Marzieh Chapardar Nahid Karimaghalou Webvan Webvan will go down in history either as the next Federal Express or as one of the biggest failed infrastructure bets in history Marzieh Chapardar Nahid 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

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.

Borders Background Revolutionizing book industry Inventory management system Customer service More efficient and cheaper ways of delivery in online grocery

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

Webvan’s Challenges GBF strategy High start-up costs Targeted technologies consumers Marketing budget Market share

Webvan's Strategy GBF (Grow Big Fast) Aggressive expansion “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

High Startup Costs Building brand recognition Large infrastructure consisting of large warehouses Government regulations Costly technology equipment

Initial Costs 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. 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)

Targeted Consumer Traditional consumer New Technologist: Technological nature of customer Customer must be technology-oriented and very knowledgeable with the internet Very limited Traditional consumer

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

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

Distribution Centers 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

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

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 Chapter11: The Chapter in the Bankruptcy Code generally permitting a business entity to file for reorganization proceedings and enter into a court ordered repayment plan while still maintaining the ability to continue running the business

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.

Webvan vs. Amazon 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. Tesco 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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