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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We jog (briskly, with hands tingling) through the produce section, just behind a team of quality-management inspectors who are looking over the shelves. Produce is the top seller for the entire grocery business, and here we find plenty of it: individually wrapped lemons and Asian pears, plastic bags of jicama sticks and arugula, tiny bowls of fruit salad and shrimp louie, all stamped with the Webvan logo. Webvan used to have an entire section of the company devoted to cooking heat-and-serve meals, but it wasn't as popular as they expected. The vestiges of it remain with elaborate-sounding ready-to-eat items like the "grilled chicken focaccia sandwich with roast peppers and roast garlic mayo" which also line the produce section shelves. Pickers in this section, I imagine, occasionally have to wipe the drool from their chins.

Finally, all the picking is done. A single customer ordering frozen, chilled, and ambient-temperature items would have blue, green, and yellow totes going through the conveyor system all at once--magically, they all find each other at the end of the process, where they are stacked, sorted by destination, and loaded onto the refrigerated vans. The Webvan driver then cranks up the radio, rockets to your house, arrives during a sixty-minute time window chosen by you, and helps you unpack the goodies in your very own kitchen. There. Wasn't that easier than going to the store?

In 1996, the idea for Webvan sprang from the fertile mind of Louis Borders as the result of an unfortunate spice-ordering incident. Borders, an MIT-trained engineer, had a history of problem-solving and was no stranger to start-ups; in addition to founding the Borders Books and Music chain, he had also cofounded a software consulting company and an investment firm. But this flummoxed him: he had ordered the spices over the Internet; the delivery person had arrived. Borders was not home; the delivery person left a sticker on his doorjamb; a new delivery time was scheduled; Borders was not home; another sticker. And so on.

According to Webvan legend, Borders promptly whipped out a pencil and paper and got to work designing what the company later dubbed "the complete shopping experience"--an e-commerce venture that would take charge of all aspects of completing a customer's order, from the Web site to warehouse to refrigerated van. Unlike companies such as Amazon, which use third-party shippers like UPS to deliver packages, Borders' grocery store would take the product right to your door, which in e-commerce vernacular is termed "the last mile." It would be efficient, environmentally friendly (reducing car trips to the store as well as paper and plastic grocery bags) and most importantly, a time-saving boon for busy people. Webvan's summary annual report for 1999 compared e-commerce to the advent of automated banking--once people got used to the idea of making transactions through a machine, shopping would never be the same again. "Make a trip to the store, parade a shopping cart up and down the aisles, scour the shelves for the best quality products, wait in a checkout line, lug the bags home and unload them," it read. "We accept this mundane and time-consuming task because we have no reliable alternative. Or do we?"

Venture capitalists liked Borders' idea. Financiers like Softbank, Knight-Ridder, CBS Corp., Sequoia Capital, and Benchmark Capital all put up money. Combined with the funds raised by former competitor HomeGrocer, which Webvan acquired in September 2000, Webvan has raked in a total of $1.2 billion in venture capital--the second-biggest funding pool after that raised by Amazon. After Webvan's initial public offering in November 1999, the company was hailed by the press and Wall Street alike as innovative and trend-setting. Webvan sold its first shares at $15 a pop; by the end of the day they had soared in value to $24.88. Webvan very quickly became a $8.45 billion company, at least on paper. (The IPO was marred only by a two-week delay ordered by the Security Exchange Commission--it seems someone had been blabbing business details not included in the company's prospectus during what is supposed to be a pre-IPO "quiet period.") And Borders wasn't the only one pitching "last mile" delivery services; the Webvan model was replicated to a lesser extent by companies like Kozmo, Urbanfetch, SameDay, and Pink Dot, which would deliver snacks, movies, or gift items to your house via delivery vans or couriers mounted on scooters and bikes.

Today, of the "last mile" online merchants, only the grocery operations like Webvan are left standing. Kozmo--the brand perhaps most familiar to Bay Area residents--folded this April; all of them disappeared without ever turning a profit. Even the grocery ventures are having a rough time, and the ones that remain have done so by dint of partnering with bricks-and-mortar retailers. Webvan's nearest remaining online competitor is, which was recently acquired in an eleventh-hour deal by Dutch grocer Royal Ahold. A few traditional grocers are gingerly testing the workability of online arms, although the industry as a whole has been slow to embrace e-commerce perhaps out of fear that they would put their own stores out of business. now does business in Seattle, and Safeway has teamed up with to try out the online delivery business in Texas. Otherwise, Webvan, which had the splashiest debut, is the only one left in the pool.

As it turns out, going the last mile is extremely expensive, especially for companies dealing in low-margin items like groceries. For companies like Kozmo, which would blithely deliver a single movie or candy bar to a customer, the cost of paying the delivery person far outweighed the value of the sale. Not long after applauding Webvan's launch, analysts went from calling Webvan's approach "innovative" to "profit-proof." Critics now argue that due to flaws inherent to the home-delivery model, Webvan won't be around for long unless it finds a way to boost order size enough to make up for delivery costs. In a report scathingly titled "The Last Mile to Nowhere," Tim Laseter, a vice president at management consultants Booz-Allen & Hamilton, writes that home delivery could be profitable only in extremely densely-populated, affluent areas--and not even there until more people warm up to online shopping. Laseter warns that early estimates of the potential for online sales--for example, Forrester Research, Inc. had predicted $184 billion by 2004--were grossly exaggerated. "We believe the last mile may lead to the gallows rather than to the promised land," the report gloomily concludes.


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