Issue 2001-4 - Wednesday, March 7, 2001
|When first mover advantage becomes first looser advantage|
another recurring element to all those stillborn business-models: most
of these companies did not spend much money studying the way Internet
users behave before they got involved in the race, as they thought it
best to trust their "intuition". As a result, we get a galore
of failures (cf: group buying business model).
We've seen spectacular failures in the following sectors: stamp sale, group buying, reverse auctions and other niches that claimed they were going to be the Internet leaders of tomorrow.
But in all those cases, there was not too much harm done as nearly all the products that were sold could be dematerialised.
The present difficulties faced by Webvan or Amazon are due to this need to set up a costly infrastructure in a very short time, and as a result, many youthful mistakes are being committed.
Webvan, the biggest online grocer, has already invested over $1 billion in its business model and now needs to convince its investors to put up some more cash in the business quickly.
If it fails to raise $100 billion in the next months, it will no doubt go bankrupt.
Unfortunately for the site, with a stock that is presently trading for about 35 cents a share (when it used to trade for as much as $30 a share at its highest level), Webvan will have to prove particularly convincing if it wants to raise additional funding quickly since its present stock trade does not exceed the cash it has left, which is around $200 million.
And this is not such a comfortable amount when you know that the company burns through $100 million in cash a quarter
How could we get to such a point with over $1 billion already invested?
Well, just as many other online failures, the difficulties webvan is presently going through originate themselves in a few "postulates" and hypotheses based on weak facts such as:
On paper, everything started well for Webvan, even venture capitalists and the most serious ones believed in the project: investors including Benchmark Capital, Sequoia Capital, Goldman Sachs pumped $793 million into Webvan. And another group put $430 million into HomeGrocer, the rival that was later bought by Webvan, in its desire to be first in the sector.
And now the first mover advantage is turning into a first looser advantage
Indeed, even though Webvan proved able to become the first online grocer, it might well become the biggest financial disaster the Internet has yet seen pretty soon.
We already saw the first sign of this when Webvan halted service in Dallas, which resulted in the layoffs of 220 workers. What is more, Webvan is expanding its delivery window from 30 minutes to 60 minutes and Webvan is now charging a $4.95 fee on orders under $70.
It is easier to try and lower the bar rather than attract more customers.
It is true that Webvan's sales do not take off as fast as they should. In Southern California, Webvan needs to fill 2,800 to 3,000 order per day to break even but in the fourth quarter of 2000, the company did not manage to handle more than 2,250 daily orders.
And this is one more proof that the Internet is not able to change the way Internet users behave. Even though Webvan did manage to attract an important number of consumers (at great cost), these customers do not make online purchases often enough for the site to hope and make its investments profitable.
Think about it: existing customers only order 1.8 times a calendar quarter!!! This is far from the average number of times people shop in bricks-and-mortar hyper and supermarkets.
Webvan is presently going through extreme difficulties and is trying to save most of its business by trying out very different strategies: it is "renting out" part of its delivery infrastructure to a site that sells articles for cats and dogs, it is closing down services, it is increasing delivery times, it is charging services that used to be free and it is even attempting to modify its business model by selling book, CDs and DVD among food products
All this looks more like a predicted failure to me than a real online strategy and should not reassure investors in any way.
Instead of gradually adjusting itself to the increase of its online market size and restricting itself to some major markets, Webvan showed delusions of grandeur and its desire to come first made it forget the basic principles that exist in all businesses.
This is the proof that Webvan has worked "backwards" ever since its site was launched.
It is only now, as it no longer has any choice, that the company decided to reduce the number of its centers, to finally adapt its expenses to what it earns, to its market real size, to what its customers really expect
Was it not possible to foresee all this?
The only ones who managed to remain pragmatic are the bricks-and-mortars actors of the sector themselves and yet they had so much less online assets than Webvan to be successful. Except that their experience as well as the very good knowledge they have of their customers' behavior advised them to remain cautious and, as a result, they only opened modest online centers in order to avoid facing the same setbacks.
The lessons to be learned from all those deaths in the Internet are the following:
Webvan would have proved much more intelligent if it had become partners with one of the top offline grocers in order to benefit from its infrastructure, thus being able to concentrate on incentives to prompt consumers to buy more than 1.8 times a calendar quarter through eServices based on the CRM (customer relationship management) just as Peapod, Webvan's competitor did when it was bought over by a brick-and-mortar food distribution industry.