Restarting The Webvan Company Essay Example
Restarting The Webvan Company Essay Example

Restarting The Webvan Company Essay Example

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  • Pages: 13 (3352 words)
  • Published: October 11, 2017
  • Type: Case Study
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The goal of this report is to make a recommendation to Webvan’s management team whether Webvan, once the largest online grocery enterprise in the United States and a large investment failure, should be restarted as a new enterprise using the original strategy and business model before the company went bankrupt in 2001.

Webvan began in 1998 as an innovative business idea that excited and drew support from investors already caught up in the dot-com phenomenon.The company ultimately failed to attract and sustain an adequate customer base to justify the large investments it made in the development of high-tech information technology systems and elaborate distribution warehouses. Team 21 was hired to explore the key elements of Webvan's original business model and provide relevant recommendations and action steps to the company's management.

Analysis of Case Data

Team 21 analyzed Webvan's origin

...

al business model, decisions, and milestones using several strategic analysis tools, such as analysis of the external environment , SWOT analysis and Porter's Five Forces analysis.

Furthermore, it reviewed the company's value disciplines and identified the key mistakes in the original business model. The results of the review provide insight to the company’s problems and serve as a basis for the development of the recommendation to Webvan's management. Vision and Mission The vision and mission are the key drivers of the analysis and recommendations, as they are also the drivers of Webvan's original business model. Webvan's vision was to provide a faster, cheaper and more efficient way of delivering items to consumers.

Webvan's mission was to deliver the last mile of e-commerce to the increasing number of people making purchases online by creating an enterprise that would provide a greater variety o

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products than a conventional store while still providing the instant gratification that online shoppers miss.

Pestle

Analysis Economic, sociocultural and technological factors had significant influence on Webvan's business and therefore are the focus of the PESTLE analysis.Economic – Although Webvan garnered considerable favor among investors, it faced an almost insurmountable obstacle in trying to convince customers to relinquish discretionary income in favor of the convenience of grocery delivery. Much of Webvan’s early success in attracting investment can be attributed to the large amount of investor interest in speculative Internet-based companies between 1995 and 2001, which is often referred to as the “dot-com bubble . In April 2001, when Webvan needed an infusion of $25 million to continue operations, it found the bubble had burst, and investors were no longer putting money into online ventures.

The end of the dot-com era led to the beginning of a mild recession , which likely served to put the final nail in Webvan’s coffin. Even without the recession, customers had shown an unwillingness to spend additional money on delivery fees when most lived within a convenient distance of a grocery store that accepted coupons not accepted by Webvan.Finally, supermarket chains had developed an economic model that is tightly efficient. The physical store also serves as a warehouse, existing technology started being used for customer self-checkout, and in-store shelf-space management and strategic product placement programs were being utilized to improve profit margins.

Webvan’s plan to capitalize on centralized distribution centers could not compete with the efficiencies of traditional grocery stores due to the high costs inherent in home delivery.Sociocultural – Though a survey conducted by Webvan in San Francisco indicated that 6% of those

surveyed would “absolutely” buy groceries online, and 23% said they would “probably” buy groceries online , the reality was that consumers often say one thing and do another, as shown by a Jupiter survey’s finding that only 2% of web users had bought groceries online from 2000 to 2001. As Peter S. Fader, a Wharton marketing professor, succinctly noted, Webvan’s service solves a “non-problem that doesn’t need a solution … Grocery shopping is not something that people complain about. Supermarket chains strive to make the consumer experience as convenient (stores located close to residential areas), easy (organized and stocked shelves, a similar floor plan in every store, aisle signage), and quick (self-checkout, multiple checkout counters for shorter lines, and a streamlined checkout process) as possible, and Webvan’s failure affirms the chains’ success. Grocery shopping is a habit for consumers and, due to the chains’ efforts, not an entirely unpleasant one.

