In its second-largest acquisition, Amazon buys the company for $970 million.
Time was, people ordered from the corner grocer or reached onto the stoop each morning for the milk. Are those days gone forever? Webvan, based in Foster City, Calif., is one of a handful of companies hoping to use the power of the Internet to bring back personalized food deliveries.
Though its stock plummeted almost to the vanishing point in the recent troubles on NASDAQ, the Webvan Group acquired HomeGrocer.com of Kirkland, Wash., in June, in a $1.2 billion deal. The combined company, which will continue to use the Webvan moniker, is expected to put the familiar vans into 13 cities by the end of the year, when all the details are ironed out.
According to most analysts, the deal will leapfrog Webvan over such pure Internet rivals as Peapod and Streamline.com. Even some of the bricks-and-mortar food sellers venturing online, such as Safeway and Kroger, may find Webvan trucking with their numbers. “This will create quite a powerhouse,” says analyst James Vogtle, research director of the Boston Consulting Group in Toronto. “The two companies will definitely be stronger by combining their distribution infrastructure. With scale comes a lower handling cost per unit.”
Using their own vans, as well as large, capital-intensive distribution centers (up to $35 million per), Webvan services about 87,000 customers (up 80% from the year before) in the Oakland/San Francisco area, Atlanta (added May 1), and Sacramento (May 30). “The response in Atlanta was wildly enthusiastic,” Maigread Martinez, vice president of marketing and strategic services alliances of the Webvan Group, reports. “Beyond our expectations.” On August 1, the Webvans started crisscrossing Chicago, with Seattle slated to debut in October, and two more cities (yet to be announced) in December. By September, the first location, Oakland/San Francisco, is expected to turn the corner into profitability.
Vogtle expects no difficulties in rolling present HomeGrocer customers over to Webvan. Fans of online ordering soon become accustomed to the convenience of last-mile service.
Although she is understandably favorably inclined to her own company, Martinez provides an example of what it’s like to use the service. She clicks over to www.webvan.com, spends a few minutes ticking off her list of food, stamps, drugstore items, and countless other little necessities of life. Then, ducking a post-work excursion to the store, she chooses her own half-hour window for delivery. “The courier comes, unloads the items on the counter, and my nanny checks everything on the spot,” she says. “If something doesn’t look right for some reason, it goes back then and there.”
It’s the delivery …
The organizing concept behind Webvan, insists its proponents, is delivery, not food. The company strives to be in the consumer’s home on a reliable replenishing basis. That way, the customer depends more and more on the predictable appearance of the courier as a convenience and adds to each order.
According to Evie Black Dykema of Forrester Research in Cambridge, Mass., the combined Webvan operation will dominate online replenishment. As an added bonus, Webvan acquires HomeGrocer’s ties to Amazon.com. Dykema’s advice to rival dot-com grocers is to position themselves for acquisition by a laggard grocer like Kroger, which has been slow to come online. Other online grocers, such as Royal Ahold, which recently acquired Peapod, are now thinking of adding the delivery element to existing bricks-and-mortar stores in areas served by Webvan.
“The key to Webvan,” says Vogtle, “is its large regional distribution apparatus, which has many satellite facilities, some of which are cross-docking stations, around the areas it serves.” This has now become larger than ever, although the HomeGrocer model tends toward hand-picking individual orders.
Success in this market depends on how well companies integrate the e commerce part of their business with the real-world part, Vogtle says. “You can’t layer a delivery system on an existing bricks-and-mortar operation, with its low profit margins, and expect to meet the prices of the corner store,” he says. “It comes down to how the supply chain is structured. Webvan addressed the entire supply chain. The key is how often the product is handled. Webvan is trying to handle it eight times, instead of 14 for a conventional store.”
Last year, according to Shop.org, online grocers did $340 million worth of business. That is expected to jump to $800 million this year.
At present, of course, the overall penetration is modest. According to PricewaterhouseCoopers, the average shopper runs over to the store nearly 10 times a month. But only about 1% of grocery shoppers cruise the aisles online on a monthly basis, with only 7% of those who have ever tried it doing more than half of their grocery shopping at the keyboard. While some optimists expect 20% of shoppers to opt for home delivery, Mary Brett Whitfield, a Columbus, Ohio-based consultant for PricewaterhouseCoopers and director of the firm’s E-Retail Intelligence System, says the figure usually cited is 5-7% and her rosiest estimate would be lower.
Your money or your time
The online grocery shopper, according to Whitfield, falls into one of two categories. Either the customer is willing to pay to get time back or is a demon saver, joining something like the Webhouse Club and discounting like mad. (One criticism of online operations, in fact, is that they don’t take coupons as a rule; it’s hard to cross the paper coupon with the computer order, the companies say.) Of course, the tantalizing notion of shopping sans toddlers may define yet another segment.
Toddlers or no, it takes time and planning to shop online, Whitfield observes. “Some people decide what to have for dinner an hour before,” she says. “Other people like to pick out their own perishables. In our study, in fact, we asked what model people liked best, and it was the store pickup model. You order, the store assembles the selections, you drop by after work and pick up the box.” Thirty percent of those polled by PricewaterhouseCoopers would use the store pickup model.