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Intelligent e-tailing: Avoiding Webvan's Mistakes

by Tapan Munroe
Aug 1, 2001
(TMA Global)
Although the U.S. retail sector continues to show signs of improvement in 2001, considerable concern
regarding "e-tailing" has been expressed in light of the recent bankruptcy filing by cybergrocer
Webvan.com.
With the bankruptcy filing, the company laid off 2,000 employees and inflicted a severe financial blow
to its investors. Between its initial funding in 1996 and its filing of bankruptcy, Webvan.com went
through a staggering $830 million. Venture capital firms holding the short end of the stick include VC
icons such as Benchmark Capital, Sequoia Capital, Softbank Corp., the Barksdale Group, Yahoo! Inc.,
and E*Trade Group Inc.
The failure of the premier online grocer will serve as a classic business school case study for years to
come on how not to plan a business. There are many reasons for Webvans failure, including:
1.

An incorrect business model. The company erroneously assumed that it was in the
technology business, not the grocery business.
2.
Managements lack of retail food experience. Webvan was an online supermarket run
by consultants, "techies" and others who were made officers and directors, even though they had
no retail food experience. Even CEO George Shaheen, former chief of Arthur Andersen Inc., had
little or no food-related experience. Because grocery stores operate on very thin margins, even
the most effectively managed can lose money. Webvan founder Louis Borders, founder of
Borders Books & Music, was an expert in selling books, but books do not expire or spoil.
3.
A lack of understanding of the sociology and psychology of retailing food. Webvans management did not grasp how consumers shop for food. People go to supermarkets to
look at and even feel the merchandise. Buying food is a tactile experience and a social event as
well. Customers like to speak to the grocer, the butcher or the wine department manager, for
example. There must be a special reason for people to forego supermarket shopping.
4.
Lack of demographic understanding. Webvan located major warehouses in Atlanta and
Los Angeles, where people are used to driving and would rather drive to a store than wait for
delivery. Only transplanted couples who hailed from congested metropolitan areas and who both
work warmed up to the Webvan idea. Webvans problems were exacerbated in Californias
Orange and San Diego counties, both of which have large Latin American and Asian populations.
These customers were already being served by local grocers who catered to these ethnic
communities much more effectively than Webvan could.
5.
Erroneous target marketing. The most obvious customers for Webvans services were not
soccer moms or the upscale suburban families the company targeted but people who have problems getting to a grocery store. Obvious potential customers were senior citizens, college
students, mothers with very young children, handicapped individuals, late-night workers and, of
course, upscale dot-com workers.
6.
The high cost of running an online grocery business. The cost for building Webvans
high-tech Atlanta warehouse alone was a staggering $40 millionmuch more than warehouses
for traditional retail grocery chains. Webvan used the latest technology to automate its
warehouses, bought hundreds of refrigerated delivery trucks, and hired and insured drivers
allover the country.
The demise of Webvan does not mean that the online retail industry is unviable. According to the
trade group Shop.org, 72 percent of catalog retailers, 43 percent of store-centered retailers and 27

percent of online retailers were running profitable Web enterprises at the end of 2000. The key to
their success is that they understand that the Internet is just one more alternative in a portfolio of
communication options.
Some of the more successful e-tailers include:
1.

WalMart.com. The company has benefited significantly from redesigning its Web site and
focusing on items that its customers have demonstrated they want to buy online rather than
offering all of the products it sells in its stores.
2.
Amazon.com. The company consistently attracts large amounts of online traffic through key
partnerships and by selling items that range from CDs to toys, tools, electronics and prescription
drugs. The company is the largest online bookseller and is likely to become profitable by the
fourth quarter of this year.
3.
1800flowers.com. Selling fresh flowers and gifts via its toll free numbers as well as the
Internet, this company succeeded by establishing good communications with customers. Among
its offerings are live chats and e-mail linkage with patrons.
4.
Sephora.com. This online cosmetic company did what the dot-com world initially
considered blasphemous-it established traditional retail outlets to bolster its Internet sales.
Realizing that selling its products on the Web alone was not sufficient, the company was a pioneer of the "clicks and bricks" strategy.
The next generation of New Economy grocery stores includes such Old Economy mainstays as
Safeway and Albertsons. In the days since the demise of Web van, Albertsons has seen a sudden surge
in online orders through its Web site (www.albertsons.com). The company uses its stores as
distribution hubs and also plans to accept online orders for customer pickup-no expensive trucks,
drivers in starched uniforms or $40 million warehouses.
Safeway is partnering with Tesco, a United Kingdom-based multinational grocery chain that has
successful Internet experience, to take advantage of Web opportunities while avoiding Webvans
mistakes.
E-tailing does work. By using the Internet intelligently, old-economy grocers such as Safeway and
Albertsons, far from being dinosaurs, are the wave of the future.

