Online Grocery Retail – The Webvan Story

Recently, one of my friends told me his start-up plans in online grocery retail domain. On asking few questions on what he wants to accomplish, the idea didn’t seem very attractive. Instead, I told him to look for Omni-Channel Retailing as I was a bit more equipped and have done a prior research. Also, after discussing his pricing model, I was convinced that margins here would be razor-thin. But, I realized soon I hurried on suggesting him something else. So, I decided to get some familiarity on “Online Grocery Retail” market.


First Q: What is Online Grocery Retail?
Organizations providing Online Grocery Retail services allow customers to order groceries online and have them delivered to their homes within a particular time frame, usually few hours or same day.

Second Q: Reasons for purchasing grocery online?
a) Avoid Traffic                      b) Special Deals
c) Takes Less Time                d) Better Product Selection
e) Sticking to Budget            f) Save Fuel Costs

Third QBarriers to Purchasing Grocery Online?
a) Waiting for Delivery       b) Confusing
b) More Expensive              d) Lack of Touch and Feel
e) Products Damaged          f) Can’t Redeem Coupons

Fourth Q: Has this been tried before?
Many companies have both tried and failed in the past last decade trying to mark their presence in such a niche and risky market segment.

Now, Let’s see and analyze Webvan, first major market player of this segment.

The Webvan Story
Webvan was established in 1997. In the period, because of its uniqueness, attracted many investors and with them millions of dollars. These funds were used to build state-of-the-art warehouses with management team betting heavily on Hi-Tech. Soon after its IPO in 1999, it seemed to bustle right up to the top beating all the competition from supermarkets and elsewhere. But it turned out to be a big disaster both for its investors and employees and went bankrupt in 2001.

Webvan Business Model
a) High-tech Distribution Centers: To increase productivity. The reason behind was the low margins of US grocery retail business. Thus, to obtain huge profits (or huge margins) they need to distribute fast with less man power (less man-power means low salary expenditures) so as to keep no. of consumers, using their website, per order high.

b) Customer Acquisition: The 1999-2001 period saw great boom in market. Hence, Webvan reached its consumers lightning fast, through widespread and prolonged publicity. But changing traditional approach was a daunting task considering cost structure, delivery and spoilage problems, which affected their customer retention policy.

c) Pricing Model: Charged a $4.95 delivery fee for orders under $50, a threshold it increased to $75 in the late 2000.

d) Payment Structure: Consumers could pay easily and immediately via credit cards without any hassle.

Competitive Forces Model Analysis
a) Threat of new entrants: The market was new and untested. In addition, huge setup costs blocked many new entrants. Thus, it didn’t play huge role in issues such as profitability, customer loyalty, and access to distribution.

b) Threat of substitute services: Supermarkets and traditional retail stores were the only substitutes; with home delivery the only service differentiation. Many consumers reluctantly prefer not to pay high delivery charges due to availability of large number of small traditional stores in nearby areas, which had a huge impact on Webvan’s overall business.

c) Bargaining power of customers: Bargaining leverage was very low as consumers can no more enjoy long-term seller-buyer relationship benefits. And due to fixed price structure consumers’ could quickly shift from online grocery option to traditional stores without any money lose. This hampered their both customer retention policy and profit margins.

d) Bargaining power of suppliers: Availability of many traditional grocery stores and few supermarkets gave suppliers high bargaining power. Suppliers switching costs were low, if not negligible. Plus distribution centers problems with handling of products cause further gain in the bargaining power of suppliers. But since Webvan was the only player selling grocery online and consumers’ attractiveness to online grocery, might had tempted suppliers to compromise a bit on profits, which would had given Webvan some power to bargain.

e) Intensity of competitive rivalry: High-tech distribution centers, comprehensible branding and advertising strategy, and top management team was not enough for Webvan because of its low concentration ratio. The competition was really fierce as most of the market was shared by traditional outlets. And with huge investments needed in both marketing and innovation the Webvan model was not sustainable at that juncture.

Factors Responsible for Failure

a) Large volumes of orders dropped in last 3 months, before the close down. As a result two things happened:

i) High Losses: Huge inventory with no sales to support.
ii) Decreasing cash: Cash outflow took a sudden plunge as sales went down drastically.

b) Very aggressive expansion into multiple cities and complex website structure.

c) Extremely optimistic about people’s willingness to ditch traditional stores in favor of there boom.

d) Acute margins due to lack of customers and low sales volumes.

Go through Checklist (before stepping into this niche market segment)
a) Returns on sales.

b) Customer acquisition model.

c) Pricing strategy.

d) Inventory (Warehouses) setup.


Please poll your option(s) on Google survey form: “Online Grocery Retail

Results are to be announced in next few days.

2 thoughts on “Online Grocery Retail – The Webvan Story

  1. Pingback: “Online Grocery Retail” Survey Result | IspiratO

  2. Arpit, you are right. Your friend has not done any analysis. and even whatever you have posted is hardly 0.1% of the study required to start this. Anyway.. good luck.

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