webvan case summary

5/26/2018 Webvan Case Summary

1/25

Bahria University

BBA


2/25

Genesis of Idea

Founder Louis Border, founder of bookseller TheBorders Group Inc.

Incorporated Intelligent Systems for Retail in Dec 1996,named it Webvan Group in April 1999.

Mission Todeliver the last mile of e-commerce.

Last mile referred to make gilded pathway into theAmerican consumershearts and homes that everyoneincluding Amazon.com to Wal-Mart to FedEx lusts after.

Webvan planned to begin with groceries and hasexpanded its business to other items includingelectronics and books etc.


3/25

From 1997 to May 1999, focused developing web

stores and constructed its first distribution and

fulfillment centre in San Francisco.

In May 1999 started grocery delivery service to 1,100

people.

As a venture web store launched in June 1999 to

deliver everything from groceries to palm pilots.

Acornucopia of opportunity,migration of consumer

purchases to internet and cracking the last mile

problem.


4/25

Management Team

Louis Border, first Chairman and CEO. September1999, George Shaheen former CEO of Andersen wasrecruited.

Senior executives from Goldman Sachs & Co.,Oracle Corporation, Federal Express, AmericanStores Company, Marriott International, and

General Electric.

WebvansBoard includes David Beirne managingmember Bench Mark, Christos Cotsakos CEO and

Chairman of the Board for E*Trade. Tim Koogle CEOYahoo! Inc., Michael Mortiz general partner atSequioa Capital.


5/25

Deliver dry & perishable goods to consumers at

competitive prices

Offerings included: fresh produce, premium meats, freshseafood, prepared meals, bakery items, non-perishable

items, wines, cigars, non-prescription drugs

Deliver goods within a specified 30-minute window- USP

Orders can be placed anytime; payment by credit card

ORIGINAL BUSINESS MODEL


6/25

No membership fees

Free delivery for orders over $50; small orders

with $4.95 surcharge

Planned for aggressive expansion

Expected to attract customers with convenience

& service than discounts

Challenges compared to regular grocery stores:

Razor thin margins of 1% to 1.5%

Wide product range

Temperature requirement


7/25

Motivating customers to shop online was very

difficult due to following reasons: Unwillingness to pay delivery charges

Demanded high service standards

Firm behavior of going to grocery stores on weekly

basis

Target customers: mothers in urban; two-incomefamilies; little spare time


8/25

Warehousing:

Capital & technology intensive approach

Automated central DC (carry 50,000 items & process

8000 orders a day) & computerized scheduling software

First DC in Oakland: 330,000 sqft warehouse

Could serve as many people as 18 regular supermarkets

Contained cooking facilities

Multiple temperature zones to store items (such as

wines, cigars & icecreams)

41 carousels


9/25

Storage capacity: 107,000 locations

Contained 5 miles of conveyor belts Goods received at the DC were broken down from cases to

single items transferred to trays

Each tray carried a unique bar code license plate (used to

track all movements)

Product barcodes were scanned by workers

Order Management:

Customers place order online specified a delivery time

information conveyed to DCappropriate quantities of

colored totes assign to orders


10/25

Yellow totes- dry groceries

Green totes- chilled products

Blue totes- frozen goods

Each tote could be

tracked as it was given a

barcode license plate

Software would then

design the optimal

picking plan

Picking Plan based on the

biggest items came first

so that delicate itemswould not be crushed

Pickers stand at the pods

responsible for

assembling orders tote

came to a pod

carousels move into

position within the reach

of the picker


11/25

Light tree display next to carousels bins indicates the

picker which ordered items to pick

Sort bar indicates which item to put into which tote

Items placed picker hit a button to confirm

Webvan was very much protective about carousels

technology

Everyone was not impressed with the technology Extra costs incurred by Webvan DCs

Invested heavily in automation- carousels & conveyors


12/25

Orders were loaded into dollies that could be wheeled onto

trucks (ambient, chilled & frozen compartments) Totes transported to manned depots (10-12) individual

orders were put on delivery vans (total 60 vans) couriers

(van drivers) take goods to the customers home & unpacked

the totes

Wireless handheld device was used for printing receipt & an

itemized list of order

The mobile device also gave access to customers back orders On a delay, customers would be refunded $3, and given the

option to reschedule delivery


13/25

To create proprietary system the Webvan group spend three

years and hired 80 software programmers.

The system would be aware of the location of every stockkeeping unit or SKU

Company invested heavily on inventory forecasting.

Optum Inc. warehouse management system supported theentire operation.

The design and complexity of Webvans system washowever, something Optum had dealt with before and theproject pushed the company to expand.

Webvan used Descartes Systems software to optimizedelivery routes.


14/25

The company established relationship withwholesalers and suppliers for stocking itswarehouse.

Webvan noted the lower costs to suppliers whono longer had to come as often to replenishproducts.

Anticipation and actual demand were the

combination for Purchases.

The information of consumer choice was providedto suppliers by the company.


15/25

Webvan marketed in a way that its prices 5% lower thanconventional grocery.

Webvan planned to increase spending substantially on itsradio and newspaper.

The company announced that it planned to spend $6 to $9million annually in advertising in each city.


