Online Grocer Webvan Shuts Operations
Two years ago, Chas Schley wiped out one of life’s aggravating chores by having groceries delivered to his home. Now, the Oakland software programmer is among 750,000 Webvan customers who will trudge back to the produce aisle to squeeze the tomatoes and thump the watermelon.
On Monday, online grocer Webvan abruptly shut its operations and joined the dot-com failure list haunted by once-soaring Internet retailers such as EToys, Furniture.com and Pets.com.
Schley was one of Webvan’s first shoppers, and he soon bought nearly all his groceries from the Internet-based delivery service. Schley took his last delivery Sunday--it arrived on time, as always.
“The whole Webvan shopping experience adapted itself to my habits,” he said. “I’m going to have to go back to the grocery store now, which is a bummer.”
With high-tech warehouses, colorful trucks and cheerful drivers, Webvan took on Safeway and other traditional grocers, but it never lured enough customers to turn a profit.
Great service, loyal customers and $800 million in investments couldn’t save Webvan.
Webvan, based in Foster City, Calif., plans to file for bankruptcy protection and laid off nearly all its 2,000 employees, including nearly 600 in Southern California. Webvan also terminated service in all seven of its markets, including Los Angeles, Orange County, San Diego and the Bay Area.
The demise of the high-profile e-tailer--which had garnered support from some of Silicon Valley’s most prominent investors--casts more doubts on the chances of creating a successful retailer that can survive exclusively on the Internet.
“Webvan built a great mousetrap, but one that consumers weren’t ready to buy,” said Ken Cassar, an analyst with Internet research firm Jupiter Media Metrix. “It makes sense to build maybe six to 12 months ahead of your market. Webvan may well have been building 10 to 20 years ahead.”
Founder Planned Rapid Expansion
Webvan’s executives boldly planned to open 26 distribution centers across the country and transform the way groceries were sold just as FedEx’s overnight service changed the package-delivery business. But even conventional grocers make only about 2 cents of profit per $1 in sales, and Webvan piled up more than $1 billion in losses.
Webvan was the brainchild of Louis Borders, founder of the Borders bookstore chain. His plan was to rapidly build highly automated warehouses that would allow a small team of workers to pick, pack and deliver groceries so efficiently that they could compete with the local grocery store. In 1999 and 2000, Webvan expanded from its Bay Area beachhead to metropolitan areas across the nation, along the way acquiring rival HomeGrocer in a $1.2-billion deal.
After the Internet stock bubble burst last year, investment funds for Webvan--which was losing about $2 million a day--rapidly dried up. Meanwhile, Webvan failed to attract enough customers to cover the escalating costs of its cutting-edge technology, fleet of vans and marketing efforts. Cassar estimates that Webvan spent $143 for every $100 of groceries the firm sold.
Webvan’s stock soared as high as $34 in November 1999, giving the firm a value of more than $10 billion. By Friday, Webvan’s shares had sunk to 6 cents; trading was halted Monday.
Sean Cumby, a Webvan driver in Oakland, remembers being modestly wealthy on paper because of his soaring stock options. Cumby stuck with the company until the end, yet will receive no severance pay. But like all hourly Webvan employees, he will receive a $900 gift from an anonymous donor.
“I don’t have any hard feelings,” Cumby said. But “I’m a little bit gunshy about the dot-com thing. . . . [For a new job] I’ll probably look for something a little more solid.”
Cumby blamed unfettered ambition for Webvan’s failure.
“The mistake was expanding too fast in a type of business that nobody has [figured out] how to run,” he said. “Expecting the public to say, ‘This is great and I’m going to jump in,’ ” is unrealistic.
Another former Webvan staffer who will feel the financial effect is George Shaheen, former chief executive, who presided over Webvan’s steep decline until leaving this year. Now he will have to stand in line with other creditors to try to collect a portion of his golden parachute of $375,000 annually for life.
The ritual of food shopping--from squeezing the melons to selecting the perfect cut of beef--is so ingrained that many consumers will reject online grocery services no matter how well run or competitively priced they are, analysts said.
“The old ways of doing things are so entrenched that they take years to change. The same is true for any e-tailer, any new way of doing things,” said Tim Miller, an analyst with the research group Webmergers.com.
Web Grocers May Catch On Eventually
Webvan faced the same problems that forced many other touted online stores out of business: Low-cost bulky goods such as water, pet food, toilet paper and soft drinks are expensive and cumbersome to deliver, making them almost impossible to make money on.
And given the razor-thin profit margins in the grocery business, “things have to go very, very right for a company to be successful,” Miller said.
Webvan continues an e-tail death march that put 329 consumer e-commerce companies out of business since January of last year, according to Webmergers. Bookseller Amazon.com--which has yet to show a profit and has seen its stock dive 84% in the last year--remains one of the few celebrated online-only retailers.
But analysts expect the online grocery business to catch on eventually as conventional grocery chains introduce online-based delivery to supplement their stores. “Where’s the best place to advertise an online grocer? At checkout, where people are standing in line wishing they weren’t,” said Rob Rubin, an analyst with Forrester research.
Chicago-based online grocer Peapod Inc. remains in business. Peapod is controlled by Dutch grocery giant Royal Ahold, which owns a number of grocery chains in the United States. Ahold uses those stores as a low-cost distribution launching pad for online shopping. Safeway also is experimenting with Web-based ordering.
But long lines or short, online shopping has lagged behind expectations.
And some Webvan customers feel like refugees, trudging back to the supermarket.
“I’m depressed, disappointed,” said Webvan loyalist Gillian O’Connell, a stay-at-home mom with two young children in Oakland.
O’Connell said she would rather take her kids to the park than drag them to Safeway. “But with Webvan out of the picture, what’s Safeway’s incentive to offer” online delivery? O’Connell said. “Webvan was so good. At least I got to enjoy it when it was around.”
