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  1. 1. Webvan: Groceries on the Internet E-commerce MGNT 671 February 22, 2000 Ben Neely Brad Smith Sharon Winemiller
  2. 2. Background and Problem Statement – Webvan was started in 1996 by Louis Borders and was established to sell groceries over the World Wide Web. George Shaheen resigned as CEO of Anderson Consulting to take advantage of the opportunity to become CEO of Webvan. Webvan, which originated as an online grocery service, delivers food (including its BestYet label, a co-brand with food distributor Fleming Companies) and non-prescription drugs to their customers' doors. Webvan’s vision was to provide grocery-shopping solutions that would save consumers both time and effort, without sacrificing the quality, selection, and low prices of traditional brick-and-mortar stores. Operations from December 1996 through June 1999 were focused on the activities of raising capital, recruiting and training employees, developing their business strategy, designing a business system to implement their strategy, constructing and equipping their first distribution center and developing relationships with vendors. Although these activities have continued and still remain important, Webvan has changed its focus to building sales momentum, establishing additional vendor relationships, promoting their brand name, enhancing their distribution, delivery and customer service operations, and construction of additional distribution centers. The company’s main operational problem is being able to maintain their goals of competitive pricing, time and effort saving, and providing good quality, while becoming operationally profitable. Description of Industry including its growth, number of firms, and major players Webvan’s business strategy positions the company within the home-shopping/retailing industry. The home-shopping industry for groceries has been around since 1990 with the industry originating with phone and catalog ordering. At the conception of the company, the organization focused on selling groceries by using the Internet medium and the World Wide Web (WWW). The online grocery business is in the beginning phases of its growth stage. The number of individuals that are acquiring access to the Internet is increasing wildly and the consumers that are already familiar with the Internet are becoming increasingly more comfortable with transacting orders via their computer terminal. This can also be seen in the fact that the number of related and competing organizations is growing. This shows that there is still profit potential, which is drawing new organizations into the industry. The growth of the industry can also be seen by the plans of the existing companies to implement expansion projects. In May 2000, at the time of the Harvard Business School case presentation, the company’s direct perceived competitors were Peapod, Streamline, NetGrocer, HomeRuns, HomeGrocer, and Albertson’s. Indirectly, Webvan’s competitors include all traditional food stores, warehouse clubs, and mega-food stores, such as Kroger, Sams Club, and Walmart Supercenters. Analysis of Porter’s Five Competitive Forces For an organization to be able to determine how competitive their company will be and how strong their competitive advantage is, they must first perform a simple comparison
  3. 3. using Michael Porters five competitive forces. The five forces that pertain to Webvan are identified below. • Threat of substitutions – Consumers have a lot of alternate choices to complete their grocery and non-prescription drug shopping needs. This indicates that Webvan does not have free reign over the prices and delivery options that they provide. If the company does not maintain its competitive edge, the consumers have other options for shopping. • Threat of rivalry – Since the online grocers segment is small there is not a great deal of rivalry. None of the competition is strongly positioned to be a great threat to Webvan’s strategy, operation, or pricing and promotional methods. • Threat of new entrants – Since the Internet usage is increasing and the population is continuing to grow, there is great potential for online shopping services. The barriers to entry and exit are small if a company wants to create an online presence. This indicates that there is a large threat of possible new entrants. Brick-and mortar organizations have very low risk in creating an e-commerce location for their goods. • Buyers’ bargaining power – The bargaining power of the buyers do exist. Buyers demand comparable prices to the brick-and-mortar grocers as well as satisfactory customer and delivery services. If the prices and customer service requirements are not met, buyers will not visit the site. • Sellers’ bargaining power – The sellers do not have a great deal of bargaining power. Manufacturers will not gain an advantage by trying to force the company to change their practices. There are many food products that could replace the orders for the manufacturers. It is more advantageous for them to hold onto their “shelf space” with Webvan so that their product is available. From the above competitive forces analysis, Webvan’s competitive position is favorable. This indicates that the firm has exploitable strength and a more than average opportunity to improve its position. Webvan does not have total control over their pricing and operational practices, but they are not yet in a heavy competitive race for market share and customer presence. The company has flexibility on how it operates its business and how it controls its products and delivery. SWOT Analysis Prior to performing a SWOT analysis, a STEEP analysis was performed. The STEEP analysis concluded that the company is in an age of increasing technological advances, which must be maintained and implemented to sustain operation. Grocery services will always be required even in a down or slow economy and currently there are few political or environmental situations that would affect the company. In the following section, Webvan’s internal strengths and weaknesses will be discussed as well as the company’s external opportunities and threats. Strengths – Webvan has many strengths within their operational practices as well as their marketing practices. One of Webvan’s strengths is their ability to provide good customer service to
