May 31, 2001, 12:00 AM

Webvan adopts new measures in its efforts to hang on

Webvan is changing its delivery fees and pleading with customers to buy more.

The online grocery segment has had a rough time in the last 12 months. Peapod

found an angel in Royal Ahold to bail it out of its financial troubles. Online

delivery company Kozmo, which dealt in a lot of food and snack items, went out

of business. And Priceline’s grocery operation, which offered a hybrid form

of grocery shopping on the web, bit the dust.

But Foster City, Calif.-based Webvan Group Inc. is hanging in there. After

naming new CEO Bob Swan following the departure of George Shaheen, the company

is making changes to ensure it stays put by dropping the delivery charge for

orders of $100 or more to reward big spenders.

If Webvan can hold on, it may be the only online pure-play left to take advantage

of what a recent Datamonitor study estimates will be a $26.8 billion market

by 2005, up from $1.5 billion last year. Datamonitor also says that marketing

is the key to capturing this potential growth. Webvan seems to be listening.

The online grocer also is instituting a rewards program to encourage shoppers

to buy more often.

After breaking even in its Los Angeles market, Webvan made changes in the delivery

structure for San Francisco and Chicago to cater to customers who spend more

than $100 per order to ensure profitability for 2002. Webvan has changed its

delivery fees to free for orders of $100 or more, $4.95 for orders of $75 to

$100 and $9.95 for orders less than $75.

Previously, customers in those markets paid $4.95 for orders of $75 or less

and received free delivery for orders of $75 or more.

In an e-mail pitch, Swan encouraged customers to utilize Webvan’s various

categories and make purchases of more than $100 to help Webvan become profitable.

“By selecting drugstore, pet, household and baby products as well as groceries

and fresh-market items, our most profitable customers place orders of $100 or

more each week,” he said. “While we realize that not all households and businesses

have the same needs, we believe that most of our customers will find it easy

to do all of their weekly shopping from Webvan’s wide and growing selection.”

Currently the average order size is $114.

Rewarding the loyal

The change in pricing also puts the San Francisco and Chicago markets in line

with Webvan’s acquired Homegrocer.com markets-Los Angeles, Orange County, Dallas

and San Diego-which already had a $9.95 delivery rate. Seattle and Portland

were expected to switch to the new fee structure in May when Webvan completed

its technology platform transitions.

Webvan also started a rewards program in April in all seven markets-San Francisco,

Chicago, Orange Country, Ca., Portland, Ore., Los Angeles, San Diego and Seattle-and

rewards one point for every dollar spent at Webvan since January. The rewards

program has gold and platinum levels, and will be retroactive to Jan. 1. Customers

get 100 bonus points for spending $100 or more per order and free delivery on

minimum orders of $25 when they reach 1,500 points.

The program also allows customers to pre-select delivery times and take advantage

of special delivery times offered only to rewards customers. Customers in the

program also can receive surprise gifts based on their purchase history and

there will be an exclusive customer service number for rewards members. Webvan’s

current active customer base is 761,000.

With these changes, Webvan is heading in the right direction to maintain its

customer base and capture some of the anticipated growth in the online grocery

sector, market observers say. Paul Ritter, managing director of Strategic Research

Advisors in Boston, says the delivery charge policy change is a sound strategy

to increase order size. And offering the rewards program will help to convert

many of the unprofitable customers into profitable ones and help to strengthen

the bond between Webvan and its customers, he says.

But Webvan shouldn’t stop there: “Webvan has to create a relationship with

its online customers that is so tight that the customers would never be tempted

to go elsewhere, online or offline, for their grocery needs,” Ritter says. “The

company must continue to research what its most profitable customers like to

buy, what motivates them to purchase one brand versus another, what limits their

online buying, and how they spend their time and grocery-related dollars.”

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