Webvan’s Demise or When Technology Fails to Meet Operations

Webvan, an online grocery, employed technological breakthroughs in its distribution system but blundered through key strategic and operational decisions, which led to a complete collapse of the company in just 5 years.

Founded in 1996, Webvan was selling groceries online and delivering them directly to customers’ home within a 30-minute window of a chosen timeslot. Company’s founder Louis Borders hoped to revolutionize delivery services by offering personalization through the extensive use of technology[i]. Webvan met its founder’s expectations – Gomez, a leading provider of Internet research and analysis, named Webvan the Number 1 online grocer in 2000, praising it for its speed and comprehensive, intuitive online shopping experience[ii]. However, just a year later, Webvan’s stock certificates were selling on eBay as a memory of the greatest Internet business failure – earlier that year, Webvan laid off its remaining employees and ceased operations[iii],[iv].

Delivering on Customer Promise with Best-In-Class Technology

On webvan.com, a customer could choose groceries from a wide range of high-quality products and schedule their delivery for the following day. If the customer had any questions, he/she could call a toll-free number. The groceries were delivered within a 30-minute window of the specified time and left on the doorstep or brought in to the kitchen. Webvan started off as a food grocer but later expanded its product offering to include other items such as electronics, pet supplies, kids clothing or OTC drugs[v]. Customers were satisfied with the product variety, quality and punctuality of the service[vi]. Webvan had an ambitious target of opening operations in 26 metropolitan areas and was operating in 10 major cities at its peak[vii],[viii].

The company did not outsource its distribution – Webvan owned and operated warehouses (all located within metropolitan areas) and vans and equipped them with a sophisticated inventory management system and computer software. Webvan’s distribution system was fully automated, temperature-controlled and minimized human-labor inputs, e.g., a warehouse worker could fulfill a customer’s order without ever having to move more than 19 feet while filled totes had to be manually lifted just twice (when loaded onto the cart in the warehouse and when carried from the van to the customer’s home)[ix]. In fact, Webvan’s warehouses were among the most automated in the world[x]!

webvan-trucks

Too Lavish and Too Quick to Scale

I would argue that the two main reasons behind Webvan’s demise were exorbitant initial fixed cost investments and a very ambitious expansion strategy. The best-in-class warehouses cost the company $35 million each, and Webvan contracted Bechtel, a construction company, to build all 26 warehouses for $1 billion in 1999[xi]. Vans, computer systems and software, personnel costs, all came on top, totaling $125 million a quarter[xii].Though innovative, the warehouses had not been tested before Bechtel started to build and scale them across cities, and Webvan found itself abandoning some of its features after the warehouses began operating[xiii]. Not only were the warehouses too expensive to build and operate, they were also too large for the rather sluggish growth of the consumer base. Each of the warehouses covered 350,000 square feet and could potentially supply the equivalent of 18 grocery stores, but most of them were operating at only one-third capacity[xiv]. In 2001, Webvan had about 750,000 customers, many of which did not even use the service regularly, and it cost the company as much as $210 to acquire a new customer[xv].

picture2

Strategic and Operational Mistakes Impeded Technological Advancements

Although some analysts argue that Webvan made a fundamental mistake by choosing groceries as their core line of business (the grocery business has one of the smallest profit margins, i.e., below 5%)[xvi], others point at strategic and operational failures of the company. To begin with, no consumer testing had ever been conducted to grasp the demand for online grocery shopping, instead, the founder believed that Webvan could be successful by capturing even the small part of the vast American grocery market, which back then had an estimated value of more than half trillion dollars[xvii],[xviii],[xix]. If the company had done the research, they would have realized that people find too many product offerings confusing, want to be able to use coupons or purchase large, economical packs of diapers and paper towels (Webvan was continuously increasing its product offering, did not sell economy-size packs and did not use coupons until the very end of its operations)[xx]. The company was also criticized for its short-window attended delivery that did not allow to efficiently rationalize delivery routes[xxi]. Companies founded after Webvan tried to solve this problem by having a more flexible delivery period and by using reception boxes[xxii],[xxiii],[xxiv],[xxv],[xxvi]. It is argued that brick-and-mortar grocery chains are better equipped to fill online orders as they can leverage their existing warehouse infrastructure and minimize capital investments, while fully-automated and specialized distribution centers like Webvan can only work in high-volume, constant-demand environments[xxvii]. Technological breakthroughs that Webvan employed in its distribution system could not make up for strategic and operational shortcomings and failed to save the company from failure.

