cnbcs200

Webvan’s Days Appear Numbered


By Hal Plotkin
CNBC.com Silicon Valley Correspondent

Feb 8, 2001 09:00 AM

Quick, what are you going to have for dinner a week from now?

If you’re like most people I know, you haven’t got a clue.

Now take a good look in the mirror, because consumers like you are the main reason online grocer Webvan Group Inc. {WBVN} will likely go under before most Americans ever see the company’s shiny new trucks in their neighborhoods. Webvan, you see, was counting on millions of busy Americans like you to get with the program.

The fact that you didn’t speaks volumes about how Silicon Valley lost touch with reality in the late 90s. And understanding what went wrong is a useful lesson for investors to keep in mind as they look for new tech-based businesses to bet on. The lesson: No amount of cutting-edge technology can compensate for a flawed premise.

Webvan’s high-profile CEO, George Shaheen, of Andersen Consulting fame, is still trying to pull off a miraculous turnaround. Barring that, however, it appears the company may have trouble surviving past the end of this year when the money-hemorrhaging firm plans to seek additional funding. With union organizers beginning to circle the company there’s also the possibility a mercy killing might end it all well before then.


Post-IPO Stock-Performance of Webvan Group Inc.

Late last month Webvan indefinitely postponed plans to roll out its home grocery delivery service in Northern New Jersey, Washington D.C., and Baltimore. The capitulation to reality was the latest setback for a company that has seen its stock drop more like a guillotine than a falling knife. This week Webvan shares could be had for less than a pack of chewing gum.

Less than a year ago, you’ll recall, many analysts were predicting a bright future for Webvan shareholders.

“If you’re willing to be patient and wait a good year or so, I think you’ll see some pretty good returns,” promised Jeetil Patel, an analyst at Duetsche Banc Alex. Brown, based in San Francisco, just last July when the stock was trading at about $8 a share.

Obviously, it hasn’t turned out that way.

Most observers have been casting blame for the poor performance on the company’s high costs coupled with the traditionally thin margins in the grocery business.

In this case, the flaw was the belief that massive investments in new highly automated warehouse facilities would create efficiencies that could be passed along to grocery shoppers in the form of a virtually free home delivery service. The warehouses cost $25 million apiece and were the lynchpin of the company’s business plan, which was initially capitalized at more than $120 million, roughly five times what the average Internet start-up received at the time.

It was faith in the company’s superior warehouse technology that led Webvan’s backers to ignore operational problems at the many other firms that had previously targeted the online grocery niche without much luck.

But the warning signs were there.

More than 30 other online grocery firms were already up and running in one form or another, most with very limited success, when Webvan stepped up to the plate. The stock of San Francisco-based Peapod Inc. {PPOD}, for example, was languishing well below its initial offering price in the weeks immediately before Webvan pulled off its splashy November, 1999 IPO. (Like Webvan, Peapod’s stock is going for under a dollar today).

Webvan’s backers claimed, however, that the company’s spiffy warehouses would make all the difference between it and the also-rans, all of which manually picked their groceries right off the shelves of conventional neighborhood supermarkets at the time.

But it turned out there was an even bigger, more intractable problem, one that, on reflection, really shouldn’t have come as that much of a surprise: Well-ingrained consumer habits are very, very tough to break.

I’ll use my own experience as an example.

My wife and I tried Webvan’s service shortly after it started up here in the San Francisco Bay Area.

The service was a delight. As first time customers we got $10 off our initial order, which showed up right on schedule slightly more than 24 hours after we hit the “confirm purchase” button. That was the first delivery window available.

The driver carried the groceries into our house and unpacked them from their attractive blue carrying crates right onto our kitchen table. He even gave us some neat refrigerator magnets and other cool little doodads. Everything arrived just as ordered at prices that were, for the most part, competitive, although certainly not better than we could find in our local discount market.

We used the service twice more after that – and have never used it since.

So what stopped Webvan from being more than a fleeting novelty in our house?

Ironically, the one thing it was supposed to deliver but didn’t: convenience.

Like most working couples, my wife and I are busier than we care to be. We pretty much already have all we can handle keeping on top of the basics, our jobs, managing financial accounts, scheduling visits with friends and family, and juggling our volunteer activities. We’re exactly the type of computer-savvy consumers a time-saving service such as Webvan should appeal to.

But like a lot of consumers, we’re also not the greatest of planners, especially when it comes to meals.

I realize there are people out there who do their meal planning one week or more ahead, which would make them better candidates for Webvan’s service. But judging from the hoards of shoppers who crowd our local supermarket right before dinnertime, most busy Americans aren’t among them. At least, not around where we live.

What’s more, it seems to me that the type of person who plans out meals a week or more in advance is also the type of person who is more likely to go shopping for what they need at places where they can buy it least expensively. If you’re worried enough about your budget to plan meals days ahead of time you’re probably not comfortable sitting on your fanny and having someone else deliver those groceries to you even if the prices are only slightly higher than you might find elsewhere. The service also appeals to shut-ins, of course, but that’s another group hardly known for its big spending ways.

Webvan’s beleaguered officials, of course, dispute all this.

In fact, the one highlight of Webvan’s otherwise dismal fourth-quarter report released on January 25 was the eye-catching claim that repeat customers accounted for 86% of total orders during the preceding quarter, a period when Webvan’s registered customer ranks reportedly swelled to 640,000, up from 520,000 three months earlier. The average order size for the year-ending quarter was also up, hitting almost $112, an increase of 9% over the $103 reported three months earlier.

That means that Webvan has, not surprisingly, attracted a core group of dedicated customers who unlike my wife and I have found a way to successfully integrate the home delivery service into their day-to-day lives. I’ve talked to some of these customers and I know they are truly fanatic about the company.

The problem, however, is it appears there just aren’t enough of them. More troublesome, the most dedicated Webvan customers apparently don’t live close enough to each other for the company to make much if any money serving them.

Oftentimes, for example, I see Webvan trucks parked at the side of the road in our neighborhood, with the driver listening to the radio or thumbing through a newspaper. Webvan drivers, of course, are required to make their deliveries on time. To its credit, the company bought enough trucks to make that happen. But the flipside of that is that when a driver gets ahead of schedule he or she must sit and wait until the time of their delivery arrives.

Needless to say, paying drivers to sit around and wait is not part of the business plans of the services that have figured out how to make money by delivering stuff, such as FedEx and UPS. I don’t know about where you live or work, but the FedEX driver who makes stops at our location looks more like a blur than a bump on a log.

This is not to say the Internet and the grocery business will never intersect.

More likely, things will eventually turn out more along the lines that Rob Labatt, an analyst at Dataquest, based in San Jose, California, first suggested early last year.

Labatt was one of the few skeptics on Webvan. He maintains that pre-existing brick and mortar grocers could make even better use of the Internet by offering a service that allows shoppers to use the web to select groceries that are then picked and packed for them at their local store within a few hours. That way, a shopper could decide what they want for dinner around 3pm, hit their keyboard while looking after their kids, and then make a quick run over to the market later the same day to pick up their groceries, maybe even at a drive thru window.

Now that would be convenient.

Several big grocery chains are reportedly looking into the idea and one or more might roll out market tests before long in a few carefully targeted areas to gauge consumer reaction, proceeding from there only if the operations are profitable.

In the meantime, however, it looks like most of the rest of us are probably going to have to continue doing our own grocery shopping, at least for the foreseeable future.

CC BY 4.0
This work is licensed under a Creative Commons Attribution 4.0 International License.