Case Study: WebVan vs. Food on the Table Minder Chen Professor of MIS California State University Channel Islands Minder.chen@csuci.edu

Webvan Groceries on demand: the killer app of the internet. The company spent money like a drunken sailor. Even in the Internet Bubble costs and infrastructure grew faster than the customer base. Loss: $800 million. Webvan’s CEO told ForbesT magazine that Webvan would “set the rules for the largest consumer sector in the economy.”

What happened? Webvan seemed to do everything right. The company raced to build vast automated warehouses and purchased fleets of delivery trucks, while building an easy-to-use web site. Webvan hired a seasoned CEO from the consulting industry, backed by experienced venture capital investors. What’s more, most of their initial customers actually liked their service. Barely 24 months after the initial public offering, Webvan was bankrupt and out of business. What happened? It wasn’t a failure of execution. Webvan did everything its board and investors asked.

Grocery / Food Retailing U.S. market for food retailing was $484 billion in 2000. On average, U.S. households visited supermarkets 2.3 times per week and spent about $87. In 1999, supermarkets accounted for 77% of grocery sales and numbered about a quarter of all grocery stores. The industry was highly concentrated. Resulting economies of scale and scope enabled supermarkets to charge lower prices, and competition drove net profit margins to about 1%.

E-Commerce opportunities Technological advances have given life to online grocers. Previous online grocery distributors failed. Webvan started late comparing to other competitors and can learn from their mistakes. Good investors such as Goldman Sachs and Yahoo. Huge market, big opportunities and potential to grab the market share. Online grocery companies can charge cheaper prices because of saving money on labor. Opportunity was driven by desire of consumers, particularly dual-income families, to save time. 60% of consumers disliked grocery shopping cause it was time consuming and many were open to online grocery shopping and home delivery.

E-Commerce initiative A lot of companies failed because of poor business model. Webvan invested huge money in automating processes and expected to become a “winner takes all” company. Online grocery market was still very complicated and problematic. Constant logistics problems. Grocery margins were as thin as 2%. Packaging and delivery were still very expensive. After all that investment Webvan still struggled to make money and ended up with net losses that kept increasing from 1999 to 2000. Huge investment wasn’t buying off. Company was still lacking of consumers.

Product Development Model Webvan management followed the product development model religiously. Its failure to ask “Where Are the Customers?” illuminates how a tried-and-true model can lead even the best-funded, best-managed startup to disaster.  Burn through $800 million in 3 years. http://web.stanford.edu/group/e145/cgi-bin/winter/drupal/upload/handouts/Four_Steps.pdf Raised $393 M before IPO Webvan launched its first regional Webstore in June 1999 The Product Development Model IPO 60 days later Webvan began to beta-test its grocery delivery service in May 1999 to approximately 1,100 people. Founded in December 1996 Raised $375 M Market cap $4.8b

Webvan Case Study Founded in December 1996 with goal to revolutionize $450 Billion grocery industry by offering online ordering, same-day delivery of grocery. Raised $393 million before IPO. Raised $375 million in an IPO in Nov. 1999 that valued the company at more than $4.8 B.  Dream Team: Backed by experienced VCs, Founder with track record (Louis Borders who co-founded Borders Bookstore) and hired Seasoned CEO (George T. Shaheen – CEO, a former CEO of Siebel Systems) but none had any experience in the supermarket industry. First mover advantage. Get “big” fast (GBF) model: "One of the hallmarks of the dot-com crush has been the presumption that you needed to get big fast, which worked for Amazon.com and virtually no one else." commented Gartner analyst Whit Andrews Executed Business Plan to a tee (perfectly) https://en.wikipedia.org/wiki/Webvan

WebVan Hired experienced executives from nations large grocery stores Marketing builds sales demo, sales materials (websites, presentations, data sheets), hires PR Agency Engineering builds product based on defined feature set Automated warehouses built with conveyers and carousels integrated with an order fulfillment software

Webvan Automated Warehouses In Webvan’s case, Engineering moved along two fronts: building the automated warehouses and designing the web site. Webvan’s money spent on infrastructure far exceeded sales growth, and the company eventually ran out of cash. Webvan placed a $1 billion order with engineering company Bechtel to build its warehouses, and bought a fleet of delivery trucks. Watch this video: https://youtu.be/18k4tdr3qO4

Expansion Webvan went public on November 5, 1999 at an offering price of $15 a share. 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. By the end of 2000, Webvan served 10 markets.  Webvan had leaped right over learning and discovery in its rush to execution.

Expansion 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 SKU’s up from 15000 when it began its operations. In the fourth quarter of 2000, Webvan@work program accounted for 15% of company’s San Francisco Bay Area sales, with an average order size of $130. In January 2001, company opened on its Web site a cobranded pet store with Petsmart.com. Webvan went bankrupt in 2001.

Instead of sticking to the idea of “go big, and do it quick”, they should have thought of “go, think, react” strategy.

The View from the Sales Organization The use of a product development methodology to measure sales The half-life of a startup VP of Sales is about nine months post first customer ship. “Build and they will come,” is not a strategy, it’s a prayer.

