Fulfillment 'Albatross' Finally Strangles Webvan

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Ignoring analysts' advice to team up with a major supermarket company crept up on Webvan Group yesterday as it closed shop entirely.

Analysts had predicted for months that the Internet grocer was doomed as it closed operations in Atlanta, Dallas and Sacramento, CA. They said Webvan could never generate the needed revenue to warrant running expensive fulfillment centers.

While Webvan admitted yesterday that its order volume was too low to warrant its fulfillment costs, the firm remained resilient in backing its business model.

Gracy Kwon, spokeswoman for Webvan, Forest City, CA, predicted that a future company would copy the Webvan model after consumers become more accepting of purchasing groceries via the Internet.

Kwon said her firm's Orange County, CA, operations had seen recent profits that proved the model can be viable. However, she said customer acquisition had sunk her firm's other locations.

"It's true that first-time consumers likely had to take a little time getting used to our system," she said. "But once they used it, they could save their grocery list histories to make ordering more convenient. We were constantly upgrading the convenience aspects of the site during this company's life.

"The current [economic] climate is really bad," Kwon added. "And I think the constant negative press probably scared some consumers away from using the service because they were unsure of the health of the company."

Analysts had suggested the company follow the lead of Internet grocer Peapod Inc., which struck a deal with supermarket giant Royal Ahold to pick and pack orders out of stores.

Royal Ahold's buying power also lets Peapod buy groceries straight from manufacturers, rather than buying them from distributors at a considerably higher cost, as Webvan did.

Online grocer Tesco PLC is about to use the same strategy as Peapod in a deal with supermarket chain Safeway and its 1,747 stores. Tesco reportedly has made millions using the strategy in England.

Meanwhile, Webvan has watched every single one of its other competitors, including Homegrocer.com, Netgrocer.com and Groceryworks.com, go out of business after their revenue was squashed by fulfillment expenses during the past year.

Webvan laid off 2,000 employees yesterday. Hourly and salary employees will receive earned wages, vacation pay and a $900 gift from an anonymous donor.

The firm will begin to liquidate its operational assets in its last markets of Chicago; Los Angeles; Orange County, CA; Portland, OR; San Diego; San Francisco; and Seattle.

Webvan raised $800 million in venture capital in mid-1999 after wowing investors with its distribution center technology.

Robert Rubin, online retail analyst at Forrester Research, Cambridge, MA, released a report in March calling for the Internet firm to hook up with a supermarket chain.

"The fulfillment centers that attracted those investors and their big money eventually became the albatross hanging around Webvan's neck," Rubin said.

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