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Issue 2001-4 - Wednesday, March 7, 2001









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  When first mover advantage becomes first looser advantage  

Can Internet really change the way we behave? Many start-ups believed in such improbable hypothesis for too long and, as a result, they have either disappeared or are presently going through great difficulties.

There is another recurring element to all those stillborn business-models: most of these companies did not spend much money studying the way Internet users behave before they got involved in the race, as they thought it best to trust their "intuition". As a result, we get a galore of failures (cf: group buying business model).

Basing themselves on the good old social and demographic criteria and with the help of venture investors, websites invested hundreds of million dollars (to no avail) hoping that a new type of "virtual" consumer would emerge, who would prove totally enthralled by the new modes of consumption he would be able to get.

We've seen spectacular failures in the following sectors: stamp sale, group buying, reverse auctions and other niches that claimed they were going to be the Internet leaders of tomorrow.

But in all those cases, there was not too much harm done as nearly all the products that were sold could be dematerialised.


On the other hand, when you decide to compete directly with the logistics network it took dozens of years to bricks-and-mortars to set up, you can no longer compare the investments that are needed.

The present difficulties faced by Webvan or Amazon are due to this need to set up a costly infrastructure in a very short time, and as a result, many youthful mistakes are being committed.

Webvan, the biggest online grocer, has already invested over $1 billion in its business model and now needs to convince its investors to put up some more cash in the business quickly.

If it fails to raise $100 billion in the next months, it will no doubt go bankrupt.

Unfortunately for the site, with a stock that is presently trading for about 35 cents a share (when it used to trade for as much as $30 a share at its highest level), Webvan will have to prove particularly convincing if it wants to raise additional funding quickly since its present stock trade does not exceed the cash it has left, which is around $200 million.

And this is not such a comfortable amount when you know that the company burns through $100 million in cash a quarter…

How could we get to such a point with over $1 billion already invested?

Well, just as many other online failures, the difficulties webvan is presently going through originate themselves in a few "postulates" and hypotheses based on weak facts such as:

  • We are going to hit hard and deliver goods within 30 minutes in most US cities. Of course, in order to do so, we'll have to build huge warehouses and the corresponding e-logistics. It goes without saying that it is much harder to deliver fresh-food items in a short amount of time than to deliver books or CDs… As a result, we have 350,000-square-foot ultra-modern warehouses.

  • As we'll have such an efficient service, we'll manage to attract a huge number of customers that will allow us to make money from this infrastructure. Internet will change the way consumers behave, as it will make their lives easier and they will no longer have to use supermarkets and hypermarkets car parks.

  • What's more, if we want to be successful online, we need to arrive there first and, as a result, we do not have time to put our hypothesis to the test. We've got to invest loads of money at once in order to suppress any king of reaction from our potential competitors.

On paper, everything started well for Webvan, even venture capitalists and the most serious ones believed in the project: investors including Benchmark Capital, Sequoia Capital, Goldman Sachs pumped $793 million into Webvan. And another group put $430 million into HomeGrocer, the rival that was later bought by Webvan, in its desire to be first in the sector.


What's more, Webvan managed to convince George Shaheen to become chief executive, and the latter left his job running Andersen Consulting (now Accenture) to become part of the company. This was enough to convince the Stock Exchange and investors that their business model was viable.

And now the first mover advantage is turning into a first looser advantage…

Indeed, even though Webvan proved able to become the first online grocer, it might well become the biggest financial disaster the Internet has yet seen pretty soon.

We already saw the first sign of this when Webvan halted service in Dallas, which resulted in the layoffs of 220 workers. What is more, Webvan is expanding its delivery window from 30 minutes to 60 minutes and Webvan is now charging a $4.95 fee on orders under $70.

It is easier to try and lower the bar rather than …attract more customers.

It is true that Webvan's sales do not take off as fast as they should. In Southern California, Webvan needs to fill 2,800 to 3,000 order per day to break even but in the fourth quarter of 2000, the company did not manage to handle more than 2,250 daily orders.

And this is one more proof that the Internet is not able to change the way Internet users behave. Even though Webvan did manage to attract an important number of consumers (at great cost), these customers do not make online purchases often enough for the site to hope and make its investments profitable.

Think about it: existing customers only order 1.8 times a calendar quarter!!! This is far from the average number of times people shop in bricks-and-mortar hyper and supermarkets.

Webvan is presently going through extreme difficulties and is trying to save most of its business by trying out very different strategies: it is "renting out" part of its delivery infrastructure to a site that sells articles for cats and dogs, it is closing down services, it is increasing delivery times, it is charging services that used to be free and it is even attempting to modify its business model by selling book, CDs and DVD among food products…

All this looks more like a predicted failure to me than a real online strategy and should not reassure investors in any way.

Instead of gradually adjusting itself to the increase of its online market size and restricting itself to some major markets, Webvan showed delusions of grandeur and its desire to come first made it forget the basic principles that exist in all businesses.

This is the proof that Webvan has worked "backwards" ever since its site was launched.

It is only now, as it no longer has any choice, that the company decided to reduce the number of its centers, to finally adapt its expenses to what it earns, to its market real size, to what its customers really expect…

Was it not possible to foresee all this?

The only ones who managed to remain pragmatic are the bricks-and-mortars actors of the sector themselves and yet they had so much less online assets than Webvan to be successful. Except that their experience as well as the very good knowledge they have of their customers' behavior advised them to remain cautious and, as a result, they only opened modest online centers in order to avoid facing the same setbacks.

The lessons to be learned from all those deaths in the Internet are the following:

  • It is a mistake to believe that new consumers can be created in just a few years…even and above all on the Internet.

  • Creating a new logistic approach to compete with the one established years ago on the same sector can only end up in a failure.

Webvan would have proved much more intelligent if it had become partners with one of the top offline grocers in order to benefit from its infrastructure, thus being able to concentrate on incentives to prompt consumers to buy more than 1.8 times a calendar quarter through eServices based on the CRM (customer relationship management) just as Peapod, Webvan's competitor did when it was bought over by a brick-and-mortar food distribution industry.

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