Webvan Group, Inc

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WEBVAN GROUP, INC.

Webvan Group was an online grocery delivery service that operated between mid-1999 and mid-2001, when it ceased operations, shut down its World Wide Web site, and filed bankruptcy. During its short history, Webvan spent roughly $1.2 billion in capital, a fact which earned it the distinction of being one of the most costly failed Internet startups to date. Most analysts agree that the young business attempted to expand too rapidly into other goods without first ensuring its core grocery delivery operations were stable.

It was Louis Borders, the founder of the Borders bookstore chain, who established Webvan in 1999. Borders had started raising capital for his business, incorporated as Intelligent Systems for Retail, in December 1996. By April of 1999, Borders had amassed roughly $122 million in capital from Benchmark, Sequoia, and other venture capitalists. Visualizing a vast delivery service that handled all types of online orders, Borders decided to start with groceries. This decision posed problems for Webvan right from the start. According to InfoWorld writer Dylan Tweney, "Webvan, despite appearances, is more than just an online food vendor. It's a bold—and expensive—experiment in direct-to-consumer product distribution." Yet, as Tweney explained, the delivery of fresh food was much more difficult than the delivery of books or CDs. "You can't just pop a carton of eggs into a FedEx mailer. You need to make sure that groceries arrive quickly, intact, and at the right temperature. And you need to do it without big per-customer shipping charges, given the food industry's notoriously skinny margins."

Webvan's business plan called for the creation of automated distribution centers in each of its 26 target markets. The $30 million facilities—to be built by Bechtel Group by 2003—would be roughly 350,000 square feet. Webvan claimed that by automating much of the distribution process, labor costs for Webvan would be minimal. Each center would service customers up to 40 miles away. In June of 1999, Webvan launched operations in San Francisco; merchandise was delivered from a nearby distribution center in Oakland. Three months later, Borders convinced George Shaheen, CEO of Andersen Consulting, to leave his lucrative and secure post at Andersen to take over as president and CEO of Webvan. By then, Borders had secured a total of roughly $400 million in financing from a variety of funding sources

Webvan's Web site allowed customers to select the items they wished to purchase and place them into an electronic shopping cart, which displayed all of the items selected as well as the total cost of the items in the cart. To complete a purchase, shoppers were asked to select a 30-minute window in which the groceries would be delivered. Typically, the soonest an order could be delivered was the following day. To draw repeat business and to encourage larger orders, Webvan offered free delivery for orders over $50. Customers with questions about their orders could also call a toll-free customer service line.

Although losses totaled $144.5 million in the first six months of operation, sales reached $13.3 million. Compared to its rivals, Webvan's early results seemed quite promising. HomeGrocer.com 's sales over nine months reached only $10.9 million, despite the fact that it was serving three markets in California and Oregon. Full-year sales at Streamline, which also served three markets, totaled $15.4 million. Also encouraging was Webvan's ability to attract customers quickly. In six months, Webvan managed to reach 47,000 customers in a single market, compared to the 110,000 clients secured by its largest competitor, Peapod, which had operations in eight markets.

Webvan's initial public offering, in November 1999, raised an additional $375 million in capital. By April 2000, Webvan was delivering roughly 20,000 grocery items, as well as flowers, books, office supplies, non-prescription pharmaceuticals, and pet supplies. Gomez Advisors ranked Webvan as the leading online delivery site among the 11 competitors it evaluated. Operations launched in Atlanta in May, and Webvan expanded its delivery service to include magazines and videos in June. Despite the firm's growth, its continued losses began to concern investors, and Webvan saw its stock prices tumble to $6 per share, compared to their high of $34. That month, the firm announced its intent to merge with Homegrocer.com in a stock swap valued at $1.2 billion. Although the merger, finalized by the end of 2000, was viewed as a positive step toward achieving profitability, investors began to question if the firm would be able to do so before its funding ran dry. Many pointed out that Webvan and Homegrocer had lost a combined total of $234 million in the first six months of 2000.

Rather than curb spending and focus its efforts on minimizing losses, Webvan launched new operations in Dallas, Texas, and Atlanta, Georgia. The firm also developed a new logo and branding strategy and redesigned its Web site, which was organized into eleven product categories: grocery, fresh market, household, pet shop, baby shop, kids stores, drugstore, books, CDs and videos, specialty shops, and electronics. The changes were designed to communicate Webvan's determination to become a leading force in online distribution of all kinds. However, many critics pointed out that the money and time would have been better spent on developing Webvan's original brand, which had yet to be fully developed. According to a July 2001 article in The Industry Standard, "Webvan was so intent on meeting its long-term goal of building a behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day. In the process, it jeopardized the shorter-term goal of being a modest but profitable online supermarket." Webvan was also criticized for switching HomeGrocer sites over to Webvan sites too quickly, which alienated many HomeGrocer customers.

Borders resigned from his firm in February of 2001, the same month that Webvan closed its Dallas warehouse and laid off 220 employees. Shaheen quit three months later. In July, Webvan ceased operating and filed for Chapter 11 bankruptcy protection. According to U.S. News & World Report writer Randall Stross, the idea behind Webvan was a good one and may have proved viable under different management. "The badly managed company is separable from the essential business concept—combining online ordering and home delivery." Webvan's story will likely become a case study for future Web-based delivery service ventures.