Webvan Case 6 CIS 410-01 By: Bradley Erickson
Mission Statement To provide a safe secure online customer experience that offered nearly double the selection of products that is offered by traditional Grocery stores at comparable prices. Introduction Webvan is an internet based company that combined grocery shopping with the ease of home delivery. On November 5, 1999, Webvan completed its much anticipated initial public offering (IPO) and made headlines across the business world. Despite tiny sales and big losses to date, shares of the two-year-old company, which combines internet grocery with home delivery, shot to an 80 percent premium on its first day of trading. As the trading day ended, Webvan had a total market value of more than $8 billion, nearly half the capitalization of grocery industry leaders such as Safeway, Inc., and Kroger co. Webvan was founded by Louis Borders, whom also founded borders books. Borders was confident that Webvan could prevail over its existing online competitors by extending aggressively. In the internet economy, Borders argued that first-to-scale, not first-to-market, counted. While Webvan had operated for a mere five months in the San Francisco area, more than 10,000 people had signed up for the service. This isn t bad considering that it had taken its rival Peapod, Inc., 10 years to amass a customer base of 100,000 households. Webvan s 1999 sales were expected to amount to $11.9 million while its losses would amount to $35 million. These sales were less than large grocery chains make in one day. Summary/Situation Webvan faced many different important strategic decisions affecting its immediate future. Borders was already thinking of how he could ensure the sustainability of his company. Borders pondered possible new revenue streams and what additional, if any, delivery markets and products Webvan could pursue in the long term. Now that Webvan had become a public company, the pressure of investor sentiment would be a major factor in Webvan s future strategic choices. Should Webvan use its large market capitalization to buy regional grocery chains in markets it was interested in pursuing? Should Webvan ever consider a takeover offer from a large grocery chain? Should Webvan continue to push forward with additional product lines? The overall problem facing Webvan was what their strategy should be in navigating and growing in a new and unpredictable market. Generic Strategy The strategy that Webvan followed was differentiation. Webvan had hoped to differentiate itself within the online grocery market in two distinct areas: Operations and Customer Service. On the operations side, Webvan's 80 software programmers created proprietary systems that automated, linked, and tracked every part of the grocery ordering and delivery process. Borders created the first Webvan distribution center in Oakland, California, which was 330,000-square-feet and served as a prototype for 26 other centers Webvan intended to build. This distribution center cost $25 million dollars and utilized these proprietary systems to service customers within a 40-square-mile radius around the San Francisco Bay area
giving it the ability to serve as many customers as 20 normal supermarkets. Once orders were placed on the Web, they were automatically routed to the warehouse. "Pickers" were stationed throughout the distribution center to assemble the orders in plastic boxes or totes, which were color-coded depending if the items were refrigerated, frozen, or dry. The pickers traveled no more than 19.5 feet in any direction to reach 8,000 bins of goods that were brought to the picker on rotating carousels. These orders were then placed on a refrigerated truck and these trucks took the orders to one of 12 docking stations throughout the bay area where they were loaded onto one of more than 60 vans so that drivers could take the orders directly to people s homes. Webvan expected that each facility would handle more than 8,000 orders a day, totaling 225,000 items and generate annual revenues of $300 million. In comparison, a conventional stand-alone supermarket brought in $12 million a year. On the customer service side, Webvan aimed to provide its customers with 50,000 products from which to choose compared to a normal grocery store that carried 30,000 items. Webvan customer could order a shopping list of items and receive the groceries the next day within any specified 30-minute time period. Deliveries could be attended or unattended, meaning that the customer could either be home to receive the order, or the Webvan associate could drop off the order while the customer was away from home. Personalized shopping lists, which appeared after a customer s initial order, were also designed to provide faster and easier shopping services for the time-strapped customer. Webvan s market position as the qualitydriven gourmet online grocer with everyday grocery prices was an attempt to differentiate itself from its competitors. Internet Enabled Business model When looking at the internet enabled business model, we must look at how the choice of profit site, Value, scope, Revenue sources, Pricing, Connected activities, implementation, capabilities, sustainability and cost structure in the context of Webvan. - Profit Site The profit site is what an organization does better than its competition. In the case of Webvan, the profit site would be the focus on operations as well as customer service. Webvan hoped to compete with the traditional brick-and-mortar grocery stores as well as its other online competitors by providing large distributions centers that would be able to serve as many customers as 20 normal supermarkets (Afuah). Webvan was focused on providing a customized and personal shopping experience of which a traditional grocery store couldn t provide. These were designed to provide faster and easier shopping services for the time-strapped customer (Afuah). These are two of the main things that define Webvan s profit site. - Value The purpose of value is to maximize customer satisfaction. This can be done in two different ways, being cost-leadership and differentiation. In the case of Webvan, they do this through differentiation. It strived to differentiate itself from traditional grocery stores
