interactive.wsj.com
January 25, 2001
Webvan Seeks to Refine Customers
In Hopes of Surviving Cash Crunch
By NICK WINGFIELD
Staff Reporter of THE WALL STREET JOURNAL
SAN FRANCISCO -- If there's anyone who can save Webvan Group Inc.,
it is people like Lisa Dana.
A pediatrician with three children and little time to spare, Dr. Dana doesn't
want to return to the hassles of grocery shopping she encountered before
she started using Webvan two years ago. Every five or so days, one of the
company's tan trucks pulls up in front of her house in a tony San Francisco
neighborhood. A Webvan driver then carries into her kitchen some $120 to
$140 worth of butter-leaf lettuce, Niman Ranch pork loin chops and other
groceries.
"They go out of business, I go out of business," Dr. Dana says. "We would
not be able to do without it."
Webvan needs more customers like Dr. Dana -- busy, dependable, big-ticket
shoppers -- if it is to avoid becoming one of the Web's more spectacular
flops. And it needs them fast. As an enormously ambitious and expensive
effort to reinvent the grocery business, Webvan has so far failed to prove it
can reverse the losses it now sustains on the average order it brings into
customers' homes.
Webvan doesn't have much time. At its current rate of cash consumption,
the company will burn through the approximately $200 million it has left
within two quarters, though it could stretch the money out if it cuts spending.
"There's a lot of people around here who believe we can do it," says Robert
Swan, the company's chief operating officer.
But faith is in short supply outside of the Foster
City, Calif., company. Though it has a star-studded
list of venture-capital backers and hired George
Shaheen, the former head of Andersen Consulting
(now called Accenture), as its chief executive,
Webvan's shares trade at around 56 cents, which
almost rules out raising new capital in the public
markets. The company has received a preliminary
warning from the Nasdaq Stock Market that its
stock will be delisted within 90 days unless it meets
certain requirements, including getting its share
price above $1.
Webvan is trying to turn a profit in an area that
others have abandoned. Most dairy companies and grocery stores gave up
home delivery many years ago, though the service is still available on a
limited basis in densely populated areas such as Manhattan. Computers and
the Internet revived interest in the home-grocery business during the past
decade, but most of the efforts flopped. Companies such as Streamline.com
Inc. have gone out of business, while another player, Peapod Inc., has
survived mostly due to a cash infusion from Dutch grocer Royal Ahold NV.
One problem is that online shopping requires consumers to plan ahead rather
than just pull into a supermarket parking lot.
Some of Webvan's backers say they haven't given up on the concept. One
large investor, who declined to be identified, said his firm would be willing to
invest additional capital if Webvan can simply show it can break even or turn
a small profit in one of the geographic markets it serves.
Webvan's Mr. Swan agrees that bringing at least one regional operation,
such as the San Francisco Bay area, its oldest market, into the black is
critical. But it won't be easy.
In Webvan's favor, the typical customer orders about $112 worth of
groceries. The company says its gross margin -- its raw profit before paying
overhead and other expenses -- is 27%, which means that on that $112
order, the cost to Webvan of the goods is $81.76, leaving $30.24 of gross
profit.
Big grocers' gross margins range from 27% to over 30%, so Webvan's
compares favorably to the rest of the industry, despite its puny size.
(Webvan says its own gross margins and those of supermarkets are higher,
but still comparable, if some unique costs are excluded from each.) Webvan
is expected to have about $260 million in revenue in 2000. Mr. Swan says
Webvan's gross margin is boosted by the fact it sells more high-profit items
like organic produce, free-range chicken and other gourmet foods than most
grocery stores. The company also says it has lower spoilage rates on
perishable items than its bricks-and-mortar competitors; Webvan customers
order a day in advance, making it easier for Webvan to stock up accordingly.
The downside is that the costs of picking, packing and delivering most orders
pretty much wipe out the $30.24 that remains on the average order once
Webvan pays its suppliers. Webvan won't say exactly what it costs to
assemble and deliver each order, but in the fourth quarter, the company is
expected to report a pro forma net loss of $109 million on
lower-than-expected revenue of $84 million, according to preliminary figures.
(Webvan plans to release final fourth-quarter results today.)
Webvan is fundamentally a scale business, in which the fixed costs of
preparing and delivering orders, such as the rent it pays on its highly
automated warehouses, become tolerable only when it reaches a certain
customer order volume.
Yet unlike most Internet retailers, Webvan operates, at great expense, its
own home delivery operation using a fleet of snazzy-looking delivery trucks.
This operation won't necessarily enjoy the same economies of scale as other
parts of its business. After all, each driver and truck can only make so many
deliveries a day, limited by traffic, weather, work shifts and other factors. A
key way to improve the economics is to make more deliveries in a smaller
geographic area.
"If you have delivery with the density of a paper route, this thing would
work," says Bill Bishop, president of Willard Bishop, a retail consulting firm
in Barrington, Ill.
How far away is it from reaching that scale?
Webvan's San Francisco Bay area distribution center in Oakland, Calif., its
oldest facility with more than five quarters in operation, was supposed to
break even on a cash-flow basis last quarter. Webvan said it would have
required a 40% increase in order volume for Oakland to achieve that goal in
the fourth quarter. Most analysts believe the company's reticence on the
topic to date means it once again fell short.
"Consumers just haven't been coming back frequently enough," says
Anthony Noto, an Internet analyst at Goldman Sachs Group Inc.
Webvan had about 524,000 customers last quarter in all of its markets, which
in addition to San Francisco include Atlanta, Chicago and seven other
regions. The average Webvan shopper in the San Francisco area ordered
only 1.8 times during the quarter.
This is why hard-core customers like Dr. Dana are so important. She shops
on the site between 12 and 18 times a quarter and places a substantially
higher order than the average Webvan customer. The company simply
needs more like her, and fewer unprofitable customers who order, say, $75
worth of groceries once every two months.
"Our challenge is to get those customers to shop more frequently, to get a
higher share of their wallet and to continue to reduce costs by being more
efficient," Webvan's Mr. Swan says.
To that end, Webvan has sought to reach out to big-spending customers. The
company has started marketing its service to businesses, where order sizes
tend to be high. Webvan also has created incentives for customers to buy
more, such as by boosting to $75 from $50 the minimum order size for free
deliveries and by offering gift certificates at other Web sites for Webvan
customers who buy more than $150 worth of groceries. Marketing to
families with children is a major priority. Webvan has gradually expanded its
selection to include DVD movies, electronics, apparel and other items to
bump up order size.
But some observers think it will take more to get Webvan's business to click.
One former Webvan executive who declined to be identified says the
company badly needs a "loyalty" program akin to those that allow customers
at some grocery stores to earn discounts. Mr. Swan says Webvan is
developing such a program.
Tim Byrne, a vice president in the Mercer Digital group at Mercer
Management Consulting in Boston, says that if Webvan can't get enough
customers to buy groceries, it should become a "last-mile delivery" operation
for other Internet merchants like Amazon.com Inc. In fact, Webvan has
begun doing this already through alliances with companies including pet
supply retailer Petsmart.com. Mr. Byrne suggests Webvan could go even
further by having its drivers pick up returned orders for other merchants.
But Webvan's immediate needs may be more dire. "The bottom line is they
need cash," says Goldman Sachs's Mr. Noto. "I don't think they can stop the
burn-rate in time without raising capital."
Write to Nick Wingfield at nick.wingfield@wsj.com
KJC |
