This case study is about Louis Borders' Webvan which had an extravagant and glamorous start in 1999 and then filed for bankruptcy in 2001. It covers how, why and what happened during these 2 years before it went bankrupt. It serves as a cautionary tale for companies worldwide.
2. Background
• Webvan was an online credit and delivery grocery business
• Founded in the heyday of the dot-com bubble in 1996
• Founder: Louis Borders (also a co-founder of Borders Bookstore in 1971).
• Headquarters: Foster City, California (near SiliconValley).
• Delivered groceries to customers’ home within a 30 minute window of their
choice.
• At its peak, it offered service in 10 U.S. markets.
• It went bankrupt in 2001
3. The Funding
• Raised approximately $1.2 billion dollars from private investors and IPO.
• Investors:
• Goldman Sachs
• Yahoo
• CBS Inc
• Knight – Ridder Co
• Softbank Co
• Benchmark Capital
• Sequoia Capital.
4. The Strategies that they thought would work
• The company expected to have only about 900 to 1,000 employees per
center, compared with about 2,200 to 2,700 for the supermarkets.
• The company kept real estate costs low by having only one large site per
metropolitan region, and the sites were located in low-cost industrial areas
rather than in high-priced residential neighborhoods.
5. The Expectations
• To offer the best quality products at the cheapest price by click of a button.
• Hiring high profile employees from companies would lead the company to
success.
• To deliver goods within a 30-minute window selected by the customers in
that week.
• Basically, presenting an unprecedented hassle free approach to allow
customers to do grocery shopping while sitting in front of their computers.
6. The Challenges
• Grocery businesses have a tiny profit margin of about 1-2%.
• Web retail sales involve delivery several days after order, but grocery orders
contain spoilables and must be shipped right away.
• Customers expect high quality but are unwilling to pay extra for
convenience.
• Customers also want to inspect groceries before purchasing.
7. The Infrastructure
• Distribution Centers of about 350000 sqft each.
• Fleet of delivery trucks.
• Highly automated information systems for warehouse management,
routing, scheduling and communication with suppliers.
• Website for ordering.
8. The Information System
• During the ordering process, the customers selected an open 30-minute
delivery time slot during the next seven days.
• A delivery optimizer marked slots as reserved if they had already been
reserved.
• The order was electronically transmitted to the relevant warehouse.
9. The Information System
• The software devised an optimal picking plan, the number of containers
required, the type of packaging as well as when to start loading the
containers for timely shipping.
• The containers were shipped via truck to a specific transfer station near the
delivery address and then delivered by delivery trucks.
• GPS and route planning software was used to map the most efficient as
well as alternative routes for delivery trucks.
10. The Information System
• Webvan determined what to order from its suppliers based on actual and
expected demand.
• If an item was not available at the warehouse when a customer ordered it,
suppliers were automatically informed using a communication website.
• The process of sorting received goods was also automated.
• However, Webvan was too small to force its suppliers to invest in supply
chain technology.
11. Where it went wrong
• Infrastructure Cost far exceeded sales growth.
• Huge upfront investment.
• Bechtel Corporation hired in July 1999 to construct 26 Distribution Centers of about
350000 sqft each across the USA at a cost of $1B.
• An in-house engineering team working with Optimum Inc. ofWhite Plains, NewYork,
to design and build systems for warehouse management, routing and scheduling, and
for communication with suppliers.
• The company had only started operations in June 1999.
• Recruited a dream team consisting of senior executives which had no
management experience in e-commerce.
12. Where it went wrong
• Acquired HomeGrocer in June 2000, despite both Webvan and HomeGrocer
operating with severe losses.
• Expansion into Atlanta, Sacramento, Chicago, New Jersey without breaking
even or at least minimizing losses at existing centers.
• Customers unwilling to sacrifice the ability to inspect groceries before
payment.
• Average order by the end of 2000 was $81, significantly lower than the $103
required forWebvan’s sustainability.
