Intelligent e-tailing: Avoiding Webvan's Mistakes

(TMA International Headquarters)

Although the U.S. retail sector contin­ues to show signs of improvement in 2001, considerable concern regarding "e-tailing" has been expressed in light of the recent bankruptcy filing by cybergrocer Webvan.com.

With the bankruptcy filing, the company laid off 2,000 employees and inflicted a severe financial blow to its investors. Between its initial funding in 1996 and its filing of bankruptcy, Webvan.com went through a staggering $830 million. Venture capital firms holding the short end of the stick include VC icons such as Benchmark Capital, Sequoia Capital, Softbank Corp., the Barksdale Group, Yahoo! Inc., and E*Trade Group Inc.

The failure of the premier online grocer will serve as a classic business school case study for years to come on how not to plan a business. There are many reasons for Webvan’s failure, including:

1. An incorrect business model. The com­pany erroneously assumed that it was in the technology business, not the grocery business.
2. Management’s lack of retail food expe­rience. Webvan was an online super­market run by consultants, "techies" and others who were made officers and directors, even though they had no retail food experience. Even CEO George Shaheen, former chief of Arthur Andersen Inc., had lit­tle or no food-related experience. Because grocery stores operate on very thin margins, even the most effectively managed can lose money. Webvan founder Louis Borders, founder of Borders Books & Music, was an expert in selling books, but books do not expire or spoil.
3. A lack of understanding of the sociology and psychology of retailing food. Web­van’s management did not grasp how consumers shop for food. People go to supermarkets to look at and even feel the merchandise. Buying food is a tac­tile experience and a social event as well. Customers like to speak to the grocer, the butcher or the wine depart­ment manager, for example. There must be a special reason for people to forego supermarket shopping.
4. Lack of demographic understanding. Webvan located major warehouses in Atlanta and Los Angeles, where peo­ple are used to driving and would rather drive to a store than wait for delivery. Only transplanted couples who hailed from congested metropoli­tan areas and who both work warmed up to the Webvan idea. Webvan’s problems were exacerbated in California’s Orange and San Diego counties, both of which have large Latin American and Asian populations. These customers were already being served by local grocers who catered to these ethnic communities much more effec­tively than Webvan could.
5. Erroneous target marketing. The most obvious customers for Webvan’s ser­vices were not soccer moms or the upscale suburban families the company targeted but people who have prob­lems getting to a grocery store. Obvious potential customers were senior citi­zens, college students, mothers with very young children, handicapped indi­viduals, late-night workers and, of course, upscale dot-com workers.
6. The high cost of running an online gro­cery business. The cost for building Webvan’s high-tech Atlanta warehouse alone was a staggering $40 million­—much more than warehouses for tradi­tional retail grocery chains. Webvan used the latest technology to automate its warehouses, bought hundreds of refrigerated delivery trucks, and hired and insured drivers allover the country.

The demise of Webvan does not mean that the online retail industry is unviable. According to the trade group Shop.org, 72 percent of catalog retailers, 43 percent of store-centered retailers and 27 percent of online retailers were running profitable Web enterprises at the end of 2000. The key to their success is that they understand that the Internet is just one more alternative in a portfolio of communication options.

Some of the more successful e-tailers include:

1. WalMart.com. The company has bene­fited significantly from redesigning its Web site and focusing on items that its customers have demonstrated they want to buy online rather than offering all of the products it sells in its stores.
2. Amazon.com. The company consistently attracts large amounts of online traffic through key partnerships and by selling items that range from CDs to toys, tools, electronics and prescription drugs. The company is the largest online bookseller and is likely to become profitable by the fourth quarter of this year.
3. 1800flowers.com. Selling fresh flowers and gifts via its toll free numbers as well as the Internet, this company suc­ceeded by establishing good commu­nications with customers. Among its offerings are live chats and e-mail link­age with patrons.
4. Sephora.com. This online cosmetic company did what the dot-com world initially considered blasphemous-it established traditional retail outlets to bolster its Internet sales. Realizing that selling its products on the Web alone was not sufficient, the company was a pio­neer of the "clicks and bricks" strategy.

The next generation of New Economy grocery stores includes such Old Economy mainstays as Safeway and Albertsons. In the days since the demise of Web van, Albertsons has seen a sudden surge in online orders through its Web site (www.albertsons.com). The company uses its stores as distribution hubs and also plans to accept online orders for customer pickup-no expen­sive trucks, drivers in starched uniforms or $40 million warehouses.

Safeway is partnering with Tesco, a United Kingdom-based multinational grocery chain that has successful Internet experience, to take advantage of Web opportunities while avoiding Webvan’s mistakes.

E-tailing does work. By using the Internet intelligently, old-economy grocers such as Safeway and Albertsons, far from being dinosaurs, are the wave of the future.