Webvan: The new and
improved milkman
By Gediminas
Sumyla
Mission and vision
• No supermarket company succeeded in building
truly nationwide grocery operation…
• Webvan’s vision was to build a nationwide
infrastructure to solve the logistics problem of this
business and succeed in this complicated market.
Company sought to capitalize on the potential
that online grocery shopping had and use this
opportunity to become the milkman of the twentyfirst century.
• “Our mission is to be the last-mile leader of
Internet commerce, and we own the whole
process from order to delivery," - Amy Nobile,
manager of public affairs
Mission (cont’d)
• Webvan’s mission was also to create and
automated process that was designed to
manage all aspects of online grocery
business, from order taking to delivery.
• Their goal was to take the west coast’s
online grocery market and expand to part of
midwest and part of east coast. They were
hoping to expand to 26 cities in United
States.
History
• Webvan was founded in the heyday of the dot-com boom
in the late 1990’s by Louis Borders, who also co-founded
Borders Bookstore in 1971.
• It launched its San Francisco Bay Area service in June
1999.
• Webvan went public on November 5, 1999 at an offering
price of $15 a share.
• In May 2000, company launched its Atlanta operations
and it expanded to Chicago in August 2000.
• In June 2000, a major competitor, HomeGrocer.com,
agreed to merge with Webvan.
• By the end of 2000, Webvan served 10 markets.
History (cont’d)
• Webvan expected each distribution center to bring in $300 million in
revenue by 2003.
• In the fourth quarter of 2000, company was operating at a run rate of
2250 orders per day in Los Angeles and 2160 in San Francisco.
• 34% of Webvan customers in the San Francisco Bay Area added
general merchandise products to their grocery orders.
• As of June 2000, Webvan purchased through 50 distributors and
directly from 300 vendors, it also sold about 35000 SKU’s up from
15000 when it began its operations.
• In the fourth quarter of 2000, Webvan@work program accounted for
15% of company’s San Francisco Bay Area sales, with an average
order size of $130.
• In January 2001, company opened on its Web site a cobranded pet
store with Petsmart.com.
• Webvan went bankrupt in 2001.
Management team
• Louis Borders – founder of Webvan.
His name is known nationally for the
successful chain of bookstores he founded
with his brother.
• George T. Shaheen – CEO of the company.
He was also a CEO of Siebel Systems.
Huge figure and key player in company’s
development.
Goals and strategies
• Company’s goal was to put together a
sophisticated distribution and iformation system,
optimized from the ground up for e-commerce.
• After it first launched Webvan expected to
construct up to 26 fulfillment centers around the
country within the following 2 years at a cost of
about a billion dollars.
• Company designed state-of-the-art automated
warehouses that could serve an entire
metropolitan market area within a radius of 50
miles.
Goals and strategies (cont’d)
• Webvan created an automated process that was
designed to manage all aspects of the online
grocery business, from order taking to delivery.
• Company implemented an integrated information
technology infrastructure, with different areas of
operation sharing data through a central
database.
• Many tasks such as delivery scheduling, route
planning, purchasing, and billing were automated
and integrated.
Goals and strategies (cont’d)
• Their goal was also to make online shopping quality
equivalent to traditional shopping experience. They
wanted their products to be always fresh and on time.
• Webvan invested more than 50 person-years in
developing proprietary inventory management,
warehouse management, route management, and
materials handling systems.
• Company also used EDI (electronic data interchange)
network to connect to its vendors.
• Webvan invested 1 billion dollars to build its warehouses,
bought a fleet of delivery trucks, bought 30 Sun
Microsystems Enterprise 4500 servers, dozens of
Compaq ProLiant computers and Cisco Systems 7513
and 7507 routers, and other expensive equipment like
huge monitors and luxury desk chairs.
Industry and Market
• U.S. market for food retailing was $484 billion in
2000.
• On average, U.S. households visited
supermarkets 2.3 times per week and spent
about $87.