  4. 4. their consumers. Webvan does not charge membership fees and waives delivery charges for orders over $50. Their ability to fill orders accurately and deliver them on time is another strength. For both of these areas, Webvan has an upper ninetieth percentile ranking. With their state-of-the-art technology, they are able to uphold good delivery policies with ample distribution centers, while maintaining a wide selection of products and services. The company’s store site contains good content, has usability ease, and provides policies that ensure consumers’ privacy and secure credit-card information processing. Weaknesses – One of the company’s weaknesses is that Webvan is trying to be all things to all people. Francis Gaskins of Gaskins IPO Desktop stated that Webvan “Bit off a big mouthful”. Webvan is taking a chance trying to provide service as well as convenience and to do this for the same price as grocery stores. To be able to do this Webvan has implemented a complex business system, which currently has only been proven at low capacities, nowhere close to the order volume levels for which it was designed. Webvan is currently operating at only 40% of their operating capacity and are having difficulties in managing rapid growth in personnel and operations. Another core weakness is Webvan’s lack of a sufficient customer base, order volume, net sales or incoming cash flows. Webvan has experienced high capital expenditures associated with building and operating their distribution centers, systems, and technologies. Even though they are realizing a 70% return customer rate, they need to create an even larger initial customer draw to the store site. This is proving difficult since there is a lack of widespread acceptance of the Internet as a means of purchasing groceries and other consumer products. Also, the company does not cater to those individuals who have procrastinating natures and wait until their shopping is a necessity. Webvan’s technology and delivery requirements cannot operate efficiently enough to offer same day delivery. A final reason for their weak customer base is that Webvan does not offer bulk products at discount prices as buying options, which has recently increased in popularity. Opportunities – One of the opportunities that Webvan needs to focus their attention on is their 70% repeat customers order level. To maintain peak operation, a company must not only work to bring in new customers, but it must maintain the customer based that already has. Maintaining its repeat customer base will be a more cost efficient method of maintaining revenue levels. Grocery shopping has recently been ranked next to last on a survey of the least liked household tasks. If Webvan can obtain these customers for the first order and delivery, they have a strong likelihood that the customers will try another order. Experts predict that American Internet access will triple by 2003 and the online grocery industry is expected to rise to upwards of one billion dollars. The potential consumer base is growing and if Webvan can attract these consumers, they will receive high levels of revenue.
  5. 5. Conversion from being an e-grocer to an e-tailer is a substantial opportunity. The profit margins in groceries are low so expanding their product lines and their variety will help Webvan cover the lower margins, increase their consumer base, and expand their customers’ opportunities and loyalties. Threats – Lack of continued support from investors will mean that Webvan will not be able to keep the company running long enough to expand its customer base to the size that would be large enough to make a profit. If the brick-and-mortar chains, such as Kroger, developed and promoted a home delivery grocers service, competition would increase and it would be more difficult to attract customers. An existing brick-and-mortar store would already have established practices and brand recognition, which would be difficult to match at this early stage of Webvans existence. Description of the companies business, including business model. Webvan is an Internet retailer that offers next-day delivery of consumer products through a proprietary business design that integrates the company's Webstore, distribution center and delivery system. The company's current product offerings are focused principally on food, non-prescription drug products and general merchandise, including housewares, pet supplies and books. The Webstore is a user-friendly, informative, and personalized Web site that enables users to quickly and easily navigate and select purchases from a wide selection of items. Relationship of e-commerce to the companies business. – Webvan was created within the Internet for e-commerce, but the company could have existed in the brick-and mortar world. If for instance there was a grocery catalog from which you could order over the phone, then Webvan could have existed this way. In Webvan’s case this is always an option, and they should look at themselves as a next-day delivery service provider not just as a grocery e-tailer. How does the Internet change the nature of the company and the industry. Webvan uses the Internet as a medium to change the way the industry and in this case, grocery shopping is done. As was stated in the previous section, a similar strategy was implemented by catalog companies when they found there was a market for shopping at home. In which ways is this online company different from traditional economy business. (target markets, bus. Model, content, staffing). The first way is the expansion of its target market. If you compare Webvan to other e- businesses their reach to shoppers is more restricted due to having to deliver perishable goods in a very short time frame. If you compare their target market to that of the grocery industry, you find that Webvan is targeting those people who do not want to spend a lot of time in the grocery store. Whereas, the grocery store’s are trying to get their shoppers to spend more time inside their stores. You also see that Webvan is
