The E-Business Software Weekly is a series profiling trends and developments in software and applications that support e-business, the Internet, and other electronic communication channels. Look for a new story each week in this space.
Food For Thought
One of the great experiments in e-business died last week. Webvan, the long-struggling online grocer, finally bowed to financial reality and closed its doors, leaving behind hundreds of thousands of disappointed customers and investors.
It wasn't supposed to be that way. Backed by one of the nation's most successful retailers-Louis Borders, founder of Borders Group, the country's second largest bookseller-Webvan was led for most of its life by former Andersen Consulting (now Accenture) head George Shaheen, an executive with impeccable credentials. Few Internet startups could claim this pedigree.
Or the boldness of vision. Some 20 months ago, Shaheen declared that Webvan would "reinvent the grocery business, just as Andersen had reinvented consulting. Webvan will set the rules for the largest consumer sector in the economy. The creation of 26 distribution centers-each one bigger than 18 conventional supermarkets-will take costs out of the equation."
Well, not quite. During calendar year 2000, while Webvan garnered $178.5 million in sales, it incurred a staggering $525.4 million in expenses. In a failed attempt to cut costs, the company dismissed 900 of its 3,500 workers and pulled out of three metropolitan markets earlier this year, but to no avail. An additional $25 million in financing-sought after but declared unnecessary until 2002-was never forthcoming.
"Webvan has weathered numerous challenges, and in a different climate, I believe that our business model would prove successful," CEO Robert Swan told reporters on making last week's announcement. "At the end of the day, however, the clock has run out on us."
In the wake of these events, those hardy souls still pursuing e-business ventures, perhaps with even less experience and less bulging pockets than Webvan, must be struck anew with shivers of worry, left to wonder: if Webvan can't succeed with the likes of Borders and Shaheen and hundreds of millions of dollars, how can we?
Missed Expectations
Looking back nearly two years makes some financial analysts look incredibly perceptive. Following Webvan's November 1999 IPO, Ben Holmes, president of ipoPros.com, remarked to CNN that, while the IPO "definitely had its challenges," the company's first-day performance "tells me that investors looked beyond [them]. If it works, it'll work huge." But, he hastened to add, "If it doesn't, it's a crash and burn."
Other analysts, including the investment bankers that took Webvan public, foresaw an unequivocally brighter future-and wound up badly missing the mark. Among other things, Webvan's bankers forecast that, by 2000, the company would incur a loss of just $154.3 million on sales of $120 million-significant but hardly catastrophic. As things turned out, Webvan actually exceeded its sales estimates by 50%, but its losses were more than twice what the company had anticipated. Worse, with the economic downturn and ongoing dot-com collapse, there was no turnabout in sight.
Still, at the heady peak of the Internet euphoria, perhaps the early optimism was justified. Webvan offered consumers an enticing promise: shop from the comfort of your computer, and have your groceries delivered to you within a 30-minute timeframe. Moreover, few companies could boast a potential market that included nearly 100% of the United States population. And the grocery delivery model was working well elsewhere in the world, in countries as far ranging as New Zealand (whose leading grocer Woolworth's is now in its third year of online operations) and Great Britain (where Number 1 grocer Tesco is already profitable online). Hence, there was credible reason to expect that Webvan could succeed as well.
And for the most part the company executed admirably. Despite a few critical missteps, like a warehouse build-out that proceeded too rapidly, Webvan's service, by all accounts, was prompt and professional, and its merchandise was equal in quality to that of most land-based grocers. Its prices, while sometimes more expensive than the local grocery store, were not exceptionally out of line. And its Web site was quick and well-organized, offering one of the most pleasant shopping experiences on the Internet.
So successful was Webvan in its first year of operation, in fact, that it was able to swallow its larger rival HomeGrocer.com in a $1.2 billion stock deal last June that quadrupled WebVan's customer base and promised to extend its reach into 13 metropolitan markets by the end of 2000. Webvan, in short, was soaring.
Still, the dark clouds that eventually enveloped the company began rolling in earlier this year (ironically, shortly after another putatively successful online retailer, eToys, was forced to call it quits). Webvan CEO Shaheen resigned this past April, and the company simultaneously ceased operations in Atlanta. Its stock, once as high as $34 per share, had plummeted to 16 cents. And in the company's 2000 annual report, released that same month, Webvan's auditor expressed "substantial doubt" that the online retailer would survive 2001.
This time, the forecast proved all too accurate.
