Webvan
Webvan: Reinventing the Milkman "Webvan will go down in history either as the next Federal Express or as one of the biggest failed infrastructure bets in history. ... On November 5, 1999, Webvan completed its much-anticipated initial public offering (IPO) and made headlines across the business world. ... As the trading day ended, Webvan had a total market value of more than $8 billion, nearly half the capitalization of grocery industry leaders such as Safeway, Inc. ... 2 Webvan Chairman Louis Borders, founder of Borders Books, felt at once exhilarated and terrified. ... While Webvan had operated for a mere five months in the San Francisco area, more than 10,000 people had signed up for the service - not bad considering that it has taken rival Peapod, Inc. ... Borders was confident that Webvan could prevail over its existing online competitors by expanding aggressively. ... For one, Webvan’s 1999 sales were expected to amount to $11. ... Could Webvan deliver on its huge promise and potential now that expectations had catapulted? Moreover, he suspected, Webvan’s IPO had been a huge wake-up call for traditional grocers. ... What additional, if any, delivery markets and products could Webvan pursue in the long term? Table 1 Webvan - Financial Performance Webvan Group, Inc. ... 18 Source: Webvan prospectus, SEC filing. ... With this goal in mind, Borders founded Webvan, an online grocer that was "arguably the most ambitious e-commerce initiative to date. ... New competitors, such as Webvan and eGrocer, sprang up in the marketplace, while more seasoned competitors, such as Peapod and Streamline. ... WEBVAN’S VISION "We are building the Last Mile to the consumer. ... Using Borders’ analytical expertise, Webvan created a more efficient way to assemble customer orders, store them while in transit, and deliver them to homes within a 30-minute window. Borders estimated that Webvan could achieve 12 percent operating margins compared to the industry’s traditionally low margins of 4 percent. To replicate this system nationwide, Webvan in 1999 signed a $1 billion agreement with Bechtel Group, an engineering and construction firm, to build distribution centers and delivery infrastructure in 26 new markets over the next two years. ... Webvan looked to Federal Express as the blueprint for its hub-and-spoke delivery system, to traditional grocers as the model for maintaining food quality in transit, and to Wal-Mart as an example of breadth of product selection. Webvan’s website emulated Yahoo! ... More than a few people were impressed as Webvan secured more than $120 million from hallmark investors such as CBS, Yahoo! ... In addition, Webvan was able to successfully recruit top, experienced management talent to join its mission. In a major coup, just prior to its IPO, Louis Borders convinced George Shaheen, CEO and 32-year veteran of Andersen Consulting, to forgo his imminent hefty retirement package and become Webvan’s CEO. THE WEBVAN MODEL Building upon Borders’ experience and expertise, Webvan differentiated itself within the online grocery market in two distinct areas: operations and customer service. Operations Webvan’s 80 software programmers created proprietary systems that automated, linked, and tracked every part of the grocery ordering and delivery process. ... The $25 million distribution center, a prototype for the 26 other centers Webvan intended to build, included 4. ... At peak performance, Webvan expected that each facility would handle more than 8,000 orders a day, totaling 225,000 items, and generate annual revenues of $300 million. ... Customer Service Webvan customers could order a shopping list of items and receive the groceries the next day within any specified 30-minute time period. Deliveries could be attended or unattended, meaning that the customer could either be home to receive the order, or the Webvan associate could drop off the order while the customer was away from home. Webvan couriers were not allowed to accept tips from customers, and were thoroughly screened and trained before starting their professional lives as Webvan "ambassadors. ... Additionally, Webvan aimed to provide its customers with 50,000 products from which to choose compared to a normal grocery store that carried 30,000 items. ... Webvan’s market position as the quality-driven gourmet online grocer with everyday grocery prices was an attempt to differentiate itself from competitors. Webvan even employed its own culinary director, who was responsible for creating chef-prepared meals that catered to the lifestyle and tastes of Webvan customers. In addition, Webvan partnered with some highly regarded Bay Area suppliers to offer high-quality produce, meats, fish, and baked goods. _ WEBVAN’S FINANCIAL PERFORMANCE With high operational costs and low initial grocery sales, Webvan’s 1999 losses were forecasted to be $35 million. ... 11 Forecasts called for Webvan to have sales of $518 million by 2001, with an overall loss of $302 million for the year. ... Webvan’s average grocery order, as of September 1999, was $71. ... 12 However, Webvan’s services had only been operational for a few months, so management believed that the average order size would increase over time. Webvan received revenue solely from sales of grocery products and delivery fees. ... COMPETITION Although the online grocery industry was relatively new, a number of companies competed with Webvan in trying to capitalize on its vast potential. ... To keep up with demand -- approximately 100,000 customers in 1999 -- Peapod switched from the personal shopper model to a warehouse model for filling orders, though its warehouses were significantly smaller than Webvan’s.