• In 1999, supermarkets accounted for 77% of
grocery sales and numbered about a quarter of
all grocery stores. The industry was highly
concentrated.
• Resulting economies of scale and scope enabled
supermarkets to charge lower prices, and
competition drove net profit margins to about 1%.
Industry and Market (cont’d)
• Andersen study found that every group of
shoppers was willing to buy groceries
online, and most of the groups showed
strong interest.
• It predicted that 15-20 million U.S.
households would buy groceries online by
2007.
E-Commerce opportunities
• Technological advances have given life to online grocers.
• Previous online grocery distributors failed.
• Webvan started late comparing to other competitors and
can learn from their mistakes.
• Good investors such as Goldman Sachs and Yahoo.
• Huge market, big opportunities and potential to grab the
market share.
• Online grocery companies can charge cheaper prices
because of saving money on labor.
• Opportunity was driven by desire of consumers,
particularly dual-income families, to save time.
• 60% of consumers disliked grocery shopping cause it was
time consuming and many were open to online grocery
shopping and home delivery.
E-Commerce initiative
• A lot of companies failed because of poor business
model.
• Webvan invested huge money in automating processes
and expected to become a “winner takes all” company.
• Online grocery market was still very complicated and
problematic.
• Constant logistics problems.
• Grocery margins were as thin as 2%.
• Packaging and delivery were still very expensive.
• After all that investment Webvan still struggled to make
money and ended up with net losses that kept increasing
from 1999 to 2000.
• Huge investment wasn’t buying off.
• Company was still lacking of costumers.
Perspective analysis
• Technological Drivers of Change
Technological advances have given life to online grocers.
Webvan saw the opportunity to take part of food retailing
market which consisted of $484 billion and used
technology to make all the processes automated and all
transactions online. Technology development and support
were central to Webvan’s operation. Company
implemented a centralized IT architecture, with the same
platform serving the different markets, while allowing for
market-specific features.
Webvan outsourced most of its network operation
functions. Company also hosted its Web and database
servers at AboveNet Communications.
DSIR
• Webvan had the potential in DSIR and hoped to
become “winner takes all” company but it didn’t
happen.
• The problem was that people weren’t switching
from traditional to online grocery shopping at fast
enough speed.
• There weren’t enough demand for online grocery
shopping.
• There weren’t any competitors that can actually
compete with Webvan.
• People didn’t care if others purchased goods the
same way as they did.
Competitive risks
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Main competitors:
Peapod, Streamline, HomeGrocer.com,
NetGrocer.com, WebHouse Club.
None of the competitors had such investements
and automated systems as Webvan.
Webvan had huge advantage over all the
competitors.
All the competitors used different business
models and served different areas which made
competition way easier for Webvan.
None of those companies could actually
compete with Webvan.
Missed opportunities
• Webvan wanted to invest huge money, to take
market and become big. Wished to make huge
money, but it didn’t work.
• They rushed to much into it and burned.
• They should have rapidly grow with slower speed
and observe the market and consumers.
• This would have helped Webvan’s management
team to make decisions.
• Instead of sticking to the idea of “go big, and do it
quick”, they should have thought of “go, think,
react” strategy.
Why they failed
• Rapidly disappearing cash reserves.
• Continuous NET losses.
• Company was too aggressive about expansion into
multiple cities, combined with an overly complex website.
• Webvan was also too optimistic about people's
willingness to ditch traditional grocery stores in favor of
something new and different.
• Lack of customers.
• It tried to get too big, too fast.
• A recent Jupiter survey found that only 2% of Web users
had bought groceries online in the last year.
• Webvan suddenly found itself with an extraordinary
amount of infrastructure and without the ability to get to
profitability.
Conclusion
• Technology wise Webvan was ahead of the
competitors, market and time, but it didn’t
have and couldn’t get enough customers to
use profitable all of that automated
infrastructure.