Remember Webvan? They Weren’t Wrong – Just Early

It’s funny how some trends seem to go “full circle.” In 1999, everybody thought they could pick the next big thing. Then after the bubble burst, it seemed like everybody distanced themselves from their “visionary” pasts. I recall a brief discussion I had around 2002 with a self-described “internet guy.” He commented about the online grocery company Webvan’s business model with the statement “I don’t know what they were thinking – I mean, if you double-bag groceries you lose your profit margin.” I’m sure I agreed with his statement. After all, Webvan was just one of the many debacles at the time. And it’s true they were bleeding cash ($526 million in operating expenses on $179 million in revenues). But I’m not so sure that the business model was unsound. In fact, 18 years later I think that Webvan had a good model. They were just early.

Online Grocery is Driving Investment in WMS and Warehouse Automation

The most prevalent grocery industry headlines surround Amazon’s purchase of Whole Foods and the delivery synergies that acquisition is expected to deliver. However, ARC’s research on the global WMS and warehouse automation markets shows that grocery retailers are increasingly acquiring and implementing warehouse technology to support their operations – their online businesses in particular. The investment by grocery operations isn’t just limited to the largest companies such as Amazon or Walmart. The investment in warehouse operations to support online grocery is widespread and international in scope. But why has the grocery business gone “full circle” and why will this time be different?

Acceptance, Adaptability, and Infrastructure

I believe this time will be different for online grocery, for a number of reasons. Online purchasing and home delivery have become more widely accepted by the masses. E-commerce accounts for a much larger percentage of retail today than it did 18 years ago. It is now a natural transition to grocery deliver for individuals that have other retail items delivered to their home on a regular basis.  However, the fulfillment operating environment is also more conducive to facilitating success. Webvan had extensive operations and IT costs. Warehouse management systems today are now more advanced and mature. There is limited need for customization, as out of the box software is functionally rich enough to meet most needs. At the same time, warehouse automation has become much more scalable and adaptable. ARC research has shown that scalability and adaptability have become much more important capabilities than they were in the past. Throughput requirements and order profiles have become so variable that practitioners are willing to sacrifice static throughput for the ability to adapt to changing conditions. Webvan noted in its 2000 annual report that “Webvan’s facilities do not currently operate at or near their originally designed capacity.” And continued with “Webvan does not expect any of its facilities to operate at designed capacity in the foreseeable future.” Today’s scalable and adaptable warehouse automation would have allowed Webvan to better flex its capacity and manage its operating expenses. Technology such as shuttle systems allow for incremental cost increases, rather than the static investment costs of older automation. Furthermore, the 3PL industry today is more well-established and could now serve as an option for flexible capacity expansion. Finally, delivery networks are much more well-established and the development of services such as Lyft and Uber have made ride-sharing and other outsourcing arrangements more accepted. This would likely have provided additional flexibility into Webvan’s delivery expenses.

Final Word

Webvan did a lot of things differently than today’s successful online grocers. But for the most part, I think they went to market before their time. Their operating environment simply hadn’t yet caught up to their business model.