Lesson from the Virtual Aisles
While scant comfort to its employees and investors, Webvan's failure provides much needed further clarification about what will and won't work in e-business-and so offers a number of important lessons for both entrepreneurs and existing businesses seeking to sell products, content, or services online. Here are some of the most noteworthy:
Lesson No. 1. The Internet is a channel, not a business. As with failed Internet-only companies Pets.com, Living.com, Garden.com, and scores of others, the vast majority of Webvan's startup costs resulted from having to build a distribution infrastructure and marketing presence from scratch-costs that already operational retailers need not bear. True, some Internet-only companies, like Amazon, have succeeded in building an online business from the ground up, but Amazon's flagship product, books-unlike groceries-have a high value-to-weight ratio and can be delivered without local distribution centers, greatly minimizing the startup infrastructure expense. By contrast, most of the few successful online grocers, like Tesco and Woolworth's, have merely added Web-based ordering and door-to-door delivery to an existing, mature brand and retail infrastructure.
Lesson No. 2. The numbers have to work. Even under the best circumstances, some businesses are not well-suited to online sales. While obvious now for products ranging from automobiles to cat litter, the same cautionary proposition may hold, to at least a significant degree, for groceries as well. San Jose Mercury News columnist Scott Herhold recalls a November 1999 conversation with FedEx founder Fred Smith, in which Smith, perhaps the nation's foremost expert on the economics of door-to-door delivery, as much predicted that Webvan would fail. Smith, says Herhold, "based his argument on the numbers. He pointed out that the average Webvan delivery person was able to make only three deliveries an hour in suburbia. Sometimes it took longer." His point, Herhold says, "was that there wasn't-and couldn't be-enough customers in a given area to justify paying that delivery person, running the truck, and keeping the warehouses. To make the numbers work would mean adding an unacceptable charge to each delivery."
Lesson No. 3. An Internet business must offer its target market a substantial value proposition. Even its advocates concede that Internet shopping is generally less satisfying than shopping in a physical store or even browsing through a paper catalog. This is especially so for groceries, whose appeal to shoppers often depends heavily on physical appearance (not just for meats, fruits, and vegetables, but for many packaged goods as well). And so, to be successful, an Internet business must offer significant value to customers to compensate for the inconveniences of slow Web page downloads and the inability to physically inspect products prior to purchase. Companies like Amazon (with its huge inventory, extensive customer reviews, and sophisticated recommendation engine) and eBay (with its wide-ranging, find-it-nowhere-else product selection and exciting auction format) amply supply this countervailing value. While Webvan did offer great appeal to a certain class of grocery shoppers, like the prototypical stay-at-home parent with three young children and a four-story walkup apartment), for most people the value proposition was not sufficiently attractive: the marginal time savings of shopping online were outweighed by the inconveniences of using the Internet and the loss of the visual and social pleasures of shopping in a physical grocery store.
Lesson No. 4. The business has to make as much success off the Internet as on. Home delivery of groceries is nothing new. Not too many years ago, "milkmen" regularly brought milk and related grocery products directly to people's doorsteps. The practice almost completely disappeared in the 1960s, however, as it became increasingly uneconomic and as consumers began placing more emphasis on product choice. As the home-delivery model expands to encompass not just milk but the entire range of grocery purchases, these problems multiply. For instance, no matter how complete the grocery vendor's product line, the online grocery purveyor inevitably will not be able to fulfill at least some of a consumer's needs (either because the products require physical inspection or because the online grocer doesn't carry the right brand). As a result, for a great many people, a grocery store trip will be required anyway. Once such a trip must be made, most of the online grocer's time-saving advantage evaporates, and many consumers will find it easier just to shop for everything they need at the neighborhood grocery store, rather than to take on the burden of shopping, not just at multiple stores, but in multiple venues.
For companies basking in billions of dollars of online sales, such concerns might not be worthy of note. But for firms still struggling to break even on their Internet operations (a group that includes virtually all online merchants), such issues cut to the heart of their financial future. Think about it: if a land-based retail store owner discovered that large proportions of her customers were refusing to hand over their credit card once they reached the checkout counter with their selected merchandise--and that a nontrivial percentage of patrons were refusing even to enter the store for fear of being robbed--the outcry would not end until the problem was resolved.
A Necessary Reminder
Perhaps the most important lesson to be learned from Webvan's demise, though, is that, like the similarly dramatic failures of Pets.com, eToys, and others, it is a special case that in no way demonstrates the impracticality of the entire e-business enterprise-no more, say, than the recent bankruptcy of 100-year-old Montgomery Ward's "proved" the lack of viability of department stores. Land-based retailers, catalog retailers, consulting companies, and other types of businesses fail all the time-sometimes spectacularly so. But only in rare exceptions (like the continuing decline of domestic textile mills and family farms) do these failures signify a sector on the wane. More often, they are merely examples of what Joseph Schumpeter once called "creative destruction," or the replacement of less efficient uses of capital with more efficient ones.
As mentioned, all of this scant comfort to the people who lost jobs or money amidst Webvan's collapse. But it is a necessary reminder that building a successful e-business requires just as much foresight, wisdom-and, yes, risk-as building a successful land-based business ever did.
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