Editorial: Wasting $1.2 Billion

Add Webvan to the list of bankrupt Internet companies that tried to sell something distantly that wasn’t cut out for it on such a large scale. After blowing through $1.2 billion, the online grocer admitted defeat last week, making it the Net’s largest failure to date. Webvan’s demise is just more reason to adhere to the fundamentals of direct marketing – and when you don’t, you pay the price.

Webvan was not ahead of its time but actually behind, many critics said. “There’s a reason why milkmen are a dying breed in America: Most people aren’t willing to pay the premium for having the bottles left at their house,” wrote Scott Herhold, a columnist for the San Jose Mercury News. “Webvan was created for a fancy Manhattan apartment building, not the tracts of Atlanta.” Interestingly, the company didn’t offer its service in New York, but more so, it wasn’t profitable in any of its markets. In contrast, online deliverer Kozmo was making money in three of its markets before it went under in April. Yes, folks, it’s looking more and more like the Internet will be used as an information source rather than an electronic shopping mall, as supported by a study last week by the Markle Foundation.

Where did Webvan go wrong? It had 750,000 customers and a 50 percent share of the market. Here’s one place to look: 6.5 percent of the households in San Francisco ordered from the company in its first year and a half of operation, but more than half never placed a second order. Just ask any cataloger or mail-order company what that means. Of course, analysts and competitors immediately piped in to say Webvan’s failure doesn’t mean the online grocery business is dead, just that it used the wrong business model: one that spent hordes of cash on stand-alone distribution centers. Excuse me, but why waste all this time and money on something with such razor-thin profit margins? This leaves Peapod and the Tesco-Safeway alliance to duke it out for the online market, but those companies only enter areas in which they team up with existing retailers. Let’s see if they can do any better.

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