coupons and other incentives to online users.

"Online ordering is not going to be a mission-critical application for most restaurants," Vanderbilt emphasizes.

In addition to convincing restaurants to sell online, Cybermeals also has the daunting task of changing consumer behavior. A recent USA Today/Intelliquest survey shows that 60 percent of Internet users are willing to order meals online, but more than 99 percent of takeout or delivery food orders are placed using the old-fashioned telephone, experts say.

To complicate matters, ordering a meal via Cybermeals is a clunky, time-consuming process that involves wading through multiple screens and waiting for confirmation calls and e-mails from restaurants.

The company claims that more than 75,000 people have registered to use the service, but Glass admits that, for now, phoning in food orders is "easier than booting up your computer."

That may explain why there are few other players in the industry Cybermeals is trying to create. While a handful of restaurants serve up online orders, and a few other companies such as Food Near You, NetMeals and MealFinder are attempting to offer nationwide service, no one has spent as much as Cybermeals to develop proprietary technology and market itself.

"It would be difficult to raise that kind of money with our head start," Glass boasts.

Cybermeals executives and restaurant partners are pegging their hopes on a high-profile marketing campaign that started rolling out on the Net this month. Glass says his marketing partnerships with Yahoo and other portal sites means the average Web user will see a Cybermeals ad 1.33 times a week over the next four years.

At some point, Glass' vision of consumers ordering food from set-top boxes with the flip of the remote control, could become a reality.

"What excites me about it is the future," says Glass. "And to successfully predict the future is kind of a rush."

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