798 words.

[i] Aspray, W., Royer, G., & Ocepek, M. G. (2013). Anatomy of a Dot-Com Failure: The Case of Online Grocer Webvan. In W. Aspray, G. Royer, & M. G. Ocepek, Food in the Internet Age (pp. 25-35). Springer.

[ii]  Business Editors/High-Tech Writers. (2000, Jun 21). Webvan.com Heats Up with No. 1 Gomez Ranking – From Ice Cream to Sunscreen, webvan.com Ushers in First Day of Summer. Business Wire. Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/446528704?accountid=11311. Accessed 12 November 2016.

[iii] Tedeschi, B. (2001, Aug 13). The fallen dot-coms are not yet cold, but some sealers are already selling their detritus as memorabilia. New York Times. Retrieved from http://www.nytimes.com/2001/08/13/business/e-commerce-report-fallen-dot-coms-are-not-yet-cold-but-some-dealers-are-already.html?pagewanted=all&src=pm. Accessed 12 November 2016.

[iv] Aspray, W., Royer, G., & Ocepek, M. G. (2013). Anatomy of a Dot-Com Failure: The Case of Online Grocer Webvan. In W. Aspray, G. Royer, & M. G. Ocepek, Food in the Internet Age (pp. 25-35). Springer.

[v] Ibid., pp. 28.

[vi] Ibid., pp. 26.

[vii] Cohan, P. (2013, Jun 17). Four Lessons Amazon Learned From Webvan’s Flop. Forbes. Retrieved from http://www.forbes.com/sites/petercohan/2013/06/17/four-lessons-amazon-learned-from-webvans-flop/#1c8f439e635a. Accessed 13 November 2016.

[viii] Laseter, T.M., Rabinovich, E. (2016). Internet Retail Operations: Integrating Theory and Practice for Managers. CRC Press. (pp. 223).

[ix] Hays, T., Keskinocak, P., Malcome de López, V. (2005). Strategies and Challenges of Internet Grocery Retailing Logistics. In Geunes, J., Akçali, E., Pardalos, P.M., Romeijn, H.E., & Shen, Z.-J.M. (Eds.), Applications of Supply Chain Management and E-Commerce Research (pp. 217-252). Springer.

[x] Aspray, W., Royer, G., & Ocepek, M. G. (2013). Anatomy of a Dot-Com Failure: The Case of Online Grocer Webvan. In W. Aspray, G. Royer, & M. G. Ocepek, Food in the Internet Age (pp. 25-35). Springer.

[xi] Hays, T., Keskinocak, P., Malcome de López, V. (2005). Strategies and Challenges of Internet Grocery Retailing Logistics. In Geunes, J., Akçali, E., Pardalos, P.M., Romeijn, H.E., & Shen, Z.-J.M. (Eds.), Applications of Supply Chain Management and E-Commerce Research (pp. 217-252). Springer.

[xii] Aspray, W., Royer, G., & Ocepek, M. G. (2013). Anatomy of a Dot-Com Failure: The Case of Online Grocer Webvan. In W. Aspray, G. Royer, & M. G. Ocepek, Food in the Internet Age (pp. 25-35). Springer.

[xiii] Ibid., pp. 27.

[xiv] Ibid., pp. 27.

[xv] Ibid., pp. 27.

[xvi] Ibid., pp. 28.

[xvii] Ibid., pp. 26-27.

[xviii] Gale Encyclopedia of E-Commerce. (2002). Webvan Group, Inc. Retrieved from http://ecommerce.hostip.info/pages/1080/Webvan-Group-Inc.html. Accessed 7 Feb 2012.

[xix]  McAfee, A., Ashiya, M. (2001, Sept 25). Webvan. Case, Harvard Business School. Retrieved from http://hbr.org/product/webvan/an/602037-PDF-ENG. Accessed 6 June 2013.

[xx] Aspray, W., Royer, G., & Ocepek, M. G. (2013). Anatomy of a Dot-Com Failure: The Case of Online Grocer Webvan. In W. Aspray, G. Royer, & M. G. Ocepek, Food in the Internet Age (pp. 25-35). Springer.