Additionally, Webvan saw its target market as families with children and focused its marketing to women.Grocery shopping has become a social event for this target market. Stay-at-home parents use the grocery store as a place to socialize with friends and run into neighbors while the children are at school. Saturday morning grocery shopping is often seen as a family outing where the family can spend time together and the kids get to choose what they want for lunch for the upcoming week. Technological – Although there were rapid advances in technology and rapid proliferation of internet throughout households in 1999, only 35% of U. S. adults were online. 1] While this represents a significant number of people, George Shaheen noted that 1 to 3% of Webvan’s

target market would be needed to make Webvan work[2] but did not confirm that 1 to 3% of that target market was even part of the 35% of adults online at that time. The technology was certainly available but was not yet being utilized by enough people for Webvan to be a success. The limitations of online grocery shopping may never be fully removed. Grocery shopping is a highly tactile, sense-intensive activity. The online grocer cannot appeal to a person’s senses the way touching and smelling the actual product can.

Secondly, a 2005 study finds that in-store media such as product demos, product packaging, shelf signs, and check-out line advertising often spurs spontaneous and impulse buying. [3] These additional sales tools are difficult, if not impossible, to translate online, thereby decreasing possible online grocery sales from the $4,600 the average family spends in a grocery store annually due to the loss of impulse buys. SWOT Analysis As a business with high capital investments and fast growth, Webvan had many strengths, weaknesses, opportunities and threats.A number of them are inter-related, providing insights into what caused the company's failure and possibilities for a sustainability strategy.

Strengths – Webvan projected a good image to its customers. The company had an intelligent delivery system, friendly customer service, competitive prices and provided its customers with a flexible and safe payment system. It had a management team made up of highly experienced professionals who had held high positions in well-known, successful companies and had diverse backgrounds and professional networks.Webvan also had highly automated and unique logistics technology and distribution networks, inventory forecasting systems, and electronic communications with suppliers. It had the capacity to

collect large amounts of information on consumer demand and was able to establish many alliances and partnerships with large suppliers. Weaknesses – At the time, Webvan was the best capitalized of online grocers, but its failure to develop a customer base to achieve projected results ultimately drove it to failure.

Led by the winner-takes-all hype, it developed a history of high cash burn rates due to capital investments in its distribution centers (DCs), automation capacities, automated distribution network, lease contracts, high inventories and the acquisition of HomeGrocer. Thus, the company lost its focus with the customers. Its business model was risky because it was new, complex and applied on a large scale from day one. The automation processes did not align with the market trends; consumers purchased more perishable goods that required more labor than automation.Opportunities – There are many opportunities for the new Webvan, but only several are integral to its sustainability. Keeping in mind the other three components of the SWOT analysis, the opportunity most relevant in Webvan's case is identifying its target market as businesses and consumers, a new online grocery following the HomeGrocer business model, using the business know-how and experience to support other business.

Another opportunity would be extending alliances and partnerships with different suppliers or vendors such as Kroger and Safeway, for which Webvan could provide online shopping software and support systems.Threats – The purchasing habits of consumers are the main threats to the new Webvan's business sustainability – Will they adapt to the online grocery shopping experience? Other threats include the efficiency of the logistics processes of perishable goods, the riskiness of the newly developed business model, and the company’s

ability to attain investor interest given its history. Competitive Analysis – Porter’s Five Forces Porter’s Five Forces analysis gives a clear vision of the obstacles Webvan encountered.With a high threat of substitute products, an existing rivalry in the market, and significant customer bargaining power, Webvan entered a market that was likely less attractive than the initial investors had believed. Threat of Substitute Products – Although Webvan was one of few online grocery vendors at the time, consumers had many options for buying similar products. Consumers could easily go to a traditional store for groceries or a produce stand for fresh fruit and vegetables.

As a result, Webvan needed to create a competitive edge to persuade customers to buy from its online service.Rivalry Among Existing Competitors – Strong competition already existed among traditional grocery stores, such as Kroger and Albertson’s. As companies like Webvan began entering the market, existing competitors likely adjusted marketing efforts to avoid losing a substantial market share. Even though Webvan sought to capitalize on the growing number of online shoppers, it still needed to cut into the traditional grocery market to be successful. In essence, it did not enter a wide-open, untapped market.

Threat of New Entrants – Webvan did not have to worry about a large number of competitors flocking to the online grocery market.Large amounts of necessary capital investment and required economies of scale created significant entry barriers. Webvan secured the capital and set out to achieve economies of scale. Also, unless a company was already established in a traditional market before it moved into online sales, such as Barnes and Noble, it would have to create a brand identity. Brand identity

became a problem for Webvan, as customers were not previously familiar with the company. Bargaining Power of Suppliers – Aside from fresh products such as fruit and vegetables, which it bought from local distributors, Webvan had a large pool of suppliers from which to choose.

