Webvan’s Drive Was Its Downfall

In retrospect, all of the signs were there, pointing to the eventual demise of Internet grocery delivery service Webvan (Nasdaq: WBVN).

It didn’t take a lot of map reading or compass checking to see that Webvan was on the road to closure and bankruptcy, not new funding and profitability.

Consider: when the dot-com bubble was first starting to bust, Webvan’s strategy was firmly dedicated to growth, instead of closing ranks and curbing expenses. After the company inked a US$1.2 billion deal in the summer of 2000 to acquire rival HomeGrocer — the merger was finally completed just last month — more than a few industry observers shook their heads. But Webvan drove unflinchingly forward.

The company also went on an expansion spree, only to turn around and close up shop in a number of newly opened markets.

Bad business decisions or calculated risks? You be the judge. Either way, however, it appears the company’s insatiable hunger for market share in the face of consumer disinterest is the reason that Webvan ran out of gas.

In the dot-com world, a strong image is half the battle and a promising bottom line is the other half. Webvan lost on both fronts.

Exit Ramps

When Webvan unceremoniously departed the Atlanta, Georgia and Dallas, Texas markets, questions were raised regarding the company’s long-range plans.

When it consolidated some of its facilities on the West Coast, industry pundits asked even more questions about the company’s strategic vision and likelihood of survival.

When it was revealed that departing chief executive officer George Shaheen would receive US$375,000 a year for the rest of his natural life as part of a deal made when he signed up with Webvan, nearly everyone asked questions about the company’s business acumen in constructing such a contract.

The struggling company’s recent auction of $1.3 million in assets, ostensibly undertaken to finance further expansion, did not do much to change the public perception that Webvan was on its way down.

All of these debacles contributed to an image problem in the industry and among the consumer base. The profoundness of this image problem was exceeded only by the company’s ill-conceived style of cash management.

Where’s the Cash?

As recently as last month, Webvan CEO Bob Swan tried gamely to put on the best face, saying the company could achieve financial self-sufficiency by the middle of 2002.

Swan claimed the company needed to raise $25 million to reach profits by the target date. Unfortunately, he could not point to any potential sources for that capital.

The fact that his company’s stock closed at 6 cents on Friday could not have been particularly encouraging to anyone on the short list of potential investors. (An 11th-hour effort to affect a 25-to-1 reverse stock split and keep the company listed on the Nasdaq was approved last week — but has now been scrapped with the closure announcement.)

Swan even claimed recently that the company would continue to expand as soon as it broke even. Here’s a thought: when aggressive expansion was the company’s biggest misstep and a primary reason why it was strapped for cash in the first place, it might have been a good idea to stop talking further expansion.

E-Commerce 101

Conducting editorial post mortems on recently deceased dot-coms serves two purposes.

First, it is instructive to figure out what we might learn from others’ mistakes. In this case, the lesson learned is that there might be room for Internet grocers, but that they probably need a brick-and-mortar presence. Consider Britain’s Tesco. All indications are that it will thrive.

The other lesson of the Webvan story? Controlled growth.

Building an Internet business does not have to occur at warp speed. Slow and steady can still win the race. Yes, keeping investors quiet and calm during an arduous marathon to profitability is tricky, but it beats dropping out and filing bankruptcy. Webvan was in too much of a hurry to find the top of the e-commerce world.

The Human Element

The epilogue of Webvan’s bankruptcy filing is that approximately 2,000 people are now unemployed and looking for jobs in a slowing economy.

While Shaheen is well-provided for with his golden parachute, the workers who made it possible for Webvan to innovate, take risks and deliver for as long as it did were left twisting in the wind. No mention of any type of severance package was made when Webvan made its announcement.

Swan said simply, “At the end of the day … the clock has run out on us.”

The last lesson of the Webvan story is that a company’s guts have less to do with its flight toward glory than with how it treats its people in the end.

What do you think? Let’s talk about it.


Note: The opinions expressed by our columnists are their own and do not necessarily reflect the views of the E-Commerce Times or its management.


6 Comments

  • As a regular Webvan user and having just received my last delivery on Saturday, I was very disappointed to hear of their closure. However, I couldn’t help but wonder over the months of receiving service that so much money was spent on marketing efforts. I seemed to receive a gift of some sort or another with every delivery. I was also surprised last year when they re-launched with a new logo and re-designed trucks. Did they really need to do that — and how much did they spend? I still believe that Webvan solves a basic need for consumers who either hate grocery shopping (as I do) or don’t have the time to do it. But I think that they could have been a little more frugal in their approach — solve the need first, then do the fancy marketing tactics. I hope some company tries the SF area again soon — I’m running out of milk.

    • Delivery of groceries isn’t anything new, indeed such was the NORM prior to the advent of the supermarket.

      In fact, nothing in the Webvan concept was new, from basic grocery retailing to order fulfillment to operation of a delivery service.

      Even their arrogance was pretty old fashioned, as was their greed, ignorance and lack of common business sense.

      Their demise was no mystery.

      Want your groceries delivered to your home? If you live in a major metropolitan area,

      that service is available — and always has been.

      • I have to say I’m sorry this happened to Webvan. Those vans, to me, were kind of a symbol of the melding of cyberspace and the real outside world. Also, in an increasingly overly-busy society, a service like Webvan should have been an easy sell to the public. Webvan needed some more time some extreme economizing internally. Also, I have to agree with the person who said one problem was Webvan was dealing with perishable items. Any business that sells perishables has this whole other challenge that other companies don’t understand.

        • As a maintenance tech for the operation in So. Cal,. getting to know the drivers and all the people involved in the “show,” shame on the brass (you know who you are) for not practicing what you preached to those people who would, as Warren Buffett said, jump off a roof for you, but why? That’s not how you treat people. It is a shame to see such greed for one’s self. My hats off to those men and women who believed in the dream you only preached. To you I say, float away in your little bubble again, next time I hope people remember your names and smile and wave on your way down.

  • I would be interested in an update from the author about whether WebVan’s bankruptcy terminates its obligation to fund George Shaheen’s retirement. Was this 375k pension fully funded by an annuity at the time he hired on? If not, I doubt the company is going to be putting funds into it now!

  • Although Webvan was an excellent service, the company tried to do too much, too fast, as described in this article. How Amazon could get away with a massive expansion program and years without a profit, while Webvan did not, probably has a lot to do with the fact that Amazon is storing books and shipping them through 3rd parties, and Webvan was dealing with perishables and driving them around itself.

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