Webvan collapses, but SimonDelivers.com is expanding
Eric Wieffering
Star Tribune
Tuesday, July 10, 2001
As soon as he heard that Webvan Group had filed for bankruptcy, Simon Foster knew the question was coming.
Would SimonDelivers.com eventually join the swelling ranks of failed Internet grocers that now includes Webvan, a Silicon Valley Internet grocer that raised and lost
more than $800 million?
"No," said the founder and CEO of the Twin Cities-based online grocer. "We're going to be around for a very long time."
Foster's conviction flies in the face of current conventional wisdom among investors and analysts: Online grocers cannot squeeze a profit out of
the business of picking, packing and delivering everything from dog food to doughnuts to customers' homes.
The Internet consulting firm Jupiter Media Metrix, which once predicted that Net grocers would rack up $6 billion in sales in 2002, lowered that
estimate to $1.3 billion and declared in May that "grocery delivery is economically unviable for the foreseeable future."
Foster disagrees. Simon Delivers, with 43,000 customers, expects sales of $55 million in 2001 and is on track to become profitable, on a net
income basis, in the next 12 months. With that milestone, the company will expand to another metro area in the Midwest that Foster declines to
identify, except to say it will be smaller than the Twin Cities.
SimonDelivers also has raised money at a time when most investors have sworn off Internet companies. Of its $51 million raised so far, 70 percent came after tech
stocks crashed. Foster expects to close on another $10 million to $15 million of financing in the coming months.
"No question, Webvan has cast a shadow on the capital markets," Foster said. "But proving our model in one market has definitely been rewarded."
How has SimonDelivers made it while so many others -- with so much more money -- have not? Chalk it up to Foster's slow-but-steady approach as well as a touch
of luck: By last summer, most of the national firms had scratched plans to enter the Twin Cities.
When Foster, a former Pillsbury Co. marketing manager, founded the company in 1999, analysts and investors already were agog over the future of online grocery sales.
WebHouse, an affiliate of Priceline.com, raised $390 million from private investors for its grocery service. Streamline.com, Webvan and HomeGrocer.com raised
almost $700 million in initial offerings of their stock.
Flush with cash, they expanded wildly, convinced that consumer demand alone would carry them to profitability.
All have since gone out of business, but none took the "get big fast" mantra more to heart than Webvan. Though sales grew quickly, from $13.3 million in 1999 to
$178.5 million in 2000, it wasn't enough to pay for the $30 million warehouses in San Francisco, Atlanta, and other cities, or the fleet of $60,000 trucks.
"Webvan epitomized the 'if you build it they will come' mentality that defined the Internet retail sector through 2000," said Jupiter analyst Ken Cassar.
Foster, with less money to work with, had little choice but to follow a more conservative strategy. So, while Webvan spent between $30 million and $40 million for each
of its massive, high-tech warehouses, SimonDelivers spent $7.5 million for comparatively modest but efficient facilities. Webvan's specially designed trucks carried an
average price tag of $60,000, while SimonDelivers' off-the-rack models cost about $32,000.
Finally, instead of getting big fast and potentially disappointing new customers, Foster expanded slowly, adding customers only once the company had the software,
facilities and employees to handle the new business.
HomeGrocer, for example, began expanding to new cities after it had 10,000 customers in Seattle. SimonDelivers, in contrast, stopped taking new customers for more
than three months last year while it moved into a new warehouse and installed new ordering and inventory management software.
That software, which is linked to the computers of its suppliers and vendors, allows SimonDelivers to turn its inventory three times faster than Webvan and five times
faster than a traditional grocery store, Foster said.
Still, SimonDelivers has generated customer loyalty unmatched by any of its formerly well-funded competitors.
About 76 percent of the people who try SimonDelivers' become repeat customers, Foster said, compared with about 30 percent of Webvan's. SimonDelivers' customers
shop an average of two times a month and spend $2,400 per year, while Webvan's customers shop less than two times per quarter and spend slightly more than $900 per
year. According to Foster, his fastest-growing group of customers are those who do their weekly shopping on SimonDelivers. They spend an average of $4,200 per year.
"We recognized that the way to crack this was to focus on the weekly grocery shopper and get customers in the habit," Foster said.
If it hits its revenue goal for the year, SimonDelivers will still do less business than two large suburban grocery stores. But Foster predicts sales in the Twin Cities will
accelerate as the company expands this summer into most of the remaining seven-county metro area, and as it enters new markets in the following years.
"We're building a transportation network right to the home, and it takes some time to figure out the front end of it," Foster said. "We're pretty happy with it so far.
When we're fully happy with it we'll roll."
-- Eric Wieffering is at ewieffering@startribune.com .
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