Will Webvan Flatten $500 Billion Grocery Industry?

Online grocer Webvan Group, Inc. fired a salvo across the shopping carts of the brick-and-mortar supermarket industry last week, when it announced that within two years it would be delivering Web ordered groceries free-of-charge in 26 major markets throughout the United States. Moreover, some analysts speculate the move could be the first step in the eventual restructuring of the $500 billion (US$) per year grocery business.

Supermarket moguls shouldn’t just be worried that the Foster City, California-based startup placed a $1 billion order for Bechtel Group to build the automated warehouses slated for different regions — but they should also be concerned that Webvan’s current food prices are as much as 5 percent less than those of many grocery chains.

This is possible Webvan says because its distribution centers, such as the one it operates in Oakland, California can handle the volume of 20 supermarkets with less labor cost and store overhead.

Heavy-hitter backing

Another factor that gives the two-year-old company’s e-commerce foray into the supermarket industry so much clout, is that a host of big players have backed it financially. Knight-Ridder Co., CBS Corp., Softbank Corp. of Japan and Silicon Valley’s Benchmark Capital and Sequoia Capital have pumped more than $100 million into Webvan. In fact, industry analysts estimate that Webvan’s latest round of venture-capital funding competed in spring, has enabled the company to raise about $700 million.

While this might not have captured the full attention of its brick-and-mortar competitors, it has definitely created a stir among e-commerce analysts.

“I can guarantee you that in two years they’ll be the leading online seller of groceries,” said Ken Cassar, an analyst with Jupiter Communications.

Even though Zona Research estimates that some of Webvan online competitors such as Peapod and NetGrocer are currently bigger and better known, it concurs that Webvan’s “deep-pocketed investors” can afford it to ramp up in a way marginal players can’t.

Eliminate the middleman

Zona adds, however, Webvan’s aggressive game plan of replacing the supermarket as a middleman between the producer and the consumer is facing a least one social obstacle. It contends that the community function of buying groceries at local supermarkets — where folks can interact with friends, neighbors and relatives — is sometimes more important than the inconvenience associated with filling up a shopping cart.

Nonetheless, Zona does acknowledge that some market segments where Webvan could beat supermarkets soundly include the disabled, elderly, and residents of crime-ridden neighborhoods.

Certainly anyone who’s recently gone grocery shopping and had to wait in a long line behind someone who takes forever to write a check can appreciate the beauty of Webvan’s business plan.

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