Webvan Domestic Expansion Failure

WEBVAN DOMESTIC EXPANSION FAILURE

Webvan was born as the supermarket online, able to deliver the grocery purchase made online in 30 minutes.

Its expansion was uncontrolled. With the sponsorship of some of the most famous Internet investors, Webvan was present in 26 cities. The company entered into stock market on November 1999. Their income representd 46% of all of the sector.

A year and a half later, on its last day on the Nasdaq, the securities closed at 6 cents, and is that if his income account shined, he still did more spending. In the first quarter of 2001, Webvan reported losses of $ 217 million. At that time, the company a 830 million dollars loss.

The numbers did not come out, and customers, were satisfied becouse of the speed of delivery and the quality of their products, but it was not enough. In the Bay Area of San Francisco and Orange County, where Internet penetration and therefore the density of customers were higher, the business was almost profitable

The agreement with the construction company Bechtel, from which they would have to be born their famous warehouses, was a million dollars. What in the beginning were food deliveries soon spread to other products like books, PDAs, camcorders or shirts. Webvan's CEO, who scaped a few months before the bankruptcy, played for a long time with the idea of selling its distribution services to third parties.

The company runned out of cash. All of Webvan's money ($ 1.2 billion in financing and a successful start in the stock market) was wasted as a result of ambitious investment plans and the high maintenance costs of modern warehouses were operating below its profitability treshold and far away of its maximum capacity.

The fall of Webvan is an example of difficultie that a online company finds in moving brick and mortar shops away from user preferences. Even more so in the case of the distribution sector, where the customer's relationship with its supplier is very close.

At present the domain Webvan is part of Amazon and its project to sell food by internet that at the moment already works in so many places.

WHY DID WEBVAN FAILED ?

From the supply chain perspective, we need to consider the six drivers, namely facilities, inventory, transportation, information, sourcing, and pricing. Among these, Webvan’s costs of facilities, inventory, transportation, and information are much higher in comparison with traditional supermarket supply chains.

For sourcing, Webvan needed its employees to pick items for orders instead of customers doing this at a bricks-and-mortar store. All of these higher or extra costs were applied to the grocery industry, where margins were only 1% to 1.5%.

To make the matters worse, Webvan advertised that its prices were 5% lower than conventional stores. All of these resulted from its hope that the number of customer accounts would be high enough to make profits after three or four quarters. In reality, the number was far below the forecasts and the company kept losing money. Webvan’s supply chain design was too expensive to be profitable.

From statistics and forecasting perspective, Webvan came out during the boom of Internet companies when there were not enough stories learn from. Timing also played a role here with overly optimistic numbers and forecasts that 5% of US households would buy groceries online in a few years and online grocery market would be worth $3.5 billion in 2000 and $6.5 billion by 2003.

Based on these numbers, Webvans CFO believed that Webvan would be “highly cash generative” and that they were going to operate at breakeven capacity within five quarters of being launched. In reality, it had not hit this target after six quarters since the launch.

From strategy perspective, the management team was too confident and ambitious. They wanted to do everything everywhere in a huge scale, they went against their original strategy of providing a more cost-effective solution.

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