http://tran-ecommerce.blogspot.in/2011/01/webvan.html
http://www.supplychainbrain.com/content/industry-verticals/retail/single-articlepage/article/webvan-rewriting-the-rules-on-last-mile-delivery/

Why did Webvan fail so spectacularly?

A spectacular case study!
For the first part of the question, here are some major reasons why Webvan failed.

From the supply chain management perspective, we need to consider the six performance drivers,
namely facilities, inventory, transportation, information, sourcing, and pricing. Among these, Webvans
costs of facilities, inventory, transportation, and information (including software) are much higher in
comparison with traditional supermarket supply chains. For sourcing, Webvan needed its employees
to pick items for orders instead of customers doing this at a bricks-and-mortar store. So, it added extra
labor costs for handling customer orders. All of these higher or extra costs were applied to the grocery
industry, where margins were only 1% to 1.5%. To make the matters worse, Webvan advertised that
its prices were 5% lower than conventional stores. All of these resulted from its hope that the number
of customer accounts would be high enough to make profits after three or four quarters. In reality, the
number was far below the forecasts and the company kept losing money. Clearly, Webvans supply
chain design was too expensive to be profitable and too elaborate to operate efficiently and effectively.

From statistics and forecasting perspective, Webvan came out during the heyday of Internet
companies when there were not enough stories of failures from history to tell and learn from. Thus,
timing also played a role here with overly optimistic numbers and forecasts such as 5% of US
households would buy groceries online in a few years and online grocery market would be worth $3.5
billion in 2000 and $6.5 billion by 2003. In this high spirit, Shaheen saw the market as $1.5 trillion, an
IDC projection for 2003, which encompassed all web-based purchases. Based on these fantastic
numbers, Webvan CFO insisted that Webvan would be highly cash generative and that the DCs
were likely to operate at breakeven capacity within five quarters of being launched. In reality, it had
not hit this target after six quarters since the launch.

From strategy perspective, the management team was too confident and ambitious. They wanted to
do everything everywhere in a huge scale. Consequently, they went against their original strategy of
providing a more cost-effective solution. They acted hastily in building huge, expensive, and
complicated DCs. At the same time, they invested money for plans to expand into various US regions
at the same time. They also announced projections that were almost impossible to be realized such
that if everything went according plan, Oakland DC would be profitable within 6 to 12 months and
other DCs might break even in 60 days. Even a tiny company never has everything going according
plan, let alone company with complicated information systems and huge infrastructures as Webvan.
Naturally, they should have been prepared to get several unexpected problems and thus, that
statement should have never been made. They hoped to get 8,000 orders a day from Bay Area DC to
make operating margin target of 10% to 12%. In reality, after six quarters, the averaged number of
orders was only 2,160, too far below the projection.

Note that all the changes later, including partnerships and Homegrocer acquisition, could not save
Webvan due to either ineffective and inefficient designs and implementations or being done too little
too late.

And the second part, here are some major reasons why Webvan failed spectacularly.

First, its funding happened so fast and spectacularly. In 1999, it was the most funded for an Internet
company with $400 million. Its first day of trading, at one point, it mounted to $15 billion capitalization.
It raised a total $800 million. All of this funding and market valuation happened for a company with
only $4 million in revenue at that time.

Second, its dream team was included so many senior executives experienced in a broad range of
industries with well-established companies such as Borders Books, Goldman Sachs, Oracle, and
FedEx. With these diverse experts, who could imagine Webvan would fail?

Third, for the three straight quarters in 2000, it had been voted the best online grocer of 12 in a
survey. This means, customer satisfaction was achieved well.

Fourth, in the last quarter of 2000, only 6 months before it closed for good, it posted a gross margin of
27%, highly competitive with large conventional grocers.

Finally, the time it took to fail was also dramatic. It closed its doors less than two years since its
heyday on November 5, 1999.