Comparative Analysis of Amazon and Webvan

Webvan was founded by Louis Borders in 1999 after he saw the opportunity in the growing number of people making online purchases. Borders created Webvan as an enterprise that would offer greater variety than conventional stores and at the same time provide the necessary convenience to online shoppers. Webvan started by offering groceries that were frequently bought by online shoppers to ensure economies of scale in their orders.

After establishing a critical customer base, it planned to use its distribution system to expand its sale to product lines that were not being frequently offered but with high profit margins such as books and consumer electronics. The company developed the web store and constructed its distribution and fulfillment center in the San Francisco Bay area from 1997 to 1999. After implementing its trial delivery system in May 1999 to 1,100 customers, Webvan was launched in June of the same year as a venture whose primordial mission is to deliver to its customers everything from groceries to palm pilots in a cheap and efficient manner.

After raising $1. 2 billion as start-up capital from its stock offering, it began to execute grandiose plans of establishing strings of futuristic warehouses with motorized carousels and robotic product-pulling machines which costed $35 million, hoping it would minimize the cost of operations. With profit-margins so thin, Webvan failed to cover its growing cost of operations. Demand was so weak to sustain the income that Webvan needed to raise. Finally, after suffering a net loss of $217 million and accumulating tremendous deficits amounting to $830 million, Webvan found itself in a loosing situation.

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By July 2001, Webvan Group, Inc. and its subsidiaries, Webvan-Bay Area, Inc. , Webvan Operations, Inc., and HomeGrocer. com, Inc. filed voluntary petitions for Chapter 11 bankruptcy protection in the United Stated Bankruptcy Court in July 2001 and ceased operations. Amazon was founded by Jeff Bezos in 1994, after he noticed the promising growth of Web sites and internet access. Bezos was said to be particularly “optimistic about online retail opportunities and set out to develop a business model that will leverage the growth of internet access in the United States”.

Bezos decided to start with bookselling as its initial retail category, with the belief that online business model possessed superior economics to established competitors. Amazon was so successful in its initial public offering that it was able to sell 3 million shares at $18 per share, thereby raising $54 million as part of its start-up capital. And so they say the rest is history. Amazon evolved from a tiny warehouse to a leading internet retailer in the world. Bogler and Johnson (2000) wrote:

“The company’s growth was phenomenal: it expanded from books to offering 28 million items across numerous categories and acquired 29 million global customers along the way. By 2000 according to Interbrand, Amazon. com became the forty-eighth most valuable brand in the world, embodying the principle of electronic commerce for people worldwide. ” However by late 2001, Amazon experienced a tremendous loss of $2. 3 billion. Its share price which ascended rapidly in 1999 went down significantly. Fortunately, it was able to borrow $2.1 billion to sustain its international investments. With innovations such as the one-click system and creative strategies to raise revenues from publishers and increase in sales from wider product selection, Amazon was able to survive the slump in the subsequent period at the NASDAQ. (Burgelman, 2001) By 2008, Amazon emerged as a global brand with 76 million active customer accounts and order fulfillment to more than 200 countries. With this volume of sales, on December 31, 2007 Amazon employed approximately 17,000 full-time and part-time employees.

Compare & Contrast

It would be interesting to note that the founder of Webvan actually started in the business of bookselling. In terms of experience in the dot-com business, Amazon started earlier in 1994 while Webvan started in 1999. Webvan started operations in 1999 and was publicly-listed on November of the same year, with its share price zooming to $34 from the offering price of $15 on its opening day. This allowed Webvan to raise a whopping $1. 2 billion in start-up capital from the offering and other sources such as venture capitalists, thereby putting it within the league of Amazon.

com. (Knowledge@Wharton, 2001) In other words, both companies were of equal footing in 1999 when Webvan caught up with Amazon in terms of dot-com stature and financial backing. Both companies also established strategic alliances in the course of their operations. In the case of Webvan, it established partnership with Eve. com, an online prestige beauty products retailing company. It also established strategic alliances with Coca-Cola Company, Kraft Foods, and Chlorox Company. This was done by Webvan to reduce its procurement costs.

Amazon partnered with Drugstore. com (pharmacy), Living. com (furniture), Pets. com (pet supplies), Wineshopper. com (wines), Sothebys. com (auctions) and Kozmo. com (urban home delivery). In most cases, Amazon purchased an equity stake in these partners, so that it would share in their prosperity. Such partnerships helped Amazon extend its reach into the customer-base of other suppliers, and of course, customers who buy in one category such as books can be encouraged to purchase into other areas such as clothing or electronics.

