CASE 7: Webvan. James Ryg CIS

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1 CASE 7: Webvan James Ryg CIS Due November 16 th, 2016

2 Case Overview Brief: Webvan was a subsidiary of Borders Books, which operated in the e-commerce field, allowing customers to handle their grocery shopping online, and have their groceries delivered during a narrow period the next day. In spite of a successful Initial Public Offering, Webvan is having difficulties making itself profitable, even though the company is valued rather highly compared to its actual market impact. They currently are restricted to the general San Francisco area, and serve ten thousand customers. Industry Competition Analysis Webvan Information: Industry of operation: Webvan technically operates in the grocery industry, but more accurately is a service provider within it. As their primary benefit to consumers is saved time, it is safe to say they are in the service industry first and foremost. Because they operate online, it is possible for them to be both cost-leadership and differentiation, but due to difficulties with product bulk discounting, and a small consumer base, they lack the proper bargaining power to sell goods at a price similar to brick and mortars and still turn a profit. 1

3 Company effectiveness analysis: Fiscal: Webvan, despite its very stable funding and credit line extended by Borders, is not doing particularly well. While valued at 8 billion in their IPO, they only made 12 million in sales in 1999, bringing home a 35-million-dollar loss. Market: In general, Webvan operates in the grocery industry. However, unlike brick and mortar grocery stores, which rely on reducing the cost of goods by buying in extreme bulk, a Webvan is equivalent to a local chain supermarket if best in terms of size, meaning that it won t get the same price Walmart and Kroger could. For online delivery services, they are usually value-added services that promise convenience, and are highly differentiated. Product/service: Compared to their direct e-commerce competitors, Webvan has a large number of advantages. Being backed by Borders means that they have a highly sophisticated system for inventory management, and the shift to a hub distribution network greatly improves their service quality. Critical Success Factors: Webvan relies on a small customer base, and needs them to make minimum sized orders to do so. This actually allows them to attempt to compete on both cost-leadership and differentiation, as it saves them the cost of building and operating a series of brick and mortars. 2

4 Five Forces Analysis: Threat of new entry: The threat of new entry is rather high, as they have a large number of direct competitors in their tiny share of the nationwide grocery market (less than 1% of the nationwide market). Bargaining power of buyers: Buyers are incredibly price sensitive and heavily subject to bounded rationality when it comes to groceries. It would not be safe to say that they are particularly able to negotiate with Webvan, but their default tends to just accept the inconvenience of going to the store so they can inspect produce and make impulse purchases. It is important to note however, that the total market currently for e-commerce handled grocery shopping is incredibly tiny, at 435,000 people. Threat of substitutes: In the grocery business, there is not much of a substitute to having to buy food. You can tweak the experience, the service, the quality of the product, and the price, but in the end you are still purchasing groceries. 3

5 Bargaining power of suppliers: In the grocery business, suppliers upstream of the Grocery business hold a large amount of power. They negotiate heavily with the largest customers in the area, as growers are involved in commodities trading, and stores in the industry tend to be hierarchal, functional organizations that are very sensitive to price and willing to spend a great deal to ensure exclusive or very low-cost per unit relationships. Competition: Webvan has a number of competitors, but the largest are supermarkets (both regional and national brands), Peapod.com (which has a strategic alliance with Walgreens to augment its product mix, and ships non-perishables across the us), and streamline/shoplink which provide a custom, comprehensive, experience service aimed at suburban families. Overview of Stakeholders Borders Books: Due to the large investment placed in Webvan by Borders, particularly the funding to transit to a warehouse distribution model, Borders is considered Webvans primary stakeholder. If Webvan fails, borders likely will face a large amount of bad publicity and loss of share value. Webvan Investors: This includes the mentioned hallmark investors, noted to be companies like CBS and Yahoo!, as well as the shareholders of Webvan itself. The investors are in for 120 million at a minimum, which covered hiring and acquisitions. Consumers: 4