  6. 6. targeting computer savvy individuals who are trusting and knowledgeable enough to shop online. With brick-and-mortar companies, this is not a concern. Business Model – The company is in a stage that is considered a question mark, which is signified by its low market share in a high growth area. This stage is typical for new companies and new market segments. This setup requires a lot of cash for new plants, equipment, and personnel. Since they are positioned in the question mark stage, they should follow the strategy of building and expansion to increase market share. Groceries are necessity products. Webvan’s products satisfy core needs. With their initial business model, Webvan aimed to provide consumers with a grocery shopping solution that saved time and effort without sacrificing the quality, selection, or low prices of traditional grocers. Their business model has just recently changed. The current plans for the online grocery- delivery service is to achieve standalone profitability by targeting its 9 existing markets, completing the integration of, and implementing a cash conservation program to reduce annualized corporate and operating expenses. "Webvan is taking the necessary actions to deliver on its value proposition to customers and conserve capital in the current economic environment," George T. Shaheen, chairman and chief executive officer of Webvan Group Inc., said in a statement. "Our priority right now is to focus on the profitability of existing markets and bring the entire company into a positive cash flow," he said. "Once we attain profitability, we will pursue new venues for business." Said Bud Grebey a company spokesperson. "Under this plan, the company would need to raise an additional $40- to $60 million in capital by the end of 2001, or early 2002, to fund its 2002 operations up to the point when the company generates a positive cash flow," he said. "We are aligning our business strategy with the priorities we established for 2001 and are positioning Webvan for future growth. We believe these actions will strengthen our business, conserve cash and significantly reduce our need to raise additional capital. Content – The store content contains a wide variety of items and services, and the selection is only limited by the absence of bulk item offers. The site does provide a generic discount brand for those individuals that are more price conscientious than brand loyal and as in traditional stores, there are sale items and already prepared food options. There content has also increased due to partnerships such as the one with Petsmart, which increases their range of non-food items. Staffing – Staffing is a little different because Webvan has to deal with an IT department that is a highly important part to the companies’ success. Webvan’s California Hub alone had 630 employees at the launch and only 386 were working at the 12 stations or spokes. The remaining were software developers and administration. Since technology is such a large part of their operation, the staff must be at the top with their technological knowledge.
  7. 7. On what key concepts and theories does the case build? How if all do these have to change to support the company? The selling concept is a common business orientation, which Webvan shares. The selling concept states that consumers if left alone, will ordinarily not buy enough products. The organization must, therefore, undertake an aggressive selling and promotion effort. With this effort, Webvan hopes to also create brand recognition and brand loyalty. Brand loyalty can range in degrees from hard-core loyals down to Switchers. Webvan needs to build brand loyalty to be successful. If Webvan acquires a strong brand following both consumers and funding will be easier to gather. Webvan also utilizes spin-in methodologies. Webvan has spun-in businesses that both complement its business arrangement and expand its selection of products. An example of a spin-in was Homegrocers, which was another online grocery ordering and delivery service. Homegrocers offered an alternate service area and delivery routes. As discussed previously, Webvan is a question mark company. It is in the beginning stages of development in a high growth area and has little market share. The company has to think hard about whether to continue to keep pouring money into the company. But, typically in this stage there is a large need for capital to provide plants, equipment, and personnel. What are the companies core competencies? How useful are these in e-business. One of Webvan’s core competencies is their ability to provide professional customer service. Consumers spoke enthusiastically about the friendly, professional delivery people and the cooperative customer service agents who handled errors and returns. Another example of this is the fact that orders were accurate 99% of the time and were delivered on time 92% of the time. Another core competency is Webvan’s technology link between the distribution centers, the customers, the suppliers, and the delivery vans to make them vastly more efficient than the traditional grocery store chain. An analysis of the companies financial situation compared to industry norms. The company’s industry rank for earnings growth is 32 of 46 according to The financial analysts are rating the company as a strong hold. A sample of this rating system is identified below. Rated as: Strong Buy: 1 Moderate Buy: 3 Hold: 5 Moderate Sell: 1 Strong Sell: 1