Thursday, June 12, 2008 Number 1 Dot-Com Flop


History was founded by Louis Borders which originally set out to create a full service online retailer that offered the customers a convenient and affordable way to shop for groceries and other items through the net. Webvan launched it’s operations in the San Francisco Bay Area in 1999. Webvan wanted to create a sophisticated and highly automated information systems centered around warehouses, and therefore started to built vast infrastructure to effectively store and deliver merchandise to customers. Customers could order online and Webvan would deliver the groceries within a 30 minute window. In just 18 months, Webvan succeeded in raising $375 million in Initial Public Offering, expanded its business rapidly to eight cities in the United States, and build a gigantic infrastructure(high-tech warehouses). At a point, Webvan worthed a staggering amount of $1.2 billion. However, Webvan was unable to sustain its business, and declared bankruptcy in 2001, causing thousands to lose their jobs.

So what went wrong with Webvan?
  • Financial problems- Webvan's high-tech order-picking centers were so expensive that the company was heavily financial burdened from the day the first center was built. The centers might have performed efficiently at scale, but the company did not survive long enough to prove it.
  • Poor understanding of consumer needs and behaviour- Although selling groceries online was an innovative move and considered as something novel at that time, Webvan failed to consider that their customers were mainly traditional consumers, and were mostly not technologically oriented and well knowledgeable with the internet. As a result, they faced financial losses due to high administrative costs, lacked strong customer base, and failed to implement proper costs controls.
  • Aggressive expansion strategy- Webvan emphasized on “GBF” of “Grow Big Fast” and built large infrastructure consisting of large warehouses, and incurred high costs in purchasing costly technology equipment.
  • Groceries are perishables-Customers must be at home to receive a grocery delivery so that they may store the perishables. Webvan scheduled deliveries in 30-minute timeslots, and was usually quite good and making them. However, deliveries would sometimes be late, and customers would soon grow annoyed at waiting, and many might simply purchase their groceries from their local supermarket. Few such dissatisfied customers would be likely to try Webvan again.
The combination of these factors was devastating for Webvan. Their highly ambitious infrastructure rollout depended on massive customer growth, while the nature of their market meant that any failures would be very damaging to customer growth. Unfortunately, some failures were inevitable.

What we caan learn from the case of
Webvan is that even though we have a great idea, we should plan our expansion carefully and not grow too fast too soon. But online grocer Webvan was the poster child for doing just that, making the celebrated company our number one dot-com flop.

1 comment:

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