as well as online grocery competitors. It attempted to differentiate itself from the brick-andmortar groceries by providing a more customized and personalized customer service, fast grocery deliveries as well as a large product mix. Webvan hoped to outperform its online competitors by marketing itself as the quality-driven gourmet online grocer with everyday grocery prices (Afuah). Webvan also employed its own culinary director, who was responsible for creating chef-prepared meals that catered to the lifestyle and tastes of Webvan customers. - Scope The scope of a business usually depends on what you are selling and usually defined by a geography limited area. In the case of Webvan, they were usually limited by the range of the distribution centers. Webvan s prototype distribution center was built in Oakland, California and had an approximate range of a 40-square-mile radius around the San Francisco Bay Area. This distribution center was designed as a prototype for the other 26 planned centers that Webvan intended to build. The end goal for Webvan was to be able to serve the entirety of North America and eventually expand into Europe, South America and Asia. - Revenue Sources Using the internet enabled business model allows organizations to create revenue sources that traditional off-line stores are unable to tap into. Although online advertising as well as selling demographic data collected through online sales are highly profitable, Webvan didn t take advantage of these. Webvan received revenue solely from sales of grocery products and delivery fees. The company did not intend to sell its customer data to third-party database firms, nor did it receive online advertising fees, since it wanted to remain neutral among the different product brands that it sold online (Afuah). - Pricing Using the internet enabled business model allows business to cut down on variable costs. The traditional approach, as well as the approach that Webvan takes, is Menu pricing. This form of pricing eliminates any forms of negotiation for the customers. The price you see is what you pay for the item. It also provides a quick and efficient sales process. - Connected Activities In the context of Webvan, the primary activities performed are the user customization and the fast delivery process. These activities were designed to help Webvan get an advantage over their competitors. To offer better value to the right customers, a firm must carefully choose which activities it performs and when it performs them (Afuah). - Implementation When looking at Webvan, we see that their organizational structure and strategy were efficient in their attempt to reach their goals. The thing that failed Webvan was the environment in which they started the business. This was because the environment at the time of Webvan s creation didn t have a sufficient market for Webvan to profit. Finding
customers was a very difficult task and the pool of customers wasn t very large at the time. Implementation in an organization depends on the relationship between strategy, structure, systems, people and environment (Afuah). The other relationships were good outside of the environment. - Capabilities The capabilities must be in line with the strategy and the goals of that organization. With Webvan, the cost required to provide the capabilities required to run the company exceeded Webvan s profits. Even though Webvan had the capabilities to serve a large market and a large number of customers, the profit just wasn t there to support those capabilities. - Sustainability To sustain a competitive advantage, a firm can depending on its capabilities, environment and technology in question pursue some subset of three generic strategies: block, run and team-up (Afuah). A sustainability strategy is chosen by looking at an organization using the complementary asset model. This model determines what sustainability strategy an organization should follow based on its imitability and complimentary assets. Analyzing Webvan s imitability shows that the services it provides are easy to replicate leading to a high imitability. The complimentary assets held by Webvan are easily accessible and free for competitors to utilize. Using this, a high imitability with free complimentary assets, we see that Webvan must use the run sustainability model. This sustainability model calls for Webvan to be constantly innovative in order to stay ahead of the competition. This model requires a large number of talented people in order to survive. Webvan did attempt to follow the run model by hiring 80 software programmers to design its system, but they just didn t have the profits to keep up a sustained innovative system. - Cost Structure A firm s cost structure expresses the relationship between its revenues and the underlying costs of generating those revenues (Afuah). Basically, in order for an organization to stay in business, it must make a profit. The goal for any organization is to make money now and in the future (Goldratt). From the start, Webvan was in trouble. The high costs of creating enormous distribution centers vastly outweighed the small revenue that Webvan made from sales. They were just losing money from the beginning. Porter s five forces Threat of New Entrants: High The threat of new entrants is high due to the rapid growth of internet usage by customers in the 1990s which transformed the grocery delivery business into an online version. With more consumers using the internet for informational and e-commerce purposes, online grocers tried to benefit from the efficiencies associated with internet technology.
