Remember Webvan? Were they right or were they just a fad? Let’s look at the business model behind the grocery store delivery service and why they are still relevant. This business model was copied by other delivery services. It was a smart move by Webvan to make groceries available to people on the go. You can order your groceries online, and the delivery person will leave a sticker on your doorjamb to confirm delivery magazine360.
Webvan was a grocery store chain
While the dot-com bust killed several grocery startups, the collapse of Webvan was not the end of the online grocery business. Rather, it relegated Webvan to a lesser-known competitor that grew slowly and deliberatively. Dutch grocery conglomerate Ahold NV acquired Peapod in 2000, for an additional $35 million. Peapod’s growth model relies on partnering with existing retailers to leverage existing warehouse space healthwebnews.
The company began offering groceries through the Internet in the Dallas area, but in February it ceased operations in the city and laid off 220 employees. The move was made to conserve capital and focus on profitability in other markets. It also suspended service in Atlanta and cut 885 jobs. While the company was struggling to find new investors, it remained open in its original seven markets. Despite its rapid growth, the company faced tough competition from traditional grocers, which was one reason why it had trouble keeping up with competition theinteriorstyle.
It was a delivery service
Founded in 1997, Webvan was a delivery service that had nearly $800 million in venture capital investment, including money from Goldman Sachs, Yahoo!, and Sequoia Capital. The company grew rapidly, initially operating in a few major markets, and ordered and built state-of-the-art warehouses. But despite its successful start, Webvan’s business model failed to translate to other markets. The company filed for bankruptcy in 2001 and lost its thousands of employees marketbusiness.
The company was co-founded by Louis Borders, who had founded the successful Borders bookstore chain. Borders planned to build highly automated warehouses that would allow a small team of workers to pick and deliver groceries. While the company eventually lost its funding, Borders returned to grocery delivery and founded his own company, Home Delivery Service. Now, the company boasts more than one million customers, and revenues that exceed $8 billion annually thecarsky.
It was a sustainable business model
Did the webvan founders make the right decision when launching the service? The company spent millions of dollars building its brand and customer base, which was not sustainable for a business that scaled too quickly. On the other hand, Tesco used its established brand and customer base to fuel growth in its online store. Clearly, Webvan failed to make the right choices when setting up their business. While their initial model seemed promising, their resulting failure was a sign of the impending collapse of their model.
In the case of grocery retail, Webvan ignored a century-old evolution in the retail industry. Consumers chose a retailer based on convenience, pricing and selection. The same holds true for gasoline. Moreover, consumers would choose Webvan over other grocery retailers if the latter offered them similar prices and selection. Hence, Webvan’s skepticism about the ‘green’ aspect of their business strategy was understandable.
It was copied by other delivery services
The success of Webvan was not entirely unexpected – the company received several millions of dollars in funding from Benchmark Capital in 1997, as well as investments from Sequoia Capital, Softbank Capital, and the venture arm of Goldman Sachs. Other investors included E-Trade, Yahoo!, and several others. The company has since ceased using plastic shipping tubs, but its vans remain visible. Other delivery services followed suit, aiming to duplicate the success of Webvan.
The company hoped to target three main customer segments – new millennials, price-insensitive consumers, and time-conscious consumers. Nevertheless, Webvan’s early business model was unsustainable due to a number of challenges. Webvan didn’t conduct thorough market research, so it relied on assumptions and untested market size. Moreover, the management team assumed that the average online purchase would translate into high sales.
It was a good bet
If only it had worked out for Webvan. This company has raised more than $400 million in funding since going public two years ago, making it one of the most successful start-ups in history. And it had the backing of big names in the business world, from Priceline and Amazon to the French billionaire Bernard Arnault. Yet the company has struggled with cash flow, resulting in its recent bankruptcy. So, was Webvan a good bet?
The debacles at the beginning of Webvan’s existence only exacerbated the company’s image problems. During the dot-com bubble, the mantra was “Get Big Fast.” Rather than focus on profitability right away, startups should concentrate on reaching scale – and achieving scale is crucial for survival. And Webvan did not even have the scale to reach its target profit margins by that time.
While it’s a common narrative to see Webvan fail, the reality is that the company raised millions of dollars without having a single customer. While Webvan’s failure is not unique, the lessons it learned should be applied across the board. Here are a few. Let’s look at what went wrong. First of all, Webvan didn’t take the six drivers of supply chain optimization into account. In other words, the company was too quick to expand.
The first mistake Webvan made was operating at the metro area level instead of the neighborhood level. A smaller playing field would have made more sense for Webvan. While grocery delivery is profitable in high-density San Francisco, it’s not as profitable in the suburbs. Instead, Webvan should have focused on building route density in specific neighborhoods. Today’s crop of grocery delivery start-ups focus on specific neighborhoods. Using this strategy, they’re hoping to avoid the same mistake.