E-Commerce failure – Webvan.com

For those unfamiliar with Webvan, it is an on-line grocery store. You went to their site, ordered your groceries, picked a delivery date/time and your groceries were delivered. They tried to get economies of scale by using a large warehouse to store, pick and ship the orders.

People tried them once, because they were novel, new, and their neighbors mentioned them at parties. That didn't translate into regular, large orders that Webvan needed to be a viable business.

There were a number of things that contributed to their demise:

1. Food
Food is a large part of most budgets, even for the folks Webvan targeted. Discounting is very much part of the grocery business, and Webvan didn't play that game. High margin items, such as soda, were cheaper at stores than on Webvan. The major chains have made shoppers very price sensitive, and Webvan was viewed at the upper end of the price range (whether they were or not is irrelevant), which meant people would use them in a pinch, but still went to the store for their major purchases.

2. Order Size
Grocery shopping is really impulse buying - stores want to get you in with a few specials, to get you to walk through their store. They know you'll see other items you need, adding to the total sale per customer. Even if you go in with a list, you probably would find a few things you needed that you forgot. Webvan, because of its web-based model, wasn't really good at capturing the impulse buy that drives the total sale. Much of the buying is touch and feel - people like to see the meat, fruit, and vegetables and pick what they like. Yes, Webvan would refund the money, but that doesn't do you much good when your trying to make a salad and the vegetables aren't up to your standards.

3. Advantage over stores
While it was great that Webvan delivered, they completely missed the "I need it now" market. That may have been smart, because cost of delivering a carton of eggs and some milk would be kill any profit on the order. (Webvan did add a delivery charge for small orders near the end) However, since I still had to run to the store to get one or two items, it was just as easy to make a list of other things I needed as well. This meant there was no compelling reason to use Webvan, since it really didn't cut down significantly on trips to the store.

4. Convenience
Scheduling delivery was hard - next day service was rarely available, forcing people to plan 3-4 days in advance. It's just as easy to sneak in a trip to the store. In short, Webvan offered no clear advantages to going to the store that made buyers switch to them. Retail stores could even adopt parts of Webvan's model, making their position even weaker. In Atlanta, several stores even offered fax/online/phone ordering - they would take and pack the order for your pickup - one even offered drive through pickup.

5. Webvan failed to learn from history. Home delivery of groceries is nothing new
There are services that will stock your pantry on a regular schedule. Sometimes there is a reason why a business model hasn't been a roaring success - their aren't enough customers. Scaling up a business model that hasn't been successful in the past and wrapping the web around it doesn't change the fundamentals.