Webvan was an on-line grocery business founded by Louis Borders in 1996; it went bankrupt in 2001. This case study will examine in detail the Webvan business model, compare it with those of other related companies, find out why it went Bankrupt as well as well as give recommendations on the changes that could be made.
At around 1999, Webvan had become a magnet for capital as most private investors were coming in. The IPO of Webvan was on November 5, 1999 and was placed at $15 and ended up closing at $25. This gave the company up to $8 billion, Louis earned himself $2.2bilion. However, as the stock surged some observers were skeptical as they claimed that Webvan had bit off more than it could swallow, this would choke. They claimed it was just a matter of time before Webvan would have to separate the success of IPO from the success of the business. Some observers like Meehan argued that the idea of buying grocery on the web was not a good one.
Border’s idea was to use mechanized warehouse and computerized scheduling system to enable customers order groceries on the internet and have them delivered at a cost relatively similar to that they would accrue if they picked the groceries at the supermarket. He knew that this idea would transform America grocery retailing. However, Webvan’s unsustainable business model was what made it bankrupt in 2001. Although Webvan looked new from the outside, inside it was still using the old economic approach such as; high cost warehouse, its fleet of vans and its labor-intensive delivery system all of which were not viable for producing good results.
Competition is also a major reason to the fall of Webvan in 2001. Competition started becoming stiff by 1999 when many companies ventured into the same line of products as Webvan. Some of these competitors include:
- Pea pod: An online grocer which had 100,000 customers in eight metropolitan states of the US. It operated fully in partnership with grocery stores.
- Streamline: A company that dealt in home delivery of groceries, home cleaning, videos and many other products. It targeted busy suburban communities.
- Home Runs: the company functioned from semi-automated distribution center found in Somerville.
- Net Grocer: An online grocer that served customers in the 48 states of the US from a single distribution center in New Jersey.
- Home Grocer: An online grocer that bought directly from the wholesalers and delivered its products in 120,000 square foot warehouses that were less automated as compared to Webvan. It placed its delivery on orders over $75 free, this attracted many consumers.
- Priceline: Was the most radical on-line grocer. It made a platform such that to place an order; the customer would log in to priceline.com and quote their price on any category and brand. This was famously known as “name-your-own-price” principle.
The above named companies without doubt posed a major challenge to the survival of Webvan. This is because they used new and effective principles in their operation that were much cheaper and much faster compared to that of Webvan and thus it was bound to lose many customers eventually . The Webvan leadership should however consider the following recommendations to ensure that they bounce back to the market:
1) Concentration should be put on commerce and not just on the e-commerce. It is important to master inventory management, finding, delivery and transportation, customer attraction and retention and warehousing and not how good the website looks.
2) Webvan should offer a new technology to customers only if it solves their problems than their current method. It is the consumers who define which technology is appropriate.
3) It is useless to enter a mature, highly efficient industry with an incompetent system. Opportunities come to new firms that may enter the industry occurs when the existing firms have high margins which are inefficient.
4) Finally, Webvan should create an e-tail system that matches the realities of market segment. The older system appealed to the small segment of the market that are the high income households.
Webvan plan to launch a hub in Atlanta, Georgia and Chicago, which would cost $25 to $35 million to build, was an indication of forecasting the future. They were optimistic about the profitability of the new opportunity. They believed that Oakland warehouse would breakeven within a period of six months. The company in October 1999 discussed broadening their markets and even proposed selling of other consumer commodity category so as to earn additional revenue. Although their initial product focus was a grocery, Webvan planned to identify and pursue new product category. They had faith that their day distribution system would position them as still the preferred on-line provider for many consumer products that could be delivered at home.
If your business model does not suit the current reality, your business won’t last. Poor implementation is probably what causes the downfall of a business.
Webvan: Groceries on The Internet Supermarket Business Havard Business School Rev. May 5 2000 : 9-500-052 Print.