The Last Mile 

When the Internet grocer Webvan opened a distribution center in East Oakland, it seemed that some of the area's e-commerce riches were beginning to trickle down to street level. Now, employees wonder if the salad days are over.

The Webvan distribution center in East Oakland is a technological wonderland, even if it is entirely devoted to the prosaic mechanics of grocery distribution. It is the back end of, an e-commerce site where shoppers can click through thumbnail images of thousands of individual items, put them into a virtual shopping cart and then arrange to have them delivered to their doorstep, all for not much more than ordinary grocery store prices. The huge warehouse is a sci-fi workplace where the employees wear bar-code scanners on their fingertips and miniature wrist computers that tell them what to do, where the software driving the machinery is so prescient that it makes sure the potato chips get packed on top of the six-pack of Coke, instead of underneath. It is also the nerve center of Webvan's Bay Area hub-and-spoke routing system, designed to time deliveries so precisely that your order gets to your house with the ice cream still frozen and the tomatoes unblemished. The Webvan warehouse is a totally digitized, super-refrigerated behemoth, capable of replacing eighteen traditional grocery stores and packing goods to be shuttled to online shoppers all around the Bay Area. The future is so very now at the Webvan warehouse, which was designed to forever change the way we shop for groceries and the way retailers deliver them to us. It's such hip, forward-thinking technology--too bad almost no one is using it.I've been itching to get inside the Oakland Webvan distribution center--or DC, in Webvanspeak--since the company opened it with great fanfare in June 1999. In those heady days of Internet business speculation, when bigger was better and much, much bigger was much, much better, Webvan had well-publicized plans to roll out identical facilities in 26 cities nationwide. There was talk of online grocers capturing a hefty slice of the $500 billion the nation's shoppers spend annually on groceries. If Internet commerce caught on, pundits mused anxiously (or eagerly, depending), it might put traditional "bricks-and-mortar" grocery stores right out of business. Opening the Foster City-based company's first distribution center in East Oakland--near a ready supply of blue-collar labor and an affluent, computer-friendly and food-obsessed consumer market--had seemed like a particularly ingenious move for the new company. I really wanted to check things out.

But perhaps because they were shielding the proprietary software that runs the conveyor belts, or perhaps because they were leery of the e-tailing competition that was out there at the time, the PR team Webvan was then employing guarded entry to the distribution center with a vigilance worthy of a facility that was warehousing alien spacecraft, rather than bulk foods. (Surely you remember the stiff competition from other early grocery e-tailers such as Kozmo, Streamline, PDQuick, or HomeGrocer? Or perhaps you don't.) At any rate, very few lucky people got to tour the premises. For me, the promised trip to the new center never panned out, and neither did the ride in the refrigerated delivery van, nor the much less exciting substitute offer: a chance to watch a Webvan driver hand off groceries to a real live customer. Several minutes before deadline, I caved in and accepted Webvan's final offer, which was a phone interview with a satisfied customer. The satisfied customer had many enthusiastic things to say about the new brush for his barbecue pit that he had purchased via the Web site, but it all seemed anticlimactic. As it turned out, e-commerce as a whole was about to become pretty darn underwhelming.

What a difference two years made, to Webvan as it did to hundreds of other Internet businesses. By the end of this April, an estimated 17,554 workers nationwide had been handed pink slips due to the dot-com bomb; even the staid

Wall Street Journal's Web site began snarkily keeping a tally of dot-com layoffs. Over the two years, Webvan lost $829.7 million in venture capital, and none of the facilities it currently runs operate at anything approaching capacity. It was only during the first quarter of this year that Webvan finally turned a profit at its Orange County facility; the others are still chalking up losses. Webvan stock, once trading at $34 per share, now hovers somewhere between nine and twenty cents. In April, after the stock's value had remained below one dollar for several months, the powers that be at the Nasdaq warned Webvan that they would be delisted if they couldn't bring up the share price. In a last-ditch move to drive up the stock's value--a move regarded by financial analysts as analogous to the futile flailing of a drowning person coming up for air one last time--Webvan proposed a 25-for-one reverse stock split. They've also appealed the Nasdaq's delisting decision; a hearing is set for June 6.

Worse for the company's flagging morale, key personnel have started leaving. The first to go was Louis Borders, founder of the Borders bookstore chain, who originated the Webvan idea and helped bankroll the company's startup. Borders stepped down as chairman last fall, then resigned from the board of Webvan Group, Inc. this February (although he continues to own a quarter of Webvan's stock).

Next to go was CEO George Shaheen. Less than two years ago, Webvan had flamboyantly recruited him away from a $4 million a year gig at Anderson Consulting with nothing more than the promise of a measly $500,000 annual salary--and lots and lots of Webvan stock. At that time, it seemed like a fair trade. Shaheen received a $13.5 million signing bonus to buy 1.25 million shares of Webvan stock, and was issued options to buy another 15 million shares. When Shaheen left, the value of those options had shrunk to about $150,000; when needled by the New York Times about his choice, he replied simply, "I didn't have any idea of the blood bath that would ensue." (Webvan recently forgave a nearly $7 million loan to Shaheen which had been intended to help him pay taxes on Webvan shares he had purchased but not sold. The deal let him walk away from the wreckage nearly unscathed, unlike many dot-com CEOs who got hit by the little-known but disastrous alternative minimum tax, which required them to pay taxes on paper gains made from exercising stock options at the height of the Internet boom, even if those stocks are now worthless.) Webvan also cut him a sweet good-bye package--$375,000 a year for life.

Industry analysts have speculated that the departure of two of the company's most visible personalities might hobble its ability to raise more capital--and Webvan estimates it will need another $25 million to make it through the first quarter of 2002. In an effort to conserve capital, Webvan recently closed its facilities in Atlanta and Dallas as well as a substation in Sacramento. (Webvan still maintains service in Chicago, San Diego, Los Angeles, Orange County, and the Seattle/Portland area, as well as the Bay Area.) In February, Webvan laid off 273 workers. In April, cutbacks necessitated the layoff of 885 more--about half of them from the Foster City administrative office. The company said it was merely "right-sizing" the business.


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