Tuesday, January 25, 2011

Why did Webvan fail so spectacularly?

A spectacular case study!
For the first part of the question, here are some major reasons why Webvan failed.

From the supply chain management perspective, we need to consider the six performance drivers, namely facilities, inventory, transportation, information, sourcing, and pricing. Among these, Webvan’s costs of facilities, inventory, transportation, and information (including software) are much higher in comparison with traditional supermarket supply chains. For sourcing, Webvan needed its employees to pick items for orders instead of customers doing this at a bricks-and-mortar store. So, it added extra labor costs for handling customer orders. All of these higher or extra costs were applied to the grocery industry, where margins were only 1% to 1.5%. To make the matters worse, Webvan advertised that its prices were 5% lower than conventional stores. All of these resulted from its hope that the number of customer accounts would be high enough to make profits after three or four quarters. In reality, the number was far below the forecasts and the company kept losing money. Clearly, Webvan’s supply chain design was too expensive to be profitable and too elaborate to operate efficiently and effectively.

From statistics and forecasting perspective, Webvan came out during the heyday of Internet companies when there were not enough stories of failures from history to tell and learn from. Thus, timing also played a role here with overly optimistic numbers and forecasts such as 5% of US households would buy groceries online in a few years and online grocery market would be worth $3.5 billion in 2000 and $6.5 billion by 2003. In this high spirit, Shaheen saw the market as $1.5 trillion, an IDC projection for 2003, which encompassed all web-based purchases. Based on these fantastic numbers, Webvan CFO insisted that Webvan would be “highly cash generative” and that the DCs were likely to operate at breakeven capacity within five quarters of being launched. In reality, it had not hit this target after six quarters since the launch.

From strategy perspective, the management team was too confident and ambitious. They wanted to do everything everywhere in a huge scale. Consequently, they went against their original strategy of providing a more cost-effective solution. They acted hastily in building huge, expensive, and complicated DCs. At the same time, they invested money for plans to expand into various US regions at the same time. They also announced projections that were almost impossible to be realized such that if everything went according plan, Oakland DC would be profitable within 6 to 12 months and other DCs might break even in 60 days. Even a tiny company never has everything going according plan, let alone company with complicated information systems and huge infrastructures as Webvan. Naturally, they should have been prepared to get several unexpected problems and thus, that statement should have never been made. They hoped to get 8,000 orders a day from Bay Area DC to make operating margin target of 10% to 12%. In reality, after six quarters, the averaged number of orders was only 2,160, too far below the projection.

Note that all the changes later, including partnerships and Homegrocer acquisition, could not save Webvan due to either ineffective and inefficient designs and implementations or being done too little too late.  

And the second part,  here are some major reasons why Webvan failed spectacularly.

First, its funding happened so fast and spectacularly. In 1999, it was the most funded for an Internet company with $400 million. Its first day of trading, at one point, it mounted to $15 billion capitalization. It raised a total $800 million. All of this funding and market valuation happened for a company with only $4 million in revenue at that time.

Second, its dream team was included so many senior executives experienced in a broad range of industries with well-established companies such as Borders Books, Goldman Sachs, Oracle, and FedEx. With these diverse experts, who could imagine Webvan would fail?

Third, for the three straight quarters in 2000, it had been voted the best online grocer of 12 in a survey. This means, customer satisfaction was achieved well.

Fourth, in the last quarter of 2000, only 6 months before it closed for good, it posted a gross margin of 27%, highly competitive with large conventional grocers.

Finally, the time it took to fail was also dramatic. It closed its doors less than two years since its heyday on November 5, 1999.