Webvan Case Study

Submitted By:

Sayak Ray-159 Pranaw Gautam-160 Vineet Gautam-162 Pardeep Jindal-169 Monika Agarwal-170 Shruti Gupta-178

HISTORY

Webvan was founded in the heyday of the dot-com boom in the late 1990s by Louis Borders Webvans mission was to create automated process that was designed to manage all aspects of online grocery business, from order taking to delivery. Webvan went public on November 5, 1999 at an offering price of $15 a share. Raised approximately $800 million from private investors and the public via an IPO In May 2000, company launched its Atlanta operations and it expanded to Chicago in August 2000. In June 2000, a major competitor, HomeGrocer.com, agreed to merge with Webvan.

HISTORY (contd)

By the end of 2000, Webvan served 10 markets. Webvan expected each distribution center to bring in $300 million in revenue by 2003. In the fourth quarter of 2000, company was operating at a run rate of 2250 orders per day in Los Angeles and 2160 in San Francisco. 34% of Webvan customers in the San Francisco Bay Area added general merchandise products to their grocery orders. As of June 2000, Webvan purchased through 50 distributors and directly from 300 vendors, it also sold about 35000 SKUs up from 15000 when it began its operations.

Business model
To deliver dry and perishable goods to consumers within 30 minutes Website includes 15000 grocery items including fresh meat, seafood, bakery items etc. No membership fee required and free delivery above an order of $50

Operations
Constructed highly automated and capital intensive DC First DC came up in Oakland that could serve 18 conventional supermarkets with different temperature zones It could carry 50000 items and process 8000 orders a day.

Customers placed order online with delivery time and this information supplied to DC

Colour totes assigned Yellow-dry grocery Green- chilled products Blue-frozen products

Barcodes assigned to specific customer order and route of the package determined

Pickers used to assemble orders one picker worked on 16 orders simultaneously

Items were assigned into tote and taken to shipping area

Supplier Relationship
In 1999 Webvan was purchasing goods from 10 distributors and directly from 160 vendors. Company had more demand based information that it could transmit to suppliers To supply JIT information to suppliers the company partnered with Harbinger.net and linked all its suppliers with it. Webvan dealt in eaches i.e. singular items from suppliers so that they could quickly place the items on carousels.

What happened?

Invested heavily in inventory forecasting Wanted to avoid costs involved in stocking Aggressive expansion Extra costs incurred by Webvan DCs
Packing carts with customer orders Delivering the ordered items

Projected annual revenue of $300 million per DC but all DCs operated at around 25 35% capacity Bottlenecks include:

Misaligned totes Misread displays Incomplete orders

Why Business failed?

Webvan tried to expand too quickly without maximizing operating efficiency Too much money plugged into technology without working on increasing demand Company should have worked on making existing operations more efficient

What was supposed to happen?

A faster, cheaper & more efficient model of delivering items to customers. Deliver goods within a specified 30 min window. DCs will operate at breakeven capacity within five quarters of being launched. Attract audience first and then monetize eyeballs to bring in additional revenues & do it on a global scale. Economies of scale. Inventory turnover 24 times annually as compared to 9 to 11 times in traditional supermarkets.

On what basis Webvans founders and initial investors hoped for success of their venture??
No other online grocery store successful at that time and the inability of existing grocers to offer same day delivery. Webvan founders planned to deliver the same day within 30-min delivery window. This was their Unique Selling Proposition. Predicting Growth

International Data corporation estimated 177 mn web users by end of 2003. Consumer purchases of online grocery to increase from 12.4 bn in 1998 to 75 bn in 2003. Most people view grocery shopping as an inconvenient & nearly 55% of Americans considered time to be their most precious commodity. 35% of the market would buy groceries on the internet by 2003-04

Were Webvan goals too ambitious?

Webvan entered into agreement with Bechtel to construct 26 expensive Distribution Centers across the country at a cost of $1B. The money spent on infrastructure far exceeded sales growth. Acquired HomeGrocer.com, though for some analysts it was hard to believe the success of two weak companies merging up. Despite realized losses, Webvan expanded in Atlanta, Sacramento, Chicago, New Jersey. No focus on minimizing losses and curb spending Recruited a Dream team consisted of senior executives from Andersen Consulting, Yahoo!, Benchmark Capital, Sequioa Capital, etc. of which none had management experience in e-commerce. Emphasized on 30-minute window delivery model; did not consider that many working customers would prefer their groceries delivered at home at night.

You dont build a rocket to go halfway to Mars

Webvan had invested over $1B in expensive DCs Bought software from Optum Inc. and Descartes System. Also hired 80 software programmers Planned to spend up to 200MUSD on advertising Over-confident about their plans Webvan wished to increase their market share and hence invested heavily to attain their mission.

What could the company have done differently to increase their chances of success?

Target fewer related products in a segment at a time instead of all products in the first go. A Step by step approach to grow both organically and inorganically after evaluating the revenue structure. Webvan spent 3 yrs and hired 80 software programmers. It was not a tried and tested model. Ideally a smaller pilot project should be developed and taken further if successful. Webvan planned to invest $200mn on advertising which was way higher than required. Changing advertising structure and channel might help. Hire senior executives who have experience in similar domain Probably think of relocating the store in a higher population area

Do you think large number of people will ever buy on internet?

Yes Total US market--$650 billion. 63 million web users in united states at the end of 1998 were projected to grow to 177 million users by end of 2003. Forrester Research projected that 5% of US household would be buying groceries online in a few years and Jupiter communications forecast says $3.5 billion. 55% of Americans considered grocery shopping as an inconvenience and time as their most precious commodity. faster cheaper and more efficient way of delivering items to consumers.

Do you think large number of people will ever buy on internet?

Lower price of purchasingas no building cost and less operating stores which can be passed on to customers. Order frequency. 30-minute delivery window. Convenience of ordering anytime, pay by credit card and schedule deliveries. Busy and high salaried employees would find it extremely useful. Door to door delivery.

What lessons do you take away from the Webvan story about the dot-com era?
Over ambitious goals Simultaneous over expansion. Due to dot-com era and online groceries has to do with last mile ecommerce they were able to raise lot of money initially from the market but failed badly when bubble blast. Customers have weekly shopping ingrained in their behavior. Mismatch between demand forecast and actual demand. Losses kept on increasing due to capital-intensive business plan. Failed to meet operating targets at many places quarter on quarter and it kept on accumulating.