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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City dwellers, who tend to be tech-savvy, are likely to be receptive to e-commerce ventures, agrees strategy consultant Jasjit Mangat, of consumer packaged goods consulting firm Swander Pace & Co. But, he says, even if they like Webvan's service, their grocery orders are typically too small to be profitable. "Your drops in these areas tend to be smaller than you would like them to be, because they are inhabited by singles or couples with no kids, the DINKs [double-income, no kids]," he says. "The families of three, four, five, or larger are out in suburbia, but once you get out there and have multiple-hundred-dollar drops, the houses are five to a block instead of fifty apartments to a block. It decreases your ability to make multiple drops per day, you have to drive a longer distance, and it takes longer to unload and carry in groceries."

Webvan has indeed felt financial strain as the result of orders being both smaller and less frequent than the company had hoped. By their own estimate, they need about $125 million in sales a year to get their finances in the black, and they've been running at about two-thirds of that. They've fought a mostly losing battle to meet their break-even point, which they had estimated at 8,000 orders per day at about $103 per order. That translates to between 2,800 and 3,000 orders daily at the Oakland facility--although those numbers have steadily been revised downwards as expectations have diminished. Donte Sawyer, a former meat cutter at the Oakland DC who was laid off this spring, recalls the sinking morale among Webvan employees. "They used to write down how many orders we had a day on a little board, but when the numbers started going down, they stopped writing them," he says. "After a while, the whole board was sitting off the wall on the floor."

One of Webvan's first moves to drive up order size was to diversify its inventory. You can now use Webvan to order a hodgepodge of nongrocery items, including books, music, movies, consumer electronics, children's toys, beauty supplies, postal stamps, transit passes, and baby clothing: almost all of these items are more expensive--and have a higher profit margin--than basic groceries. The idea is to convince customers that the site can replace not just trips to the grocery store, but a whole host of other errands as well. Last year, Webvan overhauled the design of both its site and its logo; the logo, formerly an image of a paper grocery bag overflowing with foodstuffs, was now a more ambiguous green and blue "W." Nobile says that the plan is working, that loyal customers are getting used to thinking, as they say at Webvan, "outside of the bag." "You can always tell a first-time customer because they've got one apple and one peach and one piece of broccoli, and then in the coming weeks they start adding shampoo and razors and cleaning supplies, and then all of a sudden, a book," she says. "It keeps expanding--wine, beer, maybe a Palm Pilot."

Industry analysts hailed the company's diversification as a step in the right direction. "Webvan has always been more about the van than the Web, and as many ways as you can use the van, the better off you are," says Mangat. "Groceries are and have always been a low-margin business, but if they drive traffic and you can add on high-margin items, that's an incentive to profitability. We think of that as a necessary expansion, something solid and good. They used groceries as a foot in the door, and then brought in other high-end items."

Nobile puts it more bluntly: "We weren't named 'Groceryvan'; we were named 'Webvan' for a reason," she says. "People have to eat groceries on a regular basis. It was a way to get into their home."

And not just any home. "We're really targeting households with kids," says Nobile. "We've learned over time that they need us the most and we need them the most. They order a lot--more than the average Joe--and they are frequent orderers. It's a love affair and a win-win situation. That doesn't mean we don't benefit the elderly who can't seem to make it out there, or the disabled, or working couples, but if you really want the sweet spot, it's households with kids."

In order to attract mom and pop, Webvan has recently ramped up every promotional trick in the book--they've started using coupons, sponsored a "tell a friend" program that gives you discounts if you refer a new customer to Webvan, and pumped out a slew of direct-mail advertisements as well as a whole new radio and TV ad campaign. (Perhaps you have seen the one where the harried woman, her eyes glazed over, says "I want to spend time with my kids, but I need olive oil.") Webvan has even started throwing parties so that groups of moms can get together and go shopping online.

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