WebVan Collapse
WebVan Collapse
WebVan Collapse
The grocery business is gigantic, with annual retail store sales that are estimated at $650
billion. However, it is a very tough business because the profit margins are tiny, only 1 to
2 percent of sales. Moreover, the industry is very price competitive. Yet Webvan, which
was founded in late 1996, chose groceries as the way to establish itself as a Web-based
powerhouse.
Aside from the tiny profit margin, on-line grocery sales face other problems.
Most successful Web retail sales involve delivery several days after ordering via parcel
delivery services such as UPS or FedEx. Yet people usually need grocery delivery right
away, and the groceries usually include such spoilables as milk, ice cream, fresh
vegetables, and meats.
Management claimed one distribution center could sell as many products in one
day as 18 metropolitan-area supermarkets. Orders could be entered on the Internet 24
hours per day, every day, and the goods would be delivered from the distribution centers.
The company expected to have only about 900 to1,000 employees per center, compared
with about 2,200 to 2,700 for the supermarkets. The company kept real estate costs low
by having only one large site per metropolitan region, and the sites were located in low-
cost industrial areas rather than in high-priced residential neighborhoods. Thus Webvan
would achieve a much higher operating margin than supermarkets, more than enough to
pay for such added expenses as software and delivery.
The grocery business is difficult to break into. Customers expect high quality and
yet prefer not to pay extra for convenience. Polls show the majority wants to smell the
strawberries and squeeze the tomatoes before purchasing them. The most difficult
challenge is breaking consumers’ habits of actually going to the store.
The original plan was for a rapid rollout in 26 U.S. metropolitan areas by the end
of 2001. Customers included not only people who are at home but also office workers
who would use their work computers to order groceries for home and even order lunches
and snacks for the office. The long-range plan was to expand into other businesses. If
Webvan could deliver groceries to a number of places in a neighborhood, it was set up to
deliver other products as well.
The warehouses had three temperature zones for shelf items, fresh items (such as
vegetables and meats), and frozen foods. Every warehouse had 12 huge carousels, each of
which held up to 7,500 items. An employee stationed at each carousel could stand still
rather than having to move around to pick the items. When they were picked, the items
were placed in totes and moved around using the warehouse’s 41¼2 miles of conveyer
belts.
The ordering process began when customers placed their orders on Webvan’s
Web site. When the order was completed, customers selected an open 30-minute delivery
time slot in any of the next seven days. The delivery optimizer marked slots as taken if
they had already been reserved or if they were too far away from the delivery location of
the new order for on-time delivery.
Webvan also developed a system of ordering products from its suppliers. Webvan
determined what to order based on both actual and expected demand. If an item was not
in the warehouse at the time a customer ordered it, Webvan used a rapid and reliable
communication Web site (harbinger.net) to automatically inform suppliers. Harbinger
software formatted orders for all suppliers and forwarded the orders to them. When goods
arrived at a warehouse, receiving opened the cartons and scanned the products. Shelf
items were put into trays, and the system used a very complex “round-robin” algorithm to
assign each tray to a specific carousel. However, like many of its supermarket rivals,
Webvan did little else to automate its supply chain because it was too small to force its
suppliers to invest in supply chain technology.
Webvan took its first orders on June 2, 1999, in the San Francisco Bay area, and
by the end of June it had nearly $400,000 is sales. On July 8, the company signed a
blockbuster $1 billion deal with Bechtel to design and construct 26 distribution centers
within the next two years, reflecting both the large amount of capital Webvan had raised
and its plan for rapid expansion. In October, George Shaheen, the former CEO of
Andersen Consulting (now Accenture), became the CEO of Webvan. The company was
flying high, even though it had no profit and was spending investor capital rapidly, much
of it devoted to building warehouses.
In February 2000, Webvan announced its average order size had risen from $72 to
$80. By June Webvan had spread to Atlanta, Georgia, and Sacramento, California. At the
same time it purchased a rival, HomeGrocer.com, allowing Webvan to move into Dallas,
Los Angeles, San Diego, Seattle, Portland, and Orange County, California, at a very low
cost while eliminating the need to compete with HomeGrocer for customers.
Webvan was forced into brutal cost cutting. More Webvan centers closed—Dallas
on February 21, 2001, and Sacramento and Atlanta in April of that year. The company
slashed marketing expenses and started charging for deliveries. Borders had been
replaced by Shaheen as CEO, and Shaheen resigned on April 16, replaced by COO
Robert Swann. The company noted that only 6.5 percent of San Francisco households had
ordered from Webvan, and less than half of them had placed a second order.
