Webvan
From Invertopedia, the encyclopedia of how things fail
Webvan was an online grocer that delivered to customers' homes in a 30-minute window they chose[7][8]. It went public in November 1999 with one market, the San Francisco Bay Area[1], signed a $1 billion contract with Bechtel to build warehouses for a 26-city plan[6], and burned through more than $800 million in venture money and IPO proceeds[2]. It shut down and laid off about 2,000 workers in July 2001[7].
Contents
The bet
Big, highly automated warehouses would let Webvan sell groceries more cheaply than supermarkets, which paid for more staff and expensive city real estate[3]. Its Oakland warehouse covered 330,000 square feet[1], and each new city was to get one like it[6].
Speed mattered more than proof. Peter Relan, Webvan's former head of technology, later wrote that the company launched in new cities "on the thesis that the unit economics of home grocery delivery would be profitable," and that the whole strategy depended on the Bay Area model working eventually[9].
What happened
| Jun 1999 | Webvan opens its Oakland warehouse and starts serving the Bay Area. It makes $4.2 million in sales through September 30.[1][3] |
|---|---|
| Nov 1999 | The IPO raises $375 million at $15 a share, and first-day trading puts the market value at $7.9 billion. Webvan still operates in one market.[1] |
| Nov 30, 1999 | Webvan signs leases for distribution centers in Chicago, Seattle, Dallas and Washington, D.C., part of a $1 billion expansion.[8] |
| Apr 2000 | Service opens in Atlanta while the Bay Area operation is still unsteady. An executive recommends slowing down; another argues for pressing on because of promises to Wall Street.[2] |
| Jun 26, 2000 | Webvan agrees to buy rival HomeGrocer.com in a stock deal valued at $1.2 billion. Webvan had lost $144.6 million in 1999 on $13.3 million in sales.[10] |
| Apr 2001 | Webvan pulls out of Atlanta and cuts staff; its cash has fallen to $115 million from $212 million three months earlier. CEO George Shaheen resigned on April 13.[11] |
| Jul 9, 2001 | Webvan stops taking and delivering orders, lays off about 2,000 of its roughly 2,600 workers and says it will file for Chapter 11.[5][7] |
| Jul 13, 2001 | Webvan files for bankruptcy. Its shares close at 3 cents.[4] |
The kill shot
It built for national scale before the numbers worked in a single market. Every new city added warehouse cost before the first one had shown it could make money.
Sequoia's Mike Moritz, a Webvan board member, told Reuters the company "committed the cardinal sin of retail, which is to expand into a new territory - in our case several territories - before we had demonstrated success in the first market"[2]. Each new city needed well over $50 million just to start, and the Bechtel contract was for warehouses worth more than $30 million each[9].
Inside the warehouse the costs were too high. Picking and packing a $100 bag of groceries cost about $30, and the company needed to get that to $10[2]. Deliveries spread across whole metro areas meant vans drove long distances for few drops; Webvan's former vice president of distribution called delivery density "the biggest failure of Webvan"[2]. In 2000 it had $178.5 million in sales and $525.4 million in expenses[7].
Red flags ignored
- One market, many contracts. At the IPO Webvan served only the Bay Area, but it planned new distribution centers at $25 million to $35 million each.[1]
- Thin-margin goods, costly fulfillment. It cost about $30 to pick and pack a $100 order.[2]
- Low delivery density. Serving whole metro areas meant long drives between stops.[2]
- Mass-market prices for a premium service. Webvan matched Safeway's prices, which drew price-sensitive customers, Relan wrote.[9]
- Growth promised to Wall Street. An executive argued the expansion had to continue because of promises made to investors.[2]
The cost
More than $800 million of venture money and IPO proceeds spent in a little over three years[2], and losses of at least $830 million[3]. The IPO alone raised $375 million[1]. Softbank lost $160.3 million on its stake, the biggest loss among the private investors[4].
About 2,000 people lost their jobs at the shutdown[7], and service ended for more than 750,000 active customers in seven markets[3]. CEO George Shaheen's contract promised him $375,000 a year for life after he left[12].
The inversion
Make one city profitable before you sign for the second. Prove the cost of a single delivered order in one dense neighborhood, then grow only as fast as that number holds.
What survived
The people and the robots. Former Webvan executive Mick Mountz founded Kiva Systems, whose warehouse robots grew out of ideas developed at Webvan, and Amazon bought Kiva in 2012 for $775 million[2]. Four key Amazon executives were Webvan veterans, and AmazonFresh drew on their experience; the service started in two Seattle neighborhoods in 2007 and grew slowly, and the webvan.com address became part of Amazon[2].
References
- ^ “Webvan Stock Price Closes 65% Above Initial Offering”. The New York Times (Matt Richtel), November 6, 1999 (read via the Internet Archive). $375 million at $15 a share, the $7.9 billion first-day value, one market, the 330,000-square-foot Oakland warehouse, $4.2 million in sales from June 2 to September 30, new centers at $25 million to $35 million each, Borders as founder.
- ^ “From the ashes of Webvan, Amazon builds a grocery business”. Reuters (Alistair Barr), June 18, 2013 (read via the Internet Archive). More than $800 million spent, the Atlanta launch and overruled warning, Moritz's quote, delivery density, the $30 pick-and-pack cost, Kiva and its $775 million sale, Webvan alumni at AmazonFresh, webvan.com.
- ^ “Webvan goes under / Online grocer shuts down -- $830 million lost, 2,000 workers fired”. San Francisco Chronicle, July 9, 2001 (read via the Internet Archive). Launched in June 1999, at least $830 million in losses, more than 750,000 active customers in seven markets, the cost-advantage thesis.
- ^ “Venture lessons in Webvan collapse / Financing history a cautionary tale”. San Francisco Chronicle, July 15, 2001 (read via the Internet Archive). The funding rounds, the $15 IPO price, Softbank's $160.3 million loss, Borders as founder, the Friday bankruptcy filing and the 3-cent close.
- ^ “Webvan delivers its last word: Bankruptcy”. CNET, July 9, 2001. The shutdown and Chapter 11 plan, the 26-city plan and $1 billion Bechtel contract for warehouses of about $30 million each.
- ^ “What Webvan Could Have Learned from Tesco”. Knowledge at Wharton, October 10, 2001. Bechtel hired to build 26 warehouses for $1 billion, each modeled on Oakland.
- ^ “Webvan announces shutdown, Chapter 11 filing”. CNNfn, July 9, 2001 (read via the Internet Archive). About 2,000 of 2,600 workers let go, orders stopped, the 30-minute window, $178.5 million in 2000 sales against $525.4 million in expenses, the 26-market plan.
- ^ “Webvan expands into four new markets”. CNNfn, November 30, 1999 (read via the Internet Archive). The four new leases, the $1 billion expansion funded partly by the $375 million IPO, free delivery in a 30-minute window.
- ^ “Where Webvan Failed And How Home Delivery 2.0 Could Succeed”. TechCrunch (Peter Relan), September 27, 2013. Launching cities on the unit-economics thesis, over $50 million per city, Safeway pricing for a mass market.
- ^ “Webvan Group buys HomeGrocer.com in $1.2B deal”. CNNfn, June 26, 2000 (read via the Internet Archive). The $1.2 billion stock deal and the 1999 results.
- ^ “Webvan quits Atlanta, names new CEO”. CNNfn, April 26, 2001 (read via the Internet Archive). Atlanta closed, cash down to $115 million from $212 million, Shaheen's April 13 resignation.
- ^ “Former Webvan CEO gets $375,000 a year for life”. CNNfn, May 16, 2001 (read via the Internet Archive). Shaheen's lifetime payments.