In my post yesterday, I mentioned WebVan and promised to post a separate entry about it rather than continue down the rathole of my take on the WebVan “problem”. The executive summary is that I thought WebVan was an interesting idea that was marketed completely incorrectly – it was a pitch to solve a consumer problem that didn't exist and it created a business with a cost structure that was completely incompatible with their marketing.
The late 1990's were a strange time to be working in the San Francisco Bay area. Investors were shoveling money at web startups at a pace so frenzied that it pretty much guaranteed that most of the money was wasted. Office space in what became known as Multimedia Gulch south of the TransBay terminal that had only been renting for $18 to $20 a square foot annually 12 months before the bubble inflated was all of a sudden going for $60 to $80 a foot, depending on how inexperienced the kids with the money were. And to a large extent, they were kids – a lot of them in their early 20s. Often with less real world abilities in computers than the ability to pitch a great line of bullshit. And supposedly smart guys at VC firms and bay area banks were falling for it.
Which is, I suppose, one of the reasons that investors fell all over themselves once George Shaheen joined WebVan. Formerly head of Accenture (what had been Andersen Consulting, the consulting division with Arthur Andersen), Shaheen had been at AC and Accenture at a critical time – the 20 years or so when AC grew at a tremendous rate, had an amazing reputation and eventually ended up splitting from Andersen to form a separate company. I think Shaheen was in his 50s at the time he walked away from his job as the head of Accenture to join WebVan and the rumors in the Andersen community were that Shaheen had been making $8 to $10 million a year at Accenture. WebVan gave Shaheen a huge amount of stock and a (supposedly) guaranteed annual income for life as inducement to make the leap. What WebVan got in return was instant credibility – it was as if it wasn't kids in charge at WebVan but adults with a track record.
At the time I was mystified by Shaheen leaving Accenture for the WebVan job – I just didn't get the business model. WebVan seemed to be positioning itself as the new way for everyone to get groceries (for those who don't remember, WebVan was the idea that you'd buy your groceries by ordering on the internet with WebVan delivering the food at a pre-arranged time to your home or office). WebVan wasn't the first out of the gate with this idea, Peapod had been doing it locally in San Francisco and a few other cities for at least a year or two prior to WebVan. But WebVan brought Shaheen and a hugely experienced executive team to the party and plans to roll out the service nationally at a clip that would make the Starbucks expansion look like a tortoise.
WebVan advertised, at least locally in the Bay area that it would meet or beat the prices of the major brick and mortar grocery chains. Which at least in my mind was the major problem behind the WebVan business model. Here's my take on it.
Competing on price at the same time you're also saying “Hey, there's this new way of buying groceries” is a mixed message to consumers. On one hand, I felt from watching the WebVan that they expected a large group of consumers to think “Oh my God – food. I haven't actually had food since I moved out of mom's house.” Somehow I wasn't envisioning legions of people who'd been waiting for WebVan to come along and had been, in the mean time, foraging for roots and berries. On the other hand, to say at the same time that “Hey, not only do we have food, but it's at least as cheap as the other food you might have been thinking about,” is a mixed signal.
People had been shopping at large grocery stores probably since the mid-1950s, maybe the late 1940s. I remember going to Safeway when I was a kid in the late 1950s and by that time it wasn't treated as some new fantastic experience, so I'm guessing it had been around for a while even then. Which means that culturally, people had become pretty ingrained with the idea that you had to go get the food, it didn't come to you. Also, I think people like the idea of picking out their own tomatoes. Price might be important, but making sure your bag of tomatoes doesn't have any bruised ones in it is of primary importance.
People gathering around a central collection point is a relatively efficient way of getting food into their hands. Delivering food the last mile to their refrigerators from the central collection point at the retailer's cost is a hugely expensive undertaking. WebVan's delivery charge didn't make up for the actual cost of delivery (I seem to remember that in a lot of parts of the Bay area, the delivery charge was $0).
My idea for WebVan was much more modest, but they might have been able to carve out a niche if they'd chosen not to compete on price. Rather than positioning itself as a grocery store replacement, WebVan should have positioned itself as an upper end convenience.
When WebVan was around, I asked a few of my business partners if they knew how much a quart of milk cost at a grocery store. We're all in an above-average income band, most of the partners have children living at home and don't spend as much time at home as they'd like. None of them knew how much milk cost. Neither did I. My price sensitivity to food prices is that I'm not very price sensitive. I'll notice if steak is $5 a pound more than it was last week, but overall, I don't pay much attention to how much milk, butter, canned soup or Cheezwiz costs.
There were several WebVan users amongst my partners and what the answer to my question told me (OK, an entirely inadequate sample size, admittedly) was that WebVan didn't have to compete on price. In fact, they could have probably even said they were charging more than a brick and mortar store & my partners wouldn't have cared – it was the convenience they were buying, not the food.
Anyway, WebVan eventually collapsed along with the wreckage of a few thousand other dot com startups, but I don't think it needed to. What it couldn't be is what they positioned it as, what it should have been was something all the smart guys they hired didn't see: a convenience for upper middle income and higher consumers, not another frickin' grocery store.
