Webvan's Collapse Delivers a Hard Lesson in Internet Economics

G0099357

Analyst(s): |

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Summary

A good idea does not always guarantee market success, and mass-market concepts do not always apply to the Internet as Webvan found to its cost. It failed to understand that Internet business models cannot overnight change consumer behavior or forge economies of scale.

News Analysis

Event

On 9 July 2001, Webvan, an online grocer and logistics company, announced it would cease operations and seek temporary protection from creditors under Chapter 11 of the U.S. bankruptcy code. About 2,000 employees lost their jobs. In money invested and employees affected, Webvan is the largest dot-com startup to fail.

Analysis

Webvan grew too quickly, even for a New Economy company, and eventually choked on its own complexity. It focused on the delivery side of the dot-com shopping explosion but, like others, found sluggish consumer spending and the slowing economy impossible hurdles. Webvan failed because:

  • It could not break the physical strength of traditional players in the grocery market, such as Safeway and Wal-Mart.

  • It could not offer a strong value proposition to dot-com retailers and grocery consumers.

  • It could not make a profit as a niche operation.

With consumers still going to Wal-Mart and Safeway for their groceries, Webvan's customer base

was reduced to early adopters of the service and people who could not readily go shopping, such as the elderly and disabled. Despite the limitations of this niche market, Webvan organized itself for distribution across the United States. Webvan's only hope were if consumer demand resulted in huge trading volumes or it could persuade Amazon, eBay, Wal-Mart or other, big, successful online sellers to use its trucks for next-day delivery. Webvan failed to do either.

The promise of online business has thus taken another hard, but not fatal, blow. Gartner believes that companies with traditional brick-and-mortar storefronts as well as a strong Internet presence, the so-called bricks-and-clicks, will nearly always prove the most attractive sites for online shoppers. Ordering via the Internet becomes viable in grocery retailing when the service acts as a sales channel for a mainstream company's operations. In addition, with the bricks-and-clicks, the Internet part can exploit the company's established name and retail presence.

Companies such as these also have the advantage of economies of scale in both purchasing goods and distribution. Webvan fell victim to overambition and a business model that could not work. Its fleet of delivery trucks, for example, had high and fixed operating costs, and only volume could have generated good economies of use. It did not have the sales of the big players and thus could not use cash flow or revenue to improve its business. Inevitably, Webvan failed to persuade its customers of its value proposition, and it misunderstood the sheer scale of the traditional companies it so boldly set itself against.

Analytical Sources: Alexander Drobik and Geri Spieler, Electronic Commerce & Extranet Applications

© 2001 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartners research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.

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