WEBVANWEBVAN WILL GO DOWN IN HISTORY EITHER AS THE NEXT FEDERAL EXPRESS OR AS ONE OF THE BIGGEST FAILED INFRASTRUCTURE BETS IN HISTORY

Marzieh ChapardarNahid Karimaghalou

Introduction

Founded By Louis Borders A full service online grocery retailer Activity

Internet Grocery + home delivery Launched operations in the

San Francisco Bay Area in June 1999

Vast infrastructure

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Introduction cont.

Expanding aggressively Network growth 10,000 consumer in 5months

(Compared to 100,000 of Peapod in 10 years) 330,000 square foot warehouses to

effectively store and deliver merchandise to customers

Half capitalization of grocery industry leaders Safeway Inc. Kroger Co.

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Borders Background

Revolutionizing book industry Inventory management system Customer service More efficient and cheaper ways of

delivery in online grocery

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Webvan’s Business Model

Differentiation strategy Consisted of creating a sophisticated and

highly automated information systems centered around warehouses

Target Market: The new technologist The time starved shopper The price insensitive shopper

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Webvan’s Challenges

GBF strategy High start-up costs Targeted technologies consumers Marketing budget Market share

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Webvan's Strategy

GBF (Grow Big Fast) “In the internet economy first-to-scale

counted more than first-to-market “ Aggressive expansion Based the strategy used by Jeff Bezos of

Amazon Face their rivals head on Incur costs now for future profit

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High Startup Costs

Building brand recognition Large infrastructure consisting of

large warehouses Government regulations Costly technology equipment

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Initial Costs9

Hired 80 programmers At its peak performance Webvan

could handle 8000 orders a day Attended or Unattended Delivery

service Provided the customers with 50,000

products to choose from Much more than the traditional grocery

store with 30,000 items

Initial Costs cont.10

High operational costs and low initial grocery sales amounted to a loss of $35 million

Average grocery order in September 1999 was $71 Much less than the expected value of $101

needed to produce annual targeted revenues per distribution center of $300 million

Predicted sales for 2001 were $518 million, but an overall loss of $302 million

How Webvan Burnt 1.2 B$

Borders raised $125 million in initial funding and convinced investors to invest $275 million more. (Total of $400 Million Dollars)

They built approximately 26 distribution centers that costs $35 million dollars each(A total of $910 Million Dollars)

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Targeted Consumer

New Technologist: Technological nature of customer Customer must be technology-oriented and

very knowledgeable with the internet Very limited

Traditional consumer

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Name Recognition

No one really know who you are Marketing takes a big chunk of biz

budget Webvan marketing costs were

estimated to be 30% of sales

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Market Share

Market at best was a niche market Margins were razor thin Online grocery sales less than 1% of

the entire grocery market Online grocery customers were less

than 1% of the entire online customers

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Distribution Centers15

Distribution centers contained 4.5 miles of conveyor belts

Temperature sensitive rooms Each center had the ability to serve

as 20 normal supermarkets

Order Fulfillment Process

Orders were placed on the web They were automatically routed to the

warehouse Pickers were stationed throughout the

distribution center to assemble the orders in plastic boxes or totes

They were color-coded depending if the items were refrigerated, frozen, or dry

Pickers traveled no more than 19.5 feet in any direction to reach 8000 bins of goods in rotating carousels

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Order Fulfillment Process Cont. Totes were transported throughout the facility by a

conveyor belt until loading onto refrigerated trucks Trucks took the orders to one of 12 docking stations Orders were loaded to one of more than 60 vans Drivers took the orders directly to people’s homes None of the vans traveled more than 10 miles in

any direction The route was mapped out by a system optimizing

travel time

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Webvan’s Fall

July 9, 2001 Webvan ceased operations and filed for chapter 11 protection

Burned though $1.2 billion of investor capital, making it one of the most spectacular dotcom failures on record

Since then the company has liquidated its assets

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Reasons of failure

“Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day”.

“The world’s market at your doorstep.” Short to midterm cash mismanagement. Venture capital of

$1.2 B run out. Webvan started a merger with HomeGrocer in Sept 2000 Merger costs: duplicated work force, integration of

technology, realignment of facilities. Company was too aggressive about expansion into

multiple cities, combined with an overly complex website.

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Webvan vs. Amazon20

Amazon tried something similar and succeeded

Webvan was trying to emulate Amazon Amazon only built infrastructure when forced

to Amazon used existing sales to help pay for

infrastructure Delivery of books is much easier than groceries Customers are much less upset about delays

Webvan vs. Tesco21

Tesco focused on low costs contrary to Webvan’s differentiation strategy

Tesco used existing stores and distribution chain

Tesco already had a strong brand Tesco already had low costs Tesco’s customer base growth was

slow Tesco was profitable!

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