There were several key issues/problems that led to the demise of the Webvan enterprise. Among those issues include:
Delivery – Window & Density. As stated in the case, “if you have delivery with the density of a paper route, this thing would work”[1], but unfortunately that was not possible for Webvan. The company depended on a high volume of customers that had an average order over $100 that lived near each other. A combination of those factors and the number of visits each customer would engage Webvan’s services would help spell out success for Webvan. The initial model called for a 30-minute delivery window as well, which was eventually revised to a 60-minute window. The initial projection was too aggressive which was a common theme in the rise and fall of Webvan.
Market Penetration. Initial estimates within Webvan indicated that a 1-3% penetration rate into the online grocery market would make the economics of the company feasible, whereas analysts predicted 10-12% penetration would be required to make the company successful. A bad forecast got the company off on the wrong foot and set bad expectations from day one.
Aggressive Expansion Plans. The Webvan business model calls for aggressive expansion plans into major markets. The expansion plans do not call for any sort of experiential market testing or adaptation to lessons learned from other markets, including understanding the consumer demand for each of the targeted geographic markets. According to a reference in the case, some analysts “sounded alarms that Webvan might expand faster than consumer demand.”[2]
Focus (or lack thereof) on Core Competencies. What is Webvan? The company is an online retailer that sells and delivers groceries directly to the consumer. But what does Webvan do well? They excel at producing a user-friendly web store, they have excellent warehousing and inventory management procedures, and they pick and pack their customers groceries for them. What does Webvan need help with? They need help from experts in transporting the groceries to the end consumer - that is not their core competency.
Capital Investment Requirements. Webvan has extremely high costs in several areas and has a considerably high cash burn rate. The distribution center (DC) investment is $35 million to build versus Homegrocer (a competitor at the time – later acquired by Webvan) whose DC capital investment was only $8 million. Marketing costs were also considerably high and were budgeted around $200 million a year.
