1. An Analysis of Webvan’s Future
Dennis Karlinsky
Hiro Mori
Thomas Sellitto
Andrew Weber

2. Agenda Industry overview Communication/Community
Connectivity/Alliances
Content
Interesting Financials
Brilliant Recommendations
Q&A

3. Webvan Backround Founded in 1996 by Louis Borders (Border’s Books)
Investments from some of the highest profile firms (CBS, Softbank, Yahoo, Benchmark Capital, Sequoia Capital)
Total funding = $1.35 Billion! Including $350M from a 1999 IPO
George Shaheen (former CEO of Anderson Consulting) took over in Sept. of ’99)

4. Webvan’s stock performance
$17.43
$0.46

5. Problems Identification
Very high fixed costs
Inability to acquire the needed customer base

6. Online groceries
The market is going to grow from $513 million in 1999 to 10.8 billion in 2003
It is going to represent only 2% of the global US grocery market
Only 9% of web-shoppers buy groceries

7. Secure transaction system
Market Keys
Customer’s Awareness
Efficient delivery
Convenience
Secure transaction system
Competitive Prices

8. Models Store-based model: Warehouse model: Hybrid model:
Alliances with local existing chains in particular areas
(- efficiency; - fixed costs)
GroceryWorks: alliance with Safeway
Warehouse model:
Centralized distribution in one location or in few hubs (Netgrocer)
(+efficiency; + fixed costs)
Webvan: own chain of warehouses
Hybrid model:
Mix of the first two models (Peapod, Homeruns)

9. Communication
Successful communications will result from real, two-way interaction between the firm and the customer base
How to communicate?
, discussion forums, tutorials, bulletin boards or chat rooms

10. Does it work for online groceries?
No, because the “Time starved”customer is not likely to spend time in chat rooms or in bulletin boards for grocery advice

11. Communities
The Establishment of online communities is a key to reach success in online markets
Barriers to communication are also barriers to creation of online communities
Communication among community members is vital

12. Communities Online grocers have problems in building communities:
It’s difficult to create a community for sliced bread:

13. Connectivity
Be successful in creating, concentrating, and locking in traffic (Net Gain, 1997)
How to tackle those challenges in terms of connectivity?:
Horizontal or Vertical Industries
Alliances for traffic, customer service, …
Affiliate programs
Connectivity with suppliers

14. Horizontal Industries
Affiliate/referral promotions with complementary sites
Allrecipes.com (August, 2000)
PETsMART.com (January, 2001)
Special Discounts
Free Delivery

15. Vertical Industries Strategic alliances with package goods firms
Nabisco, Clorox, Kimberly-Clark, Kellogg, ...
On-line marketing programs
New consumer-behavior models
Alliance with InformLink
On-line manufacturer-sponsored coupons

16. LOST of potential “time sensitive” customers
Start Page
almost no information beyond a choice of 10 links to current service areas
Once the service area page is reached, it displays quite a bit more information, but no links and only a choice to enter userID/password for new customers
LOST of potential “time sensitive” customers

17. Shopping Page
Product sorted by different sections (beverages, bread, …)
One-click access to shopping cart
Engine able to perform a “smart” search, but gives too many results
Absence of banner ads

18. High costs are crushing the bottom line
Headed in the wrong direction…
$ million
100 50
-50
-100
-150
-200
99-III
99-IV
00-I
00-II
00-III
00-IV
NET SALES
NET INCOME

19. Current Financials
Three Months Ended Three Months Ended Fiscal Year Ended Fiscal Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1999
Net sales 84, , , ,953
COGS 61, , , ,804
Gross Profit 22, , , ,149
Sales and Marketing 19, , , ,091
Development 6, , , ,366
General and Admin Expense 110, , , ,995
Total Expenses 136, , , ,452
Interest Income 5, , , ,712
Interest Expense , ,540
Net Interest Income 4, , , ,172
Pro Forma Net Loss $(109,117) $(56,067) $(413,186) $(132,131)

20. Financial Keys 614,000 customers as of Q4 2000
Q4 Margins = 27% up from 25% for FY00
FY00 ProForma Loss = $413M vs. $132M
General and Admin costs for FY00 were a whopping 154% of sales.
At current burn rate ($1,582,000 per day), Webvan will be out of money in 134 days!

21. Break Even – Fact vs. Fiction
At the current yearly margin (25%) and costs, Webvan would have needed sales of $1,900,000,000 in order to break even for FY00!
Raising margins to 27% will lower break even needs to only $1,698,000,000!
Lowering G&A costs to 100% of sales (vs. 154%) will lower break even to $873,777,000.

22. Is a pure online grocery play, the place to be?

23. Recommendations
Improving website content by eliminating initial layer, by allowing entrance to the site without registering
Increase number of alliances on the supply side in order to create communities and relationships
Webvan needs to cut the high fixed costs:
Alliance with a big brick-and-mortar grocery store to cut fixed costs
Fred Meyer is a prime candidate
Explore integration with a non-grocery retailer. Serving as the “last mile” wing of the retailers operation.

24. Q&A