Threat of Substitutes: High The threat of substitutes is extremely high because consumers can shop at numerous amounts of brick-and-mortar grocery stores as well as online grocery competitors. Supplier Power: Low The supplier power would be low since there are many suppliers of different food products such as produce that Webvan needs to achieve their goals. Buyer Power: High The buyer power would be high due to the numerous amounts of substitute grocery options available to them. Degree of Rivalry: High Rivalry would be high due to the constant threat of new entrants and the constant competition for new customers. Stakeholders Stakeholder 1: Webvan Shareholders The shareholders have a critical stake in the success of failure of the company. After its IPO, Webvan s primary goal was to provide profit to shareholders. Stakeholder 2: Louis Borders (Founder) As the founder of Webvan, Borders has a large stake in the success of Webvan. He has a monetary stake as well as his reputation. Stakeholder 3: Webvan Employees The employees have a large stake in the success of Webvan. Stakeholder 4: Webvan Customers Since Webvan is in an industry that relies on customer loyalty, the customers have a stake in the future of the organization. Stakeholder 5: Webvan Contractors Engineering and construction firm, Bechtel Group, has a major stake in the success of Webvan since they signed a $1 billion agreement with Webvan in 1999 to build distribution centers and delivery infrastructure in 26 new markets over the next 2 years. Courses of Action/Alternatives 1. Do Nothing This option would involve Webvan continuing business in its current state and not changing anything. If Webvan continues as usual without changing anything, if the predictions were to be accurate then, by 2001, sales would be $518 million, with an overall loss of $302 million for the year. $518 million would be less than 1 percent of the entire grocery market (including brick-and-mortar sales). If Webvan were to continue down this route, they would eventually run out of money and potentially go bankrupt. Webvan shareholders would lose
their investments. The employees would all lose their jobs. Borders would get a bad reputation for bankrupting the company. The Bechtel group would lose out on the contract. Webvan customers would be forced to choose another online retailer or even go to a brick-and-mortar store such as Kroger. 2. Purchase Regional Grocery Chains This option involves Webvan purchasing regional grocery chains in order to diversify in brick-and-mortar stores as well as its current online market. According to Afuah, These regional chains already possessed supplier networks as well as their own distribution centers. Webvan could possibly leverage some equipment from these distribution centers while attempting to replicate its existing distribution centers. This option would also eliminate a few competitors in these regions. This option would be costly and could prove difficult for a company making losses. If this option was to be chosen, Webvan could create more infrastructure, as well as tap into existing customer bases. If this option was successful, the shareholders will benefit from increased profits. The employees could potentially get bonuses based on rising profits. Borders will keep a good reputation and still be head of a successful company. The Bechtel group will keep its contract and could potentially sign future contracts for more money. The customers will continue to shop at Webvan and enjoy all of the benefits. 3. Attempt to Get Bought Out This option would call for Webvan to be purchased or attempt to be purchased by an existing organization such as Amazon. While Webvan did have a large valuation that provided some protection against takeovers, a buyout is still an option for Webvan. This option would greatly depend on the organization that purchases Webvan. This option would allow Borders to eliminate his risk within the company and allow Webvan access to the capital and assets of the new organization. Some of the employees could lose their jobs because the buying organization might not need every employee. The customers may still purchase items from Webvan, but they may not like the new organizations methods of delivery. The shareholders could greatly benefit depending on how the buyout goes. 4. Exit the Market This option would call for Webvan to exit the market completely and liquidate all of its assets. Since Webvan was making a loss and financial forecasts predicted even more losses for Webvan in the future, Webvan can cease all operations and exit the market completely. This option could save the shareholders from a large loss if Webvan were to fail as a business. This option may cause Borders a large deal of embarrassment since the business failed, it would be better than having to exit based on bankruptcy. The employees would have to find a new place of work. The customers would have to find a new grocer to purchase from. Bechtel group would lose out on the contract. Recommendation
Even though Webvan had a good idea along with good capabilities to achieve their goals, they just didn t have the capital to support the capabilities and they were losing money. My recommendation for Webvan would be to just Exit the market. I feel that this would be the best option due to the current state of Webvan and the decisions that were being made. Since Webvan wasn t making money, the buyout option wouldn t be recommended because Webvan wouldn t be very valuable and I don t feel that any organization would want to take a chance on them. The risks outweighed the rewards. Prior to Webvan entering the online Grocer market, other companies in the market were not performing well. Despite the hype of Internet companies and e-commerce as the "wave of the future", analysts and grocery industry experts were unsure about the actual growth potential of the online grocery market. Industry analysts estimated online grocery sales of $156 million in 1998, less than 1 percent of the entire grocery market. Market predictions for the year 2003 ranged from $4.5 billion (Andersen Consulting) to $10.8 billion (Forrester Research). With such vastly different market projections, it appeared difficult to predict which online companies would do well, if any. Additionally, of the 53.5 million people who were online in the United States, only 435,000 ever purchased food online. This number represented less than 1 percent of the 14.5 million users who had made purchases online (Afuah). Based on that, it would be best if they just exited the market. The lack of a market in the industry that Webvan is trying to be a part of is the primary reason for Webvan to exit. They are on a collision course with bankruptcy and it s just a matter of time. This option would be best for everyone within Webvan as well as the shareholders. It will save them from potentially losing large investments in the company. Webvan entered a market that really didn t have a profitable customer base, or even enough customers, and invested way to much in a stagnant industry.
Bibliography 1: Management of Information Systems, CIS 401 Course pack, Professor Barker 2: Afuah, Allan, and Christopher L. Tucci. Internet Business Models and Strategies Text and Cases. 2 nd ed. Boston: Irwin/McGraw-Hill, 2001. Print. 3: Afuah, Allan, Denise Banks, Otto Driessen, Thomas Oh, German Scipioni, and Rachel Zimmerman. Webvan: Reinventing the Milkman. (2001): n. page.print. 4: Goldratt, Eliyahu M., and Jeff Cox. The Goal. N.p.: Gower, 1989. Print. 5: Porters 5 Forces