Webvan: The Ambitions and Reality

The adage "everything old is new again" rings true as many business models from the early dot-com era receive renewed interest today. Here, we delve into Webvan, a trailblazer in online grocery delivery that experienced an impressive rise followed by an equally dramatic downfall.

The Cash and Burn Cycle

The grocery business is notoriously tough, compounded by the challenges of delivery and e-commerce. Webvan's experience illustrated that merging these three sectors doesn’t simplify operations.

During the dot-com boom, Webvan emerged as a star in the grocery delivery market. The company secured $800 million from investors such as Benchmark, Goldman Sachs, Sequoia, Softbank, and Yahoo, a significant feat for 1999. It went public in November of that year, boasting a cumulative revenue of $395,000. Analysts predicted sales would skyrocket to $500 million by 2001, anticipating a major market share in a rapidly expanding sector.

On its first trading day, Webvan garnered a staggering valuation of $8 billion, nearly 40% of Kroger's market capitalization. While investors celebrated, existing grocers were perplexed. One Safeway executive remarked, "They have the sales of two of our stores and one fourth of our market cap." This confusion, however, was short-lived, as Webvan declared bankruptcy less than two years later.

Webvan's Business Model

Louis Borders, an entrepreneur also known for founding the Borders bookstore chain, established Webvan in 1996. His vision was to utilize the internet to offer more variety and convenience than conventional grocery stores. Webvan aimed to deliver groceries ordered online within a 30-minute timeframe, targeting busy dual-income families.

For customers, the cost structure was straightforward: delivery was complimentary on orders exceeding $50, while a fee of $4.95 applied to smaller purchases. There was no annual membership fee, unlike today’s models where services like Whole Foods charge $9.95 for a two-hour delivery and $14.95 for a one-hour delivery. Webvan's prices were positioned competitively, marketed as 5% lower than leading supermarkets. However, the company aimed to excel in convenience, pricing, and quality, ultimately overreaching.

The strategy involved attracting customers through grocery items, which are frequently purchased, and then expanding into additional categories like electronics and books, which offered higher profit margins.

Challenges of Delivery and Operations

The grocery sector operates on thin margins and high volume, and adding home delivery complicates matters. Webvan faced unique expenses associated with delivery and order fulfillment. To mitigate these costs, the company required extensive automation and scalability. They invested in proprietary software to streamline operations, claiming a need for only one-third of the workforce compared to a conventional supermarket.

Webvan's facilities featured advanced automation, allowing pickers to handle 450 items per hour across multiple orders. They also employed real-time data for inventory management, aiming for quicker turnover compared to traditional grocery stores, and chose locations in industrial areas to reduce rent costs.

After years of preparation, Webvan commenced grocery delivery in June 1999, starting from a 330,000 square foot distribution center in Oakland, California, which boasted multiple temperature zones and extensive conveyor systems.