In fact, Webvan created strategic alliances with several big suppliers such as Pillsbury, General Mills and Proctor & Gamble. Bargaining Power of Customers – While grocery customers are numerous and do not directly drive the price, there is a low switching cost when moving from an online vendor to a traditional store and vice versa. If customers were not satisfied with the online experience or simply preferred to stick with regular stores, there was limited cost to the customer for switching.Consumer retention became a problem for Webvan because it focused too much of its resources on expanding the customer base instead of retaining existing customers. Once Webvan recognized and corrected this problem, the opposite became true: Its newly limited marketing budget meant a substantial decrease in new customers and a slight decrease in return customers. Value Disciplines Webvan was a highly ambitious operation.

Its ultimate goal was to go “the last mile” from e-commerce to the home. In doing so, it focused on the following value disciplines – operational excellence, customer intimacy and product leadership.Webvan focused primarily on operational excellence. It did, however, make attempts at customer intimacy and product leadership in hopes of strengthening its business.

Webvan created a highly complex system that allowed customers to order groceries online and receive delivery within a specified thirty-minute window. The group’s operational excellence was truly groundbreaking. Distribution centers carried as many as 50,000 items,

could process 8,000 orders a day and supply 18 supermarkets. Orders were put together through the integrated customized software programs, miles of conveyor belts and sophisticated machinery.

From the strategically located manned depots, couriers would deliver the order all within a 10- mile radius of a customer. Orders were tracked and logged via integrated databases for each customer and the needs of the distributions centers. Demand was anticipated automatically within the warehouses and inventory replenished accordingly. Webvan overcame complications in time constraints, food temperatures, product quality, order preparation and delivery speeds. In so doing, they brought in $23 million in revenues off 1-1.5% margins from one branch by the end of the third quarter of 2000.Webvan achieved a system that was fast, convenient and cheap for the customer. While Webvan performed impressively under the operational excellence discipline, it did not perform well in one key area: startup costs. A single distribution center cost $35 million. High startup costs meant that reaching the breakeven point would be very difficult and ultimately impossible for Webvan.

Although customer intimacy was not Webvan’s primary focus, it did achieve a fair level of customer service. After receiving orders from customers online, couriers, who were trained to be “ambassadors of reliability,” delivered and unloaded the totes.The customer could review orders and get immediate credit for any returns. If delays occurred, customers would be given a $3 refund and given the option to reschedule the delivery. Webvan also attempted to focus on product leadership as well.

It was creative, quick and brought the highest quality products to market. Within a few short years, Webvan’s management created a company that delivered a wide variety of products

in a very short period of time to customers’ homes at a scale never seen before. It saw an opportunity to fill the space from the Internet to the home and rushed to make it happen.Webvan seized this opportunity by bringing on 11 of the top 20 consumer goods companies. In anticipation of a threat and in an attempt to expand its base, Webvan bought out HomeGrocer, a strong supplier across the western seaboard.

It expanded across the country into populations with potentially favorable conditions like Sacramento and Chicago to capture untapped markets. Webvan also adapted to challenges presented in different markets when, for instance, it bought GPS trackers to avoid traffic in Atlanta. As a practitioner of product leadership, Webvan made a fundamental error by not anticipating the market or making accurate projections.Growth in online purchases was a fraction of what Webvan anticipated. This made profit almost impossible due to low sales densities in its markets of choice. Key Mistakes The Webvan model for online groceries was new and original and, therefore, complex and risky.

Over the course of its short life span, Webvan made a series of mistakes that ultimately led to its demise. From a financial standpoint, the company spent its cash reserves at a very high rate, pouring millions of dollars into new DCs and costly automation systems.Webvan expanded too rapidly, entering new geographic markets and setting up additional DCs, even though it was increasingly unable to recoup those millions of dollars. The group also failed to create consumer demand that could keep up with its ambitious expansion. Webvan’s management team, which appears to have lacked an expert in grocery sales, overestimated its

ability to change consumer behavior. While it was spending exorbitant amounts of money on IT systems, the business failed to attract enough customers to sustain its enterprise.