On July 9, 2001, Webvan ceased all operations, laying off 2,000 employees and
announcing plans to file for Chapter 11 bankruptcy protection. During its short life it had
burned through $1.2 billion in investor capital, making it one of the most spectacular
dot.com failures on record. Since then, the company has been liquidating its assets.
Does Webvan’s demise mean that on-line grocery retailing is a dead end? Or was
the problem Webvan’s ambitious business model? One of the few on-line grocers to turn
a profit is Tesco.com, the on-line arm of the British supermarket chain. Tesco.com serves
nearly 1 million registered customers in the United Kingdom and handles 70,000 orders
per week. It is ringing up annual sales of $420 million. Tesco.com moved slowly into on-
line retailing. It experimented with having customers order groceries on-line and having
their groceries prepackaged and waiting for them at an existing Tesco store. Customers
saved time by not having to cruise around supermarket aisles to pick out products, and
Tesco was able to use its existing infrastructure to provide the groceries. Tesco recently
started to deliver groceries to customer homes near their stores but charges delivery fees.
Shopper order sizes actually grew because households wanted to get maximum mileage
for the delivery charge. Tesco’s on-line customers have increased purchases from the
stores, and people who used to shop in the stores have increased their shopping on the
Web. Tesco used technology to make the existing shopping process more efficient rather
than trying to create an entirely new shopping process unfamiliar to people. But Tesco
also benefits from higher profit margins in grocery retailing in the United Kingdom,
which run around 8 percent. This means that Tesco could lose close to 6 percent on its on-
line operations and still reap the same percentage of profit as U.S. grocery retailers.
1. Describe the Webvan business model and then analyze it using the value chain
and competitive forces models. What were the assumptions that drove this
business model?
2. Describe the role of technology in the Webvan model. What Webvan problems
could computer technology solve, and what could it not solve? Explain your
answer
3. Critique the Webvan strategy and give your views as to whether this strategy is or
can ever be viable. Explain your answer.
4. What management, organization, and technology factors were responsible for
Webvan’s failure? Explain.
Sources: Christopher T. Heun, “Delivery, Anyone?” Information Week, July 16, 2001; “What Webvan
Could Have Learned from Tesco,” Knowledge@Wharton, October 10–23, 2001; “Why Webvan Crashed,”
FTDynamo, July 25, 2001; Miguel Helft, “The End of the Road,” The Industry Standard, July 23, 2001;
Ronna Abramson, “Webvan Checks Out of Dallas Market,” The Industry Standard, February 20, 2001; Saul
Hansell, “Some Hard Lessons for Online Grocer,” New York Times, February 19, 2001; Miguel Helft,
“Amazon.com Sues Webvan over Marketing Deal,” Computerworld, April 3, 2001; Andrew Edgecliffe-
Johnson, “Webvan Job Cuts Dent Online Grocery Dreams,” Financial Times, April 27, 2001; Jen
Muehlbauer, “Webvan Delivers Corporate Welfare,” The Industry Standard, May 17, 2001; “Disaster of the
Day: Webvan,” Forbes.com, January 10, 2001; Nick Wingfield, “Grocer Webvan Reveals Initiatives for
Recovery, Including Job Cuts,” Wall Street Journal, April 26, 2001; Jean V. Murphy, “Webvan: Rewriting
the Rules on ‘Last Mile’ Delivery,” Global Logistics & Supply Chain Strategies, August 2000; “Unlike
Many, Grocers Haven’t Given Up on the Net,” Forbes.com, April 23, 2001; Miguel Helft, “Webvan’s CEO
Resigns,” The Industry Standard, April 13, 2001; Jim Carlton, “Stalled, Webvan Hits New Roads,” Wall
Street Journal, July 31, 2000; Miguel Helft, “Going the Last Mile,” The Industry Standard, November 10,
2000; “Webvan Fails to Deliver,” The Industry Standard, October 18, 2000; “Webvan Goes Shopping,” The
Industry Standard, July 10, 2000; Christine McGeever, “Online Grocer Inks Deals with Consumer Goods
Makers,“ Computerworld, January 25, 2000; Jen Muehlbauer, “Webvan’s Knockin’, But Is It Rockin’?”
The Industry Standard, June 27, 2000; Don Tapscott and David Ticoll, “Retail Revolution,” The Industry
Standard, July 24, 2000; and Rusty Weston, “Return of the Milkman,” Upside Today, February 18, 2000.