[xxi] Ibid., pp. 32.

[xxii] Ibid., pp. 28-29.

[xxiii] Ring, L.J., Tigert, D.J. (2001). Viewpoint: The decline and fall of Internet grocery retailers. Int J of Retail and Distrib Manag, 29(6):264–271.

[xxiv] Smaros, J., Holmstrom, J. (2000). Reaching the consumer through e-grocery. Int J of Retail and Distrib Manag, 28(2):55–61.

[xxv] Tanskanen, K., Yrjola, H., Holmstrom, J. (2002). The way to profitable Internet grocery retailing: Six lessons learned. Int J of Retail and Distrib Manag, 30(4):169–178.

[xxvi] Williamson, D.A. (2000, Aug 21). Why net delivery service schemes are out of order. Advertising Age. Retrieved from http://adage.com/article/news/net-delivery-service-schemes-order/1337. Accessed 13 November 2016.

[xxvii] Aspray, W., Royer, G., & Ocepek, M. G. (2013). Anatomy of a Dot-Com Failure: The Case of Online Grocer Webvan. In W. Aspray, G. Royer, & M. G. Ocepek, Food in the Internet Age (pp. 25-35). Springer.

Previous:

Blue Bird flies high as an omnichannel taxi company

Next:

Consumer Reports: Would you Take a Chance on the Safety of Your Child’s Helmet to Save a Buck? Today’s Digital-centric Consumer Is.

4 thoughts on “Webvan’s Demise or When Technology Fails to Meet Operations

  1. Wow – what a fantastic summary of a defunct operating model. As you point out, the narrow margin (5%) with the high cost of customer acquisition ($210 per customer) make this model difficult to justify. While the allure of digitization is enticing across all industries, it make more sense for some industries than others. I would imagine that due to many of the points you have made, digitization in Grocery will begin at a store optimization level, perhaps with customers able to schedule pick-up of pre-ordered items. Perhaps the industry will be able to expand to limited delivery options to areas with extremely high population density but I would doubt these services will be “on demand” instead will be up to the company optimizing their supply chain around many orders to minimize spoilage and distribution costs.

  2. Im curious as to how you think Amazon’s approach was different/better and will they ever really make the online grocer business model successful. They certainly have the warehouse infrastructure to take a stab at it, but like you’ve mentioned in your post the 5% margins makes it difficult for any company to get it right. Thats why Amazon has actually started to build a brick and mortar grocery operation which you can read more about here. http://www.geekwire.com/2016/amazons-secretive-drive-up-grocery-store-looks-ready-for-the-holidays/

  3. Great post Great! I actually remember when WebVan came out, my family was really excited to try it. As I recall, we only ever used it one time before my mother declared it “too expensive” and not worth the effort vs. just making her weekly trip to the grocery store. With all digital shopping experiences, consumers give control over to another party to make their grocery selections, which is a fundamentally different shopping experience vs. the storefront that we are all used to.
    I actually did my blog entry on Instacart, which adopted a fundamentally different model for the same business problem. Where WebVan went all in with the warehouses and full fleet of full time workers, Instacart contracts out basically every element of the process (stores and inventory, pickers, drivers, delivery). Time will tell to see if this model ends up being profitable long term, but I think the digital delivery services of today learned a lot from WebVan’s unfortunate failure.

  4. This was a very interesting piece, Greta! I love the convenience of on-demand grocery delivery platforms such as Instacart. I did not realize Webvan was one of the pioneers in this space! I would agree that the main reason Webvan failed was its large investment in warehouses and other fixed cost investments.

    The success of Instacart, on the other hand is because it does not have any warehouses or delivery trucks. Instead, it partners up with existing supermarkets and hires shoppers who use their own cars to deliver grocery items. Customers make orders on instacart’s digital platform and are paired up with a shopper. The customer decides when to schedule the delivery and can typically schedule same day deliveries. Next, shoppers pick up the items and deliver it to the customers using their own cars. The shoppers are paid per hour in addition to the tips they receive from customers. This eliminates most of the high upfront costs that Webvan invested in.

    Source: http://nextjuggernaut.com/blog/how-instacart-works-makes-money-revenue-business-model/

Leave a comment