Webvan initially pursued an aggressive marketing strategy aimed at building its brand identity and attracting new customers, which was essential. However, when Webvan cut its market budget to focus on customer retention instead of customer acquisition, it left out an important part of a viable strategy. Webvan was not set up to rely solely on fewer customers who would make large purchases. The Webvan model made acquiring new customers and retaining old ones a necessity. The company wrongly assumed it could persuade people to order more than twice a month.

This was unlikely because going to the grocery store is highly ingrained behavior.Making a trip to the store is not a huge hassle, as grocery stores are everywhere. Also, for those who keep close tabs on grocery costs and are not willing to pay extra for delivery while forgoing the use of coupons, ordering groceries from a Webvan-type system is not economically feasible.

Recommendations

Based on the analysis of Webvan's business model, Group 21 recommends Webvan management attempt a similar enterprise, with significant adjustments to the original Webvan business model. The revised enterprise would build on Webvan's strengths and would avoid or correct its mistakes while seizing the urrent online market opportunities.

Key Drivers for the Recommendation Key Strengths

  • Existing, tested, and successful software system for online sales and demand statistics
  • Online sales platform and experience working with the system
  • Great networking abilities of management – formed alliances with large suppliers Key Mistakes •Avoid high cash burn rates – costly automation and expansion
  • Avoid developing own distribution channel
  • Avoid high stocking capacities
  • Develop a scaled-down and less capital intensive business model
  • Stick to a specific value discipline – operational excellenceKey Market Opportunities
  • Growing online consumers and purchases
  • Alliances with grocery chains and other large vendors nationwide
  • Take advantage of economies of scale Revised Webvan Vision Webvan will be the key strategic online sales partner to grocery and consumer goods vendors.
  • Revised Webvan Mission Webvan will bring the virtual marketplace to grocery and consumer goods vendors in a timely, cost-efficient, and customized manner.
  • Revised Webvan Business Model

    Webvan develops virtual stores for grocery chains and other consumer goods vendors such as Kroger, Safeway, etc. Webvan opens virtual stores for its partners, connecting with the inventory system of the partner's stores around the country ? The customer can browse virtual reality aisles and find the same items he would see if he were actually in the store ? Customer purchases items online, drives to the store and picks up the items already packed and ready to go ? Webvan processes the online shopping and transaction ?Webvan collects demand statistics and develops marketing proposals to its customers – the vendors Revised Webvan Revenue Sources

    • Sales of web store
    • Maintenance of web store Commission for online sales
    • Sales of customer demand data to partner vendors
    • Sales of marketing options to partner vendors
    • Sales of customer demand data to consumer goods producers

    Action Plan

    To implement the above recommendations, Webvan would have to undertake the following action steps:

    • Preparatory Stage ?
    • Webvan develops business plan ?
    • Webvan approaches key partners/ vendors such as Publix and Kroger ?

    Webvan signs contracts with partners/ vendors

    • Implementation Stage ?
    • Webvan develops

    virtual store and connects it to the partner’s inventory system ?

  • Webvan opens virtual store Daily Operations ?
  • Webvan’s system communicates with partners' inventory system ?
  • Webvan processes online purchasing for partners' customers ?
  • Webvan collects demand data ?
  • Webvan processes demand data ?
  • Webvan distributes demand data to partners

    • Additional business ?
    • Webvan markets its demand information to consumer goods producers ?
    • Webvan sells demand data to consumer goods producers ?

    Webvan develops & sells online marketing packages for its customers/partners

    The action steps for the new business model can be used as a basis for developing the business plan of the new Webvan enterprise.

    Conclusions

    The original Webvan company began as an innovative and exciting business idea but did not achieve sustainability due to high cash burn rates, fast expansion and no clear focus. The analysis of the original Webvan business model gave Team 21 many insights into what went right and what went wrong with the company.

    These were later used as a basis for the development of the recommendation to start a new Webvan enterprise, whose mission is to provide and service virtual stores of major grocery and consumer goods vendors.The recommendation for the new Webvan enterprise is in line with the company's original mission to take advantage of the growing online marketplace and to deliver the last mile of e-commerce. It takes advantage of economies of scale, builds on the original model's weaknesses, avoids or corrects its major mistakes, and does not require high capital investment. Team 21’s recommendation focuses on a business model this is less capital intensive and is driven by customer and consumer needs.

    The new Webvan business model provides opportunities for moderate and

    safe business growth that will be driven by multiple revenue sources.

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