Reality and the Plan After Webvan’s June 1999 launch, the average daily volume of orders was 2,500 orders per day. The Webvan business plan had forecast 8,000 orders per day, a number that was necessary for the company to achieve profitability. Its distribution center (designed to process product volumes equivalent to approximately 18 supermarkets) was operating at less than 30% of capacity. Oops.

The View from the Marketing Organization The use of a product development methodology to measure marketing During the Internet bubble, one more function of the marketing department was to “buy” customer loyalty with enormous advertising and promotion spending to create a brand.

Marketing Plan in the Vacuum All this marketing activity occurs before customers start buying—that is, before Sales has had a chance to actually test the positioning, marketing strategy, or demand-creation activities in front of real customers. In fact, all the marketing plans are made in a virtual vacuum of real customer feedback. The inexorable march to this date has no iterative loop that says, “If our assumptions are wrong, maybe we need to try something different.”

Marketing Death March “Marketing death march” happened at Webvan. In its first six months of business, Webvan acquired an impressive 47,000 new customers. However, in those six months 71% of the 2,000 orders per day that were coming in were from customers who had already used the service. This meant Webvan needed more new customers, and it needed to reduce the number of customers who ordered once and then never used the service again. The Startup Death Spiral: The Cost of Getting Product Launch Wrong http://steveblank.com/2009/09/07/the-customer-development-manifesto-the-death-spiral-part-3/

Customer Development vs. Product Development

http://www. slideshare http://www.slideshare.net/venturehacks/customer-development-methodology-presentation/

Customer Development

Food on the Table The Concierge Minimum Viable Product (MVP) http://mealplanning.food.com/ Food on the Table will ask you for your preferences—the types of foods you like and dishes you enjoy, and the grocery stores you shop at. Then it will recommend dishes for you for the week, helping you get out of food ruts or scrambling to figure out what to make for dinner. The app helps you save money by listing the items on sale each week at your chosen grocery stores and recipes based on those sale items. Add the recipes to your meal plan and the foods to your grocery list. The mobile app syncs up with your account on the website. http://www.macworld.com/article/2109727/food-on-the-table-makes-meal-planning-and-grocery-shopping-a-piece-of-cake.html

Lean Startup Food on the Table (FotT) began life with a single customer. Instead of supporting thousands of grocery stores around the country as it does today, FotT supported just one. How did the company choose which store to support? The founders didn’t—until they had their first customer. Similarly, they began life with no recipes whatsoever—until their first customer was ready to begin her meal planning. In fact, the company served its first customer without building any software, without signing any business development partnerships, and without hiring any chefs.

Food on the Table Manuel, along with VP of product Steve Sanderson, went to local supermarkets and moms’ groups in his hometown of Austin. Part of their mission was the typical observation of customers that is a part of design thinking and other ideation techniques. However, at the end of each interview they would attempt to make a sale. They’d describe the benefits of FotT, name a weekly subscription fee, and invite the customer to sign up. Most times they were rejected. After all, most people are not early adopters and will not rejected. After all, most people are not early adopters and will not sign up for a new service sight unseen. But eventually someone did. That one early adopter got the concierge treatment. Instead of interacting with the FotT product via impersonal software, she got a personal visit each week from the CEO of the company. He and the VP of product would review what was on sale at her preferred grocery store and carefully select recipes on the basis of her preferences, going so far as to learn her favorite recipes for items she regularly cooked for her family. Each week they would hand her—in person—a prepared packet containing a shopping list and relevant recipes, solicit her feedback, and make changes as necessary. Most important, each week they would collect a check for $9.95.

References Anatomy of a Dot-Com Failure: The Case of Online Grocer Webvan at http://www.springer.com/cda/content/document/cda_downloaddocument/9783319015972-c1.pdf?SGWID=0-0-45-1445160-p175348398 http://ocw.mit.edu/courses/sloan-school-of-management/15-760a-operations-management-spring-2002/lecture-notes/lecture6_feb19.pdf Deighton, John and Kayla Bakshi. Webvan: Groceries on the Internet. HBS Case No. 9-500-052. Harvard Business School Publishing, Boston, 2003. http://www.groenewout.com/TrueStars/Media/Groenewout/Groenewout%20EN/Internals/9024D264%20Webvan%20the%20Hindenburg%20of%20the%20dotcom%20era%20RP%20EN.pdf

References Online grocery: how the internet is changing the grocery industry http://www.csus.edu/indiv/c/chingr/mis270/darden-peapodcasestudy.pdf https://flatworldbusiness.wordpress.com/flat-education/intensify/creating-a-flat-business/webvan/ http://web.stanford.edu/group/e145/cgi-bin/winter/drupal/upload/handouts/Four_Steps.pdf http://www.knowbd.com/piedmont/mba605/ReportWebVan.pdf http://foundrmag.com/4-startup-case-studies-failure/

http://mobileopportunity. blogspot http://mobileopportunity.blogspot.com/2010/10/whats-really-wrong-with-blackberry-and.html