Name: - Priyesh Gupta

Roll No: -18421

Background

“WebVan” e-tailer business startup which was started in 1999 when dot-com companies boom is
raising with phenomenal growth, WebVan attracted so many big capital ventures raised 800
million dollars within span two years, business shooted like a rocket and suddenly failed at the
business in 2001.

A startup that promised delivery of groceries within 30 minutes of ordering, from state-of-the-art
order fulfillment centers manned by advanced robots. A startup that raised VC funds and even had
a blockbuster IPO after which it was valued at $1.2 billion at its peak, before racking up $830
million in losses and filing for bankruptcy within a few more months

WebVan is considered as one of the big disaster in the dot-com companies era , Webvan raised
and failed within span of three years of time, still so many business schools consider Webvan case
study as their main topic to teach their students and so many new tech startup companies, venture
capitalist, investors do keep in mind about the WebVan failure to be cautious about the business.

Reasons

1. An incorrect business model. The company erroneously assumed that it was in the
technology business, not the grocery business.
2. Management’s lack of retail food experience. Webvan was an online supermarket
run by consultants, "techies" and others who were made officers and directors, even
though they had no retail food experience. Even CEO George Shaheen, former chief of
Arthur Andersen Inc., had little or no food-related experience. Because grocery stores
operate on very thin margins, even the most effectively managed can lose money.
Webvan founder Louis Borders, founder of Borders Books & Music, was an expert in
selling books, but books do not expire or spoil.
3. A lack of understanding of the sociology and psychology of retailing food. Web-
van’s management did not grasp how consumers shop for food. People go to
supermarkets to look at and even feel the merchandise. Buying food is a tactile
experience and a social event as well. Customers like to speak to the grocer, the
butcher or the wine department manager, for example. There must be a special reason
for people to forego supermarket shopping.
4. Lack of demographic understanding. Webvan located major warehouses in Atlanta
and Los Angeles, where people are used to driving and would rather drive to a store
than wait for delivery. Only transplanted couples who hailed from congested
metropolitan areas and who both work warmed up to the Webvan idea. Webvan’s
problems were exacerbated in California’s Orange and San Diego counties, both of
which have large Latin American and Asian populations. These customers were
already being served by local grocers who catered to these ethnic communities much
more effectively than Webvan could.
 5. Erroneous target marketing. The most obvious customers for Webvan’s services
were not soccer moms or the upscale suburban families the company targeted but
people who have problems getting to a grocery store. Obvious potential customers
were senior citizens, college students, mothers with very young children, handicapped
individuals, late-night workers and, of course, upscale dot-com workers.
6. The high cost of running an online grocery business. The cost for building
Webvan’s high-tech Atlanta warehouse alone was a staggering $40 million—much
more than warehouses for traditional retail grocery chains. Webvan used the latest
technology to automate its warehouses, bought hundreds of refrigerated delivery
trucks, and hired and insured drivers allover the country.

Mitigation
• It should not have dependent on economies of scale just in the beginning
• Capital Intensive approach increased the fixed inventory carrying cost though the
break even point
• Wrong estimation of demand lead to wrong investment estimates
• Non availability of delivery channel though it was there.
• Grocery items include more perishable items. Attention was not paid to large
number of perishable items and their handling and delivery
• Automation does not mean cost saving.