Webvan

With the introduction of the Internet as a medium of commerce, many retail sectors have seen the introduction of Internet-based competition. The earliest e-tailers were companies such as Amazon.com and CDNow, selling items including books, music, and videos. Playing on the obvious correlation between the Internet savvy and computers, software and hardware companies also entered the online retail market. Every one of these companies has a model in which margins are increased by the lowered costs of centralization. Cutting out the need for traditional "stores", warehouses serve both as storage and distribution centers. A parcel carrier such as Federal Express or UPS then delivers the item to the consumer. This model works very well for durable and fungible items that are easily compatible with the existing methods of delivery. However, it is just this type of retailing model that Webvan seeks to integrate with the market for groceries. Using the grocery market as leverage for the introduction of its "Last-Mile" strategy, Webvan can then enter other markets, consequently expanding its revenue base. TOP

Many speculate about the difficulty of selling groceries, and more specifically, meat and produce on the Internet. However, the grocery market is not so attractive in its present compatibility with the Internet, but in its size. The approximate size of the market for books is about $30 billion, while the music industry is about $20 billion. The market for consumer electronics is about $75 billion. While these numbers seem large, they are dwarfed by the size of Webvan's addressable market. According to Progressive Grocer, the market for groceries is $520 billion, followed by an $80 billion market for drugstores (National Association of Chain Drugstores) and a $100 billion market for "Home Meals" prepared meals (ACNielson). With a current addressable market of over $700 billion, Webvan may be looking at one of the largest opportunities in e-tailing yet. (See Chart) TOP

The fundamental structure of Webvan's model is one based on technology, scalability, and consumer contact. Webvan as spent about $10 million developing one of the most advanced warehouse distribution systems in the world. Webvan's technologically advanced distribution center is highly automated and designed to provide scalability and to create significant cost savings compared with traditional supermarkets and existing online competitors. The software and technology in the warehouse, such as carousels and 4.5 miles of conveyor belt, bring individual products directly to the worker, compared with competitors' designs, which require the worker to move throughout rows of products to fill individual orders. Webvan's standard distribution center, at approximately 300,000 square feet, provides greater scalability because it can serve a larger customer base in each market than its key competitors. Each distribution center serves the same customer base as approximately 18 conventional supermarkets. However, due to the advantages of centralization and technology, it only requires 900 employees to operate, as opposed to the 2,700 required to operate the conventional grocery stores on a similar scale. These lowered costs translate into higher operating margins for Webvan. According to Goldman Sachs Research, Webvan's long-term model can achieve operating margins between 10% and 12%, while the conventional grocery store operates on margins of about 4%. TOP

Key to the future of Webvan is the viability of its "Last Mile" strategy. The "Last Mile" concept is based on an improvement of the basic relationship between the e-tailer and the consumer. One of the difficulties for many e-tailers is the retention of customers. With the sale of fungible items, many e-tailers compete only on the basis of price. On the Internet, there is nothing to stop a consumer from easily switching to a different online store because of a lower price. However, with the adoption of the "Last Mile", Webvan can attack this problem of disconnection with the consumer. Being in control of every aspect of a sale, Webvan has the ability to form relationships with its customers. There are a variety of reasons that groceries and Webvan have this advantage over other e-tailers. First, Webvan personally delivers their product. This personal recognition is very important towards customer retention. Secondly, people have a continuous need to buy groceries. The convenience of staying with one company is accentuated when the consumer buys goods on a regular basis. Such services that Webvan provides, such as the retention of grocery lists adds to that convenience. With a strong connection created with the consumer, Webvan can then leverage that connection to provide additional, higher margin products and services. Built into the distribution centers capabilities are the ability handle books, music, clothes, and most consumer electronics. Also, Webvan can use its delivery infrastructure to partner with other companies. So, by taking control of the "Last Mile", Webvan gains the favor of the consumer and opens the door to new markets. TOP

Webvan's future will be directly dependent upon the reaction of the consumer to the new service that it provides. Webvan's model of high fixed-costs and low variable-costs, while risky, is designed to maximize scalability and efficiency for the long-term. At the present time, Webvan only operates in the San Francisco Bay area. However, it plans to expand into 15 new markets by the end of 2001. The success that Webvan has in these new markets will dictate the viability of such a model. Another important benchmark in the effectiveness and viability of the business model is the September 2000 quarter, where the Oakland distribution center should be EBITDA (earnings before interest, tax, depreciation and amortization) break-even.

While nobody has been able to predict the future, Webvan's unique concept and huge potential give them a high probability that they will be there.

Additional Notes.

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