FDX chief predicts roadblocks for Webvan
By Lawrence Aragon
Redherring.com
November 11, 1999
Fred Smith, founding CEO of FDX (NYSE: FDX), parent company of Federal Express (FedEx), says the business model for online grocers such as Webvan (Nasdaq: WBVN) is ill-conceived.
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Webvan, which went public November 5, plans to spend billions of dollars building 26 high-tech distribution centers around the United States. It hopes to undercut traditional grocery stores by taking customer orders over the Internet and fulfilling them via delivery vans dispatched from its distribution centers. Webvan has predicted that its business model will produce operating margins as low as 12 percent.
But Mr. Smith, one of the world's foremost experts on logistics, says the current model of neighborhood grocery stores will not be overtaken by Web-based grocers. "The distribution patterns for low value-added goods exists for a reason," said Mr. Smith, who was the featured speaker Tuesday night at Weiss, Peck & Greer Venture Partners's annual meeting for limited partners. Mr. Smith and Weiss Peck founding partner Philip Greer have been friends for 26 years; Mr. Greer has sat on the board of FedEx since 1974.
ÿ Webvan stock had a roller-coaster ride in its first day of trading.
ÿ Webvan's profit potential is questionable.
ÿ Webvan refiled its prospectus after an SEC wrist-slapping.
SLUSH AHEAD
Without mentioning Webvan by name, Mr. Smith said he believes that for online grocers, "it will be very tough sledding, except for very high-income areas."
Wearing a corporate blue suit and red tie, the silver-haired Mr. Smith spoke about online grocers in a brief Q&A session following his speech before approximately 80 venture capitalists, entrepreneurs, and institutional investors at the Robert Mondavi winery in Napa Valley. Before commenting on online grocers, he noted that he once sat on the board of a grocery distributor.
Mr. Smith bemoaned the fact that experts in physical distribution, such as himself, "are so seldom consulted" about online enterprises that rely on physical distribution. "The level of competency there is very thin," he said with his famed Southern drawl. Online grocers have made a fundamental mistake in assuming that the average person can afford a delivery service that really is aimed at high-income individuals, he said.
MYTH VS. MATH
Mr. Smith went on to lump online grocers into a group of companies he labels as "myth" -- information-technology companies with a physical distribution component. Conversely, "math" companies, which have viable business models, are "pure information technology companies," he said.
Mr. Smith emphasized that he was not throwing cold water on the Internet and its effect on how business is conducted. "The Internet will be used to order everything," he said. "The question is: what physical distribution will go with it?"
Near the end of his talk, the self-deprecating Mr. Smith took a shot at himself. "Who the hell am I to question Webvan when they have an $8 billion market cap? We're at $12 billion, and I'm almost ashamed to say that we have $2.4 billion in EBTD [earnings before taxes and depreciation]."
FORGIVE MY PROFITS
"It's almost a sin to have cash flow in the Internet world," Mr. Smith concluded to laughter and applause. "Over time, all these things will rationalize themselves out."
Mr. Smith said FDX is on track to post revenue of $18 billion in its next fiscal year, which ends May 2000. "Business is extremely strong, driven by macro-economic trends," he said.
FDX stock closed at $43.25 Wednesday, down 75 cents. Its 52-week low is $25.88, and its 52-week high is $61.88. Webvan closed at $21.88 Wednesday, down $2.75. Its IPO was priced at $15 a share. Webvan is still in its quiet period. |
