Mistakes to Learn From

Mistakes to Learn From

Learning from other businesses mistakes is crucial when planning to start your own business. Webvan was an online grocery business that filed for bankruptcy protection and fired all 2,000 employees in 2001. (Evans) People believe Webvan failed for many reasons such as a poor business model, lack of retail food knowledge, lack of understanding the demographics of their customers, and the high costs for all the up to date technologies that they used. They started their company out with a large initial investment and began losing money from the beginning. A few years later Webvan had to file for bankruptcy. This paper will cover the background of Webvan and why they failed. Second it will cover how Tesco, an online grocery store, has learned from Webvan's mistakes. Start-up companies can learn a lot from Webvan's mistakes and benefit from the success of Tesco.

Webvan was created in 1996 by Louis Borders, the founder of the Borders bookstore chain. He first started raising capital for his business which was originally called intelligent systems for retail. By 1999, he had saved up $122 million in capital from Benchmark, Sequoia, and other venture capitalists. Also in 1999 he opened the business that we all know now as Webvan. (Inc. Webvan group) According to InfoWorld writer Dylan Tweney, "Webvan, despite appearances, is more than just an online food vendor. It's a bold--and expensive--experiment in direct-to-consumer product distribution... You can't just pop a carton of eggs into a FedEx mailer. You need to make sure that groceries arrive quickly, intact, and at the right temperature. And you need to do it without big per-customer shipping charges, given the food industry's notoriously skinny margins." Tweney and others believed that if Webvan succeeded it would be an innovative way to grocery shop.

The company's main idea was to get the groceries to the customer's door in 30 minutes or less after they placed their order. But before you ordered the food there was a lot of costs that went into the process. First the company wanted "automated distribution centers" in their initial 26 target markets. Each facility was to be around $30 million dollars and about 350,000 square feet. Each distribution center would be surrounded by smaller local stations. These stations would send out smaller trucks to deliver the groceries to the public. Webvan did not want to charge any shipping, but they would spend a lot of money on it. If they were to charge customers for delivery it would be around $15 dollars an order. The graph below illustrates how the company came up with this number and better shows how the company planned to distribute their products. (Delaney- Klinger)

Reasons Webvan Failed

The first reason Webvan collapsed was the lack of food retail experience. The CEO George Shaheen had no food-related experience. And the only experience that the founder Louis Borders had was non-food related. He was experienced at selling books, movies, and music, but they don't expire like food does. Grocery stores try to operate on very small margins but at times can lose some money. (Munroe) Customers want to hand pick perishable foods such as fruits and vegetables to make sure they are fresh and getting the best quality. The company needed to have a slogan or promise to tell the customers that if they weren't satisfied with anything they could get their money back.

The second reason Webvan failed was due to of their lack of understanding the demographics of their customers. Their main warehouse locations were in very large cities such as Los Angeles and Atlanta, where most of the people are used to driving to get their groceries and don't want to wait at home for them to be delivered. The idea of online grocery appeals to the elderly and the people that can't leave their house due to health reasons. Also people living in large Latin American and Asian populations go to ethnic grocery stores where they will be better catered for their needs rather than using Webvan. (Munroe)

The third reason that Webvan failed was because of the financial situation they put themselves in right at the beginning. When Webvan started the company, they wanted to use state-of-the-art equipment to operate their business. They spent 40 million alone on a high tech warehouse in Atlanta Georgia. Other costs the company incurred were all of the refrigerated trucks that were used to deliver food from the warehouses and the local stations, hiring all the people to drive the trucks and work in the warehouses, plus the insurance for the people to drive the vehicles legally. As of December 31 2000, according to the company's financial statements, the company spent $370 million on property, equipment, leasing and other expenses. (Munroe)

According to the company's financial statements they knew they were going under, but came up with ways to turn the company around and make a profit. The company's first year in 1998, their start up year, they didn't sell anything but were down $12 million. The second year their gross sales were $13 million while their losses were $144 million. The third year their gross sales were $178 million and their total loss was $453 million. Over the first three years of the company they were already $609 million in the negative. (Form 10-K)

The company perceives that they are running into a problem and were committed to fix their problems. In their financial statements the company says "Webvan may continue to suffer significant net losses and a negative cash flow from operations. These matters raise substantial doubt about Webvan's ability to continue as a going concern." They don't want to close the business so they propose a few fixes to bring in more revenue and reduce their spending. (Form 10-K)

Ways Webvan Tried to Recover

First, Webvan proposes to reduce the infrastructure required to process orders. They plan to reduce the number of employees by 27%, and outsource operations that can be prepared more cost effective through a third party. Second they plan to expand the delivery window from 30