Webvan.com Failure

[Janie Mccorey]

Webvanan online grocery, employed technological breakthroughs in its distribution system but blundered through key strategic and operational decisions, which led to a complete collapse of the company in just 5 years.

On webvan.com, a customer could choose groceries from a wide range of high-quality products and schedule their delivery for the following day. If the customer had any questions, he/she could call a toll-free number. The groceries were delivered within a 30-minute window of the specified time and left on the doorstep or brought in to the kitchen. Webvan started off as a food grocer but later expanded its product offering to include other items such as electronics, pet supplies, kids clothing or OTC drugs[v]. Customers were satisfied with the product variety, quality and punctuality of the service[vi]. Webvan had an ambitious target of opening operations in 26 metropolitan areas and was operating in 10 major cities at its peak[vii],[viii].

Although some analysts argue that Webvan made a fundamental mistake by choosing groceries as their core line of business (the grocery business has one of the smallest profit margins, i.e., below 5%)[xvi], others point at strategic and operational failures of the company. To begin with, no consumer testing had ever been conducted to grasp the demand for online grocery shopping, instead, the founder believed that Webvan could be successful by capturing even the small part of the vast American grocery market, which back then had an estimated value of more than half trillion dollars[xvii],[xviii],[xix]. If the company had done the research, they would have realized that people find too many product offerings confusing, want to be able to use coupons or purchase large, economical packs of diapers and paper towels (Webvan was continuously increasing its product offering, did not sell economy-size packs and did not use coupons until the very end of its operations)[xx]. The company was also criticized for its short-window attended delivery that did not allow to efficiently rationalize delivery routes[xxi]. Companies founded after Webvan tried to solve this problem by having a more flexible delivery period and by using reception boxes[xxii],[xxiii],[xxiv],[xxv],[xxvi]. It is argued that brick-and-mortar grocery chains are better equipped to fill online orders as they can leverage their existing warehouse infrastructure and minimize capital investments, while fully-automated and specialized distribution centers like Webvan can only work in high-volume, constant-demand environments[xxvii]. Technological breakthroughs that Webvan employed in its distribution system could not make up for strategic and operational shortcomings and failed to save the company from failure.

[iii] Tedeschi, B. (2001, Aug 13). The fallen dot-coms are not yet cold, but some sealers are already selling their detritus as memorabilia. New York Times. Retrieved from -commerce-report-fallen-dot-coms-are-not-yet-cold-but-some-dealers-are-already.html?pagewanted=all&src=pm. Accessed 12 November 2016.

This was a very interesting piece, Greta! I love the convenience of on-demand grocery delivery platforms such as Instacart. I did not realize Webvan was one of the pioneers in this space! I would agree that the main reason Webvan failed was its large investment in warehouses and other fixed cost investments.

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In this series on the tech of tech graveyard, we had the opportunity to exhume the once promising startup Webvan whose only crime was scaling too fast and it paid dearly for it what do we have to learn from the history of Webvan let's check it out.

Webvan, an online grocery delivery company, initially employed technological breakthroughs in its distribution system but made critical strategic and operational mistakes, leading to its complete collapse in just five years.

Founded in 1996 by Louis Borders, Webvan aimed to revolutionize the grocery industry by offering personalized online shopping and delivering groceries directly to customers' homes within a 30-minute time slot. Under the leadership of founder Louis Borders, Webvan leveraged technology extensively.

In 1999 Webvan was fully launched and operating in scale, On the webvan.com website, customers could select groceries from a wide range of high-quality products and schedule delivery for the following day. The groceries would arrive within a 30-minute window and could be left on the doorstep or brought into the kitchen. Webvan expanded its product offerings beyond food to include items such as electronics, pet supplies, kids' clothing, and over-the-counter drugs. The company received positive feedback from customers regarding the variety, quality, and punctuality of its service.

Webvan differentiated itself by not outsourcing its distribution. It owned and operated warehouses located within metropolitan areas, equipped with sophisticated inventory management systems and computer software. These fully automated, temperature-controlled warehouses minimized the need for human labor. Warehouse workers could fulfill customer orders without moving more than 19 feet, and filled totes only needed to be lifted twice during the process. Webvan's warehouses were considered among the most automated at that time.

Amongst all other causes that led to the failure of Webvan, records have it that two main factors contributed to Webvan's demise: excessive initial fixed costs and an overly ambitious expansion strategy.

The construction of each best-in-class warehouse cost $30m. On the webvan.com website, customers could select groceries from a wide range of high-quality products and schedule delivery for the following day. The groceries would arrive within a 30-minute window and could be left on the doorstep or brought into the kitchen. Webvan expanded its product offerings beyond food to include items such as electronics, pet supplies, kids' clothing, and over-the-counter drugs. The company received positive feedback from customers regarding the variety, quality, and punctuality of its service.

Webvan differentiated itself by not outsourcing its distribution. It owned and operated warehouses located within metropolitan areas, equipped with sophisticated inventory management systems and computer software. These fully automated, temperature-controlled warehouses minimized the need for human labor. Warehouse workers could fulfill customer orders without moving more than 19 feet, and filled totes only needed to be lifted twice during the process. Webvan's warehouses were considered among the most automated 5 million, with Bechtel, a construction company, contracted to build all 26 warehouses for $1 billion in 1999. Additional expenses for vans, computer systems, software, and personnel pushed quarterly costs to $125 million. Although innovative, the warehouses were untested before construction began, resulting in the abandonment of certain features after they were operational. The warehouses were not only expensive to build and operate but also too large for the slow growth of the customer base. Most warehouses operated at only one-third capacity despite being capable of supplying the equivalent of 18 grocery stores. By 2001, Webvan had around 750,000 customers, many of whom did not use the service regularly. Acquiring a new customer cost the company as much as $210.

Apart from the high costs, Webvan made strategic and operational mistakes that impeded its technological advancements. The company did not conduct consumer testing to gauge the demand for online grocery shopping.

Had Webvan conducted research, they would have discovered that customers found too many product offerings confusing and desired the ability to use coupons and purchase large, economical packs of products like diapers and paper towels. Additionally, Webvan's short-window attended delivery system hindered efficient delivery route optimization. Other companies that emerged after Webvan addressed this issue by offering flexible delivery periods and using reception boxes. Critics argued that brick-and-mortar grocery chains were better positioned to fulfill online orders due to their existing warehouse infrastructure and the ability to minimize capital investments. They suggested that fully automated and specialized distribution centers like Webvan could only succeed in high-volume, constant-demand environments. Despite employing technological breakthroughs in its distribution system, Webvan's strategic and operational shortcomings proved insurmountable, leading to the company's failure.

Entrepreneurs should focus on finding the right balance between innovation and real-world viability. While Webvan employed groundbreaking technology in its distribution system, it failed to address strategic and operational aspects crucial to its success. Entrepreneurs should conduct thorough market research and consumer testing to understand customer preferences, needs, and market dynamics before diving into an ambitious venture. Validating the demand for their product or service through pilot projects or smaller-scale operations can help mitigate risks and make informed decisions based on real-world feedback.

Prioritize market research and validation to ensure there is a viable market for the product or service. Seek feedback from potential customers, conduct surveys, and even test the concept on a smaller scale before scaling up operations. This iterative approach allows entrepreneurs to refine their offerings based on real-world data and customer insights.

Webvan's downfall was partially attributed to exorbitant fixed costs and an aggressive expansion strategy. The company invested heavily in building state-of-the-art warehouses and expanding into multiple cities without considering the slower growth of its customer base. Overextending resources and scaling too quickly without achieving economies of scale can lead to financial strain and operational inefficiencies.

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