16/25

Economic of scale was able to achieve bynational layout by the Webvan group.

To construct DCs across the country, thecompany entered into an agreement withBechtel group.

A conventional supermarkets wereconstrained by the number of item it couldoffer customers.


17/25

Sales improved steadily but losses remained at a high rate given

the companys capital intensive business plan and for the

expansion plan it had signed an additional set of leases.

EARLY PERFORMANCE IN THE SAN FRANCISCO AREA-The

Webvan chose San Francisco for its debut, citing residents food

and Web savvy.

To address the problem of delivery time, at early stage, Webvan

intended to guarantee repeat customers the same delivery slot

week after week. As the company has extended its distribution operations at its

Oakland DC from 5 days to 7 days a week but still it was

operating at a less than 35% capacity and had posted a loss of

$38.7 million for the quarter.


18/25

EXPANSION-The company had opened its second DC in

Suwannee, Atlanta, since it is second to San Francisco on

internet shopping, household income and population

which climbs to 2000 orders a day, extended delivery

hours and continues advertising.

Hurdles faced by company in Atlanta were its vans had to

be outfitted with GPS, it product mix was tailored to the

region and had to develop relationship with local

suppliers. The company then using Oakland DC to service the

Sacramentomarket, saving costs of building an

additional DC.


19/25

Goods were transported through large vans and hence

increases the customer base as well as the companys

revenue and gross margin.

Then Webvan entered the Chicagomarket from its third

DC in Carol Stream, which increases the sales as well as

the marketing expenses as it expanded in to other

markets.

According to its rollout plans, Webvan intended to enter in

The Northeast; Baltimore and New jersey but since the

changes in capital markets had eliminated the possibility

of procuring additional financing, it would indefinitely

postpone the launch of its new DCs.


20/25

HOMEGROSER ACQUISITION- In June 2000, Webvan entered a deal to acquire

HomeGrocer.com, a competitor online grocer after which the company had been

able to enter many markets quickly at lower costs.

This merger has given greater negotiating power with manufacturers on the cost ofgoods and also resulted in lower inventory investment with greater variety of

products.

In the latter half of 2000 Webvan focused on creating a single brand identity ,

unveiled a new logo and worked on the transition to a single common technology

platform.

It also worked on converting the companys customer fulfillment centre in Irvine to

a cross-docking operation in the hope of increasing profitability in Los Angeles

markets, where Webvan was converting 4 HomeGrocer distribution centers to 2

Webvan DCs.

The company hoped to double the number of orders (approx 2000 for single shift)

and shorten delivery window.


21/25

LATER PERFORMANCE IN THE SAN FRANCISCO AREA- At the

end of the third quarter of 2000 company is unable to meet

breakeven (3300 to 3500 orders per day), due to low demandand operations results in $23 million in revenue at $ 105 per

order company is operating at less than 30% capacity.

Company should increase the capacity up to 42.5% to attain

target of $30 million for breakeven.

Company faced insufficient delivery personnel and

fluctuating demand.

Till the end of six quarter company is operating at less than

30% capacity but customer order size increases and company

revised its estimates for breakeven (2900 to 3000 a day).


22/25

Growth projection and revisited

Heavy equipment slated warehouses because soilcouldnt support weight. non-acceptance of

coupons resulting in 20%shoppers cut back It was evident that high population density and

penetration is key for viable operation, thusleaving many regions as unviable.

Sales density might not be provided by homedelivery volume.

With 120,000 household in 60 miles of DCs andestimation of 20% of those connected to internetgave Webvan only 25 markets for expansion

Economies of delivery could be resulted by largenumber of deliveries

Increase in order size ($91-$112) is observed andfocus on non grocery items is more


23/25

Webvan@work served businesses, businesssupplies were delivered and catering for businessmeetings and workers.

Marketing was to support brand name and itsservices. In 2000 a TV ad was made to highlightbenefits by delivery out of dot-com.

Their major target market was families withschool going children and later businesses

became a prominent sector as well. Target audience were attracted by an internet

fundraiser for schools, loyalty programs, onlineand on the street coupons, tell-a-friend schemes


24/25

Marketing partnership with:

Old navy, In five week promotion 4thof July 2000 T-shits, tote bags

and hats were delivered to customersdoorsteps

Pillsbury and Kellogg, this allowed webvan to cut cost in supply

chain and merchandisers to connect with customers

A 28% cutback in marketing resulted in 8% fall in total orders,

increased cost of acquiring customers to$166 and loss ofcustomer satisfaction.

60-minute delivery window (more deliveries in one 60-minute

rather two 30-minute windows) and free delivery bar raised to

$75 from $50.

Pet store was launched, eve.com products were delivered and

some manufacturers were category captain, to optimize supply

chain and marketing.


25/25

Webvan needed to increase repeat purchaseand maintain order size to survive with veryfew of its DCs were near break-even wileother far away.

They were presented with options toshutdown DC with insufficient demands,marketing initiative and serious cost cutting.

They chose latter.Webvan closed on 9th July, reasons being

unwilling investors, falling shares andinability to raise $25 million that it sought

webvan case summary

Documents

webvan group

items process8000

bakery items

items includingelectronics

regular grocery stores

cases tosingle items

delivery charges

motivating customers