6 Consumers have a stake in this as well. Many consumers are going to be initially weary of services like Webvan, as they can neither compete on price equally with the bigger stores, and have restrictions such as delivery time restrictions, and a delay on the delivery itself that pushes the delivery past the time it would take to simply go to the store. Planned ahead however, consumers could use services like Webvan to make their lives easier, assuming they re willing to pay the premium. Potential Alternative Solutions Alternative One: Expand product mix Alternative overview: This alternative would incorporate a larger selection of goods into Webvans catalog, provided it did not steal market from Borders of course. Potential business impact: The potential impact is rather large, provided the right product mix is chosen. Offering other types of goods may very well enable sales that would not normally be possible due to consumers being willing to pay for certain good deliveries as a way to get one-day shipping on other items. Consequences for stakeholders: Borders: Assuming the catalog expansion is done carefully, Borders would be seeing larger revenue streams from Webvan, as new types of markets would be open for competition, and due to the internet being ubiquitous, enabling greater access to the service (since other goods are nonperishable), expands the scope of the business to anywhere there is internet access. Webvan Investors: 5

7 Webvan investors would likely see an increase in stock price, as higher margin items could be sold with less carrying cost. However, it is unlikely that this alone would cause the company to suddenly turn a profit. Consumers: Consumers would benefit from greater catalog diversity and higher quality of service. In addition, being able to selectively increase the scope of the business around certain products makes them more able to benefit from the flexibility of the service, and might even create new customers who are more willing to buy smaller durable or personal goods from Webvan, but need some convincing to buy groceries that way. Alternative Two: Close down (I m serious) Alternative overview: This alternative would involve Webvan closing their doors due to poor performance, and being a burden on their investors and their parent company. Potential business impact: This would clearly kill the business, but would be a wise decision on Borders part to get rid of a bad investment before it becomes more expensive through additional investment. Consequences for stakeholders: Borders: Borders would benefit greatly from getting rid of Webvan, at least in the long run. They could still repatriate the assets of Webvan and put them to greater usage, expanding their own product mix, or simply selling the properties. The expense of Webvan was simply too great to be tenable in the first place, since customers are weary to purchase groceries they cannot feel, or otherwise inspect. 6

8 Webvan Investors: This would hurt Webvan investors. Borders would need to make sure that the investors were taken care of in advance, perhaps with a stock buyback option. However, in the long run, the investors would be out less than if the company ended up tanking due to seriously poor performance. Consumers: To the consumer, there would be little ill effect. Other companies would likely fill the gap, and many customers would never use this service anyway. Alternative Three: Do nothing: Alternative overview: This alternative would involve continuing business as usual. Potential business impact: To be honest, there would be no particularly large impact. We already know that the forecast does not look particularly great, predicting continuous losses. In the long run, this means that the company would fail unless it could somehow render itself profitable. Consequences for stakeholders: Borders: Borders would hold out as the parent company for a while, but would continue to bear the burden of Webvan until it became too expensive to afford. Webvan Investors: Webvan investors clearly were overzealous of the prospects of Webvan in the first place. They will continue to face losses, and eventually the failures of Webvan will end up actually affecting stock prices. 7

9 Consumers: Business would continue as usual. No large changes until Webvan inevitably goes bankrupt from losses. Selected Option & Reasoning Selected Option: Close Down: Webvan is not really worth the money. Consumers in general do not use the service, and other competitors can easily enter and leave the market at will, unless they attempt to set up a distribution network and sell directly to reduce the labor costs involved with shopping for consumers. Rejected Option: Expand product mix: This option could potentially be successful, but would also increase carrying costs of inventory, and may also take focus away from the main business operation. Consumers might be drawn to greater product mix and customizability, but could also simply use Webvan for those items, on which it would have less of a distribution network, and less competitive advantage in sales. Rejected Option: Do Nothing: This is without a doubt the worst option. In a few years, Webvan will likely continue to hemorrhage money, unless consumers could be readily convinced of the benefits and convenience of having your groceries delivered. 8