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.

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Industry Standard's Web site, which runs zingers like "Knock, knock. Who's there? If you're in Dallas, not Webvan.") "The press are just ruthless right now," sighs Nobile. "The media is really not seeing the big picture. They just want to see who the next E-Toys is. The minute they see a layoff it's like 'Oops, they're dead.' We feel like we really had to make this decision to move forward. We know this works. It's not like, 'Let's just take this downward spiral.' It's, 'Let's take this step back to move two steps forward.'" Of course, Webvan management has had to radically adjust its goals for the next year, going from plans for pie-in-the-sky expansion to making dramatic cuts to reduce its expenses. "A mere ninety days ago, we stated that we would need $40-60 million in the first quarter of 2002," says Bud Grebey, another Webvan spokesperson. "We believe with the changes we made and are making we now we will only need $25 million, so we've cut our capital needs by at least half." Webvan is in discussion with existing investors for that money, and Grebey says they anticipate being self-sustaining and profitable by the second half of 2002. "Clearly," he says, "there's difficult news with regard to colleagues being laid off, but there's also--at least from the perspective of the business and customers and shareholders--a real silver lining to that news, and that is that we've eliminated the risk of failure."

Well, even if they haven't quite eliminated it, they may have staved it off. Webvan still has $210 million left to burn through this year, as well as two intangible assets--brand-name recognition and customer loyalty. They take heart in the fact that over 84 percent of their orders are from repeat customers, and that during the first quarter of 2001, the average order size had finally jutted past the break-even point (at $114 an order). "If the customers we've got now ordered just once or twice more during a quarter then we'll wildly exceed our expectations," says Nobile. "We've got the folks--it's not that we need millions and millions of customers we don't have. It's not that hard a goal to reach, and we're working on it slowly and surely."

At the end of April, new CEO Robert Swan even took the unusual step of sending a personalized e-mail to Webvan customers asking them to bear with the company through what he called "the current climate of uncertainty in e-commerce." The letter asks customers to continue to refer their friends to the site, and encourages them to order nongrocery items to drive their order sizes up over $100. The company is also pulling out all the stops with new initiatives, like the recently piloted Webvan@Work program, which targets business managers who need to buy office basics like toner, copy paper, and coffee--and maybe a sushi platter or two. Other last-ditch moves include hiking delivery fees to encourage orders over $100, a flirtation with the idea of same-day delivery service, and the advent of the "Webvan Rewards" program, which gives shoppers bonus points redeemable for reserved delivery times and customer-service privileges. The company has also started sending out surprise gifts to its best customers.

But those who see Webvan as nearing the end of the road are already predicting what will happen next. On one hand, there are those who foresee a merger with Amazon, which already owns six percent of the combined Webvan/HomeGrocer operation. After all, if you could mix Webvan's affluent, urban customer base with Amazon's huge product selection, you might finally see shoppers placing orders large enough to be truly profitable.

Then there are those who advocate a "clicks-and-bricks" approach: partnering with a traditional grocer looking to ease into online sales. "Webvan's model is one the traditional grocers would have never taken; they would have obsoleted eighteen grocery stores. It took a pure-play company like Webvan to go do this, but because they overextended themselves, now they need to be rescued," says Laseter. "They never would have done it on their own, but if someone can buy Webvan's assets for pennies on the dollar--which is not inconceivable--then the economics actually get pretty good. They don't have all this overhead cost for building those distribution centers, their break-even point is lower, and that gives them time to let customers grow into this model."

Despite the economic slump of the past few months, Laseter still sees online grocery shopping as a rising phenomenon. "It wasn't as dramatic and fast a shift as what everyone was predicting, but there really is a good value proposition for a subset of consumers--a growing subset of customers," he says. "As bad as the story is about e-tailers, online retailing is still a growth market. It reached $30 billion last year and that still is only one percent of the total [US retail], so there's room for growth." So while electronic shopping right now serves mainly a niche market--early adopters who have mostly stayed loyal to the concept--it's a niche that may well become increasingly profitable as more homes get wired and more people get used to making purchases on the Internet. As Nobile puts it, "This is a sea change. The adult generation right now is on the cusp--we're learning it, and some people feel comfortable doing it. The next generation coming after ours is not only going to want it, but demand it."

The bottom line is: can that demand accelerate fast enough to save Webvan? The company has enough cash to get it through the year; whether or not that is enough time for them to finally turn a profit--or convince deep-pocketed investors to feed them yet more cash until they do turn a profit--is still almost impossible to speculate. For now, even the company's harshest critics agree that even if Webvan doesn't survive, online grocery shopping most likely will, albeit probably at a more sedate pace and in a less flashy manner. "Webvan has been a pioneer in many respects," says consultant Jasjit Mangat. "It was quite a large idea they stepped out to tackle, and who's to say that if the capital market was in a different state right now they wouldn't still have the wind in their sails?"

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