Webvan was an online grocery delivery service that started doing business in the late 1990s. Customers could order their items and have them delivered within a thirty-minute time frame that they specify when they order. They offered free delivery for all of their items, regardless of order size. The service was available in eight U.S. markets: San Francisco Bay Area, San Diego, Los Angeles, Chicago, Seattle, Portland, Atlanta, and Orange County. They had planned to expand the service to a total of 26 cities.
Webvan tried to build their grocery network on their own, instead of becoming partners with supermarket chains in the markets that the company served. They signed a contract with Bechtel to build $1 billion in high-tech warehouses, worth about $30 million each. None of Webvan’s senior executives had any experience in managing supermarket chains.
Webvan raised $375 million from its IPO, more than any other online company except for Amazon.com. Some of the major backers for Webvan included its founder, Louis Borders, Benchmark Capital, Softbank, Sequoia Capital, and former Netscape Communications CEO Jim Barksdale. Webvan spent much more money on their infrastructure than they generated from sales and eventually ran out of their investor’s money. For instance, in 2000, they had sales of $178.5 million, but had $525.4 million in expenses. The business was never profitable during its lifetime. The company was still expanding until late 2000, when it bought out one of its rivals, HomeGrocer.com for $1.2 billion in Webvan stock.
Webvan attracted George Shaheen, who left Anderson Consulting in November 1999 to become the company’s CEO. He left Webvan in April 2000. As part of Shaheen’s contract with Webvan, the company was required to pay him $375,000 each year for the rest of his life. Webvan’s CEO, Robert Swan, took over after Shaheen left the company.
When Webvan started to charge for delivery of groceries, their sales dropped sharply. The company also received some bad press when Shaheen resigned. According to the company spokesman, Bud Grebey, “Some of our customers thought we had gone out of business. Some new customers thought our closure was imminent and guessed it wasn’t worth signing up with us.”
In May 2001, Webvan released a statement saying that they were going to receive an additional $25 million in funding to try to restore faith in the company. In one last effort to save the company, the shareholders voted for a 25-to-1 reverse stock split to raise the value of the company’s stock so it could still be listed on the Nasdaq Stock Market. They never ended up implementing the split and on the Friday before they announced their bankruptcy, the stock ended at six cents.
When they shut down the business, they laid off about 2,000 employees. They donated all of the perishable food left over from the venture to local food banks. The non-perishable items were either returned to suppliers or sold.
Gartner analyst Whit Andrews said that the failure of Webvan does not mean that there is no market for online grocery retailers, and that “The future of the online grocer market belongs to the grocery stores.” Some regional online grocery delivery companies such as ShopLink.com have also gone out of business. There have been successful online grocery delivery companies, such as Peapod, and GroceryWorks.
One of the reasons that Webvan failed was because the company believed that they had to get big fast. They were more concerned about expanding their business into other markets than about making a profit in the markets they were in already. The company was never profitable. Another reason was that they offered free delivery, no matter the size of the order. When they did start to charge for delivery they ended up losing many of their existing customers, who only used the service because delivery was free. The biggest mistake that the company made was not partnering with existing grocery chains in the markets that they served. Doing so would have kept the company from having to buy warehouses to store the food that they were selling. If they had partnered with a grocery retailer, they would have gained valuable information on the grocery market and would have been able to catch many of their mistakes before they ended up hurting the company.