Webvan checks out

Five years and $1bn after its inception, US online grocer Webvan has made its final delivery. Stephen Phillips explores the...

Five years and $1bn after its inception, US online grocer Webvan has made its final delivery. Stephen Phillips explores the boldest online gamble of them all

Sifting through the rubble of failed online grocer Webvan is like turning the pages of a high-octane thriller. Before it careened into bankruptcy on 9 July, the Foster City, California-based retailer had burned through a staggering $830m (£586m), taking investors for a $1.2bn (£84m) ride (only topped by Amazon in e-business funding) in its tumultuous four-and-a-half-year life.

Webvan stands as perhaps the boldest all-or-nothing gamble of all. Putting his own fortune on the line, US bookstore magnate Louis Borders bet on creating the number-one Internet supermarket. "They shot for the moon," says GartnerGroup analyst Whit Andrews.

But Borders knew the risks. Asked early on if Webvan would be a billion-dollar business, the founder told Randall Stross in his book, eBoys: "It's going to be $10bn (£7bn) or zero."

Nevertheless, the stars seemed aligned as Webvan went live in mid 1999. It had already done due-diligence during two years of operating in stealth mode, eyeing a rich seam of demand for buying groceries online from cash-rich but time-poor young urban professionals.

Borders quickly assembled a crack management team for his brainchild. In one of the most audacious executive raids of recent years, the virtually unknown start-up poached George Shaheen, the chief executive of top-five consultancy Accenture (at the time Andersen Consulting), to spearhead operations.

Nevertheless, Webvan sowed the seeds of its downfall in its over-hasty expansion, say analysts. Flush from a $275m (£194m) venture capital funding round in April 1999 and a $375m (£265m) IPO, the firm sketched plans to enter 25 markets at a cost of $1bn (£700m).

At its peak, Webvan's operations straddled 10 US cities, including San Francisco, Los Angeles and Chicago, employing 3,500 staff. In each market, the pure-play dotcom had to replicate the storage and distribution networks of bricks-and-mortar retailers.

Traditional supermarkets make just $2-$4 (£1.4-£2.8) on every $100 (£70) in sales after overheads. With an already slim margin for profit, Webvan chose to absorb $10-$15 (£7-£10) delivery costs per order to attract customers.

Add exorbitant marketing costs - estimated at up to 30% of sales - from promoting a new brand and purchasing model to consumers and you have a profit-proof business model, say analysts. "Maths was not in Webvan's favour," says Robert Rubin of the Forrester Group.

Meanwhile, despite its loss-leading strategy, the mass market that Webvan had been banking on didn't materialise. Although it built up a 46% share of the US online grocery market, according to Jupiter Media Metrix, the firm took less than half the 8,000 orders a week each of its warehouses was equipped to handle.

Less than 1% of the US population bought groceries online in the past year, a recent Jupiter survey found. "Webvan has proved that right now the online grocery market is niche at best, and this won't change until there is far greater Internet adoption," says Jasjit Mangat of retail industry consultancy Swander Pace & Co.

Stranded years adrift of profitability as the investment climate turned against further funding for firms without the prospect of near-term profitability, the writing was on the wall for Webvan long before the actual end came.

The remaining players are more low-key than their erstwhile competitor. Chicago-based Peapod, plucked from the brink of bankruptcy by Dutch supermarket chain Royal Ahold NV, has no plans to expand beyond current operations in five US cities, says chief executive Marc Van Gelder. "It's evolution rather than revolution."

The firm will only trade in cities where it can harness its new parent's US infrastructure, says Van Gelder. Joining the exodus from the Webvan-style e-business model, Peapod has also closed many of its centralised warehouses since being taken over. Retailer Toys R' Us folded its dot-com arm into a joint venture with Amazon last June to tap the online retailer's storage and distribution network.

Meanwhile, Dallas-based GroceryWorks closed its warehouse-based online business in July, announcing plans to resume operation using US supermarket chain Safeway's Texas stores.

Britain's Tesco recently paid $22m (£15m) for a 35% stake in GroceryWorks, half owned by Safeway, opening up its first US bridgehead. Tesco is bidding to export its successful clicks-and-mortar business formula.

It is currently the only profitable online grocer, counting one million Internet customers and 70,000 orders a week, bringing in $420m (£296m) in yearly sales. With Webvan joining other dot-com casualties - Streamline, Kozmo.com, Shoplink.com and PDQuick - the future of online grocery shopping will look similar to the high street, say analysts.

"Bricks-and-mortar retailers that are building online extensions can leverage their existing customer base and offer value-added service to premium customers," explains Rubin.

"Customer acquisition cost is thus reduced [compared with pure-play dotcoms] because they can advertise at checkouts and on receipts as well," he says. As for Webvan, with hindsight it looks very much a creature of its time. Founded at the height of Internet investment mania, it conformed to then-received wisdom that e-businesses needed to spend as much as it took to conquer virgin Internet markets, and think about making profit later.

Ultimately, belying its management credentials, operational mis-steps, as well as overambition and changing market conditions characterise Webvan's downfall. The firm botched its acquisition of Seattle rival Homegrocer.com and continued to spend lavishly, even as creditors closed in.

Visitors to the San Francisco giants' plush baseball stadium can still place their liquid refreshment in the Webvan cup-holder adorning each of the 41,000 seats.

The company was already tottering when promotion began in April, and the cup-holders and billboards with the revamped Webvan logo were all paid for while the company was in trouble.

Webvan had hoped its gleaming fleet of delivery trucks would become icons for the New Economy. Instead, it lives on as a poster boy for dot-com excess.

The life and times of Webvan

December 1996
Louis Border starts business in stealth mode, choosing deliberately cumbersome name of Intelligent Systems for Retail to pass beneath the radar of potential rivals. The goal is to become the online supermarket to the world

April 1999
Webvan clinches $275m (£194m) in its fourth venture capital round, bringing its funding total to $393.4bn (£277.6bn) before operations even begin

June 1999
Webvan goes live, delivering anything from fresh steak to hair conditioner to consumers in and around San Francisco from an Oakland warehouse

September 1999
In a coup for the New Economy, George Shaheen ditches his $5m (£3.5m) a-year chief executive post at Andersen Consulting to head Webvan

November 1999
Webvan goes public in $375m (£265m) IPO. Shares peak at $34 (£24), valuing the company at more than $8bn (£5.6bn)

March 2000
Decline already setting in. Shares sink below $10 (£7), never to recover as losses escalate

June 2000
Webvan buys rival Homegrocer.com for $2.1bn (£1.5bn) in shares. Acquisition fails to deliver expected efficiencies amid integration problems and culture clashes

February to June 2001
Borders quits as chairman and Shaheen as chief executive. Battling mounting losses and the ignominy of being delisted from Nasdaq, Webvan exits three markets, sacks 1,150 staff and proposes a 25-to-1 reverse stock split.

July 2001
Webvan files for bankruptcy and lays off remaining 2,000 employees.

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