Webvan carried mostly perishable grocery goods in its retail categories while Amazon had the policy of selling only non-perishable and conveyable items. Since profit margins were so thin for perishable goods compared to non-perishable goods, it would be easy to undertsand why Amazon had greater chances of success than Webvan. Furthermore, perishable items have greater risk and cost in inventory handling. This is the reason why Webvan had to invest too much money in its warehousing infrastructure. This spelled the difference in the success and failure of the Amazon and Webvan.

Webvan had to invest too much money on a system that must ensure the freshness of its perishable goods. It had to establish a highly technological and robotic warehousing infrastructure that was very expensive to begin with in contrast to Amazons system which required its employees to “touch” its products. In the case of Amazon, since most of its items sold online were non-perishable, it had lesser inventory risks. In addition to that, its business model allowed it to shift it cost of carrying most of its inventory to its suppliers.

Thus, Amazon had better grip in its infrastructure costs. The savings it obtained from its leaner operations allowed it to invest its money in developing its software systems that facilitated greater efficiency in its distribution. Finally, the viability of both business differed mainly from its customer-base and funding support during hard times. Webvan had a weak local customer-base that was often dissatisfied by its delivery service while Amazon had a strong customer-base that was not only confined to the US but also overseas.

More so, NASDAQ just gave up on Webvan when it continously experienced financial setbacks while Amazon was able to secure additional investments to sustain its global operations.

Causes for Failure or Success

One of the main reasons why Webvan failed is because it made the wrong decision of investing the money it successfully raised in a very expensive infrastructure and rapid expansion of operations. According to Strom (2001): “Webvan spent huge sums on high-tech warehouses that were designed to revolutionize distribution, but they turned out to be mostly a waste of money.

The problem is that all the technology was meant to reduce labor costs, and labor is relatively cheap. Worse, Webvan designed the warehouses so they could scale to 8,000 orders per day, but that's a lot of unnecessary expense when you're receiving less than half that many orders. ” Another factor that led to the failure of Webvan is the decline in the quality of its service delivery. When Webvan took over HomeGrocer, an internet grocery shopping store which was absorbed into Webvan’s grandiose expansion plan, customers noticed the deteriorating effectivity of customer service.

Before the takeover, there were no complaints with HomeGrocer especially interms of customer service. Emails from customers were being promptly addressed by customer service such as providing refunds in cases of occasional mistake or damaged food. This quality of service worsened when customers started to receive rotten fruits from the delivery. Webvan was buying inferior produce in order to save on cost. Such decline in customer service resulted in customers going back to the conventional way of picking up their groceries and patronizing the local groceries once again. (Mcafee, 2006)

Finally, it can be seen that Webvan’s botched acquisition of HomeGrocer led to its failure as it didn't handle the merger of resources and assets wisely. HomeGrocer’s competency and strength in terms of operations and marketing were not totally assimilated into Webvan’s system. Amazon’s e-commerce technology platform, brand power, and fulfillment infrastructure was key to its success. It had technological innovations that efficiently facilitated online order such as the “one-click checkout process”.

Amazon provided its customers with an online system that allowed shoppers to purchase products online without filling lengthy registration and shipping forms that would usually turn-away buyers. Amazon was able to create an online system that also helped repeat purchases by buyers to be executed by just one click of a button – a system whose patent was eventually awarded to Amazon. One important factor why Amazon succeeded is because of certain inherent strengths in its business model.

Its negative operating cycle allowed Amazon to get credit card payments from its customers in a few days while enjoying a time lag of thirty to sixty days to pay its vendors after the sale. This gave Amazon a financial advantage that allowed it to generate interest in the full price of its goods for over a month. Another inherent strength in Amazon’s business model is its less dependence on physical infrastructure such warehouses. Amazon was able to sell it products with out actually carrying in most of its inventory thus shifting the risk of its inventory to its vendors.

Amazon’s suppliers carried the burden of storage, thereby lessening its cost due to minimal inventory handling. Amazon also instituted free shipping offers to encourage increase in basket size since customers have to spend over a certain amount to receive free shipping. The level at which free-shipping is set is critical to profitability. Because of this, Amazon got a competitive edge as promotional battles evolved with its competitors.

Lessons Learned and Conclusion

Growing Too Fast Too Soon

The lesson that can be learned from the experience of Webvan is that of timing.

Some would think it’s a business that is way ahead of its time; others would say it grew too fast too soon. In his review of the “Top ten dot-com flops”, German (2009) wrote that: “A core lesson from the dot-com boom is that even if you have a good idea, it is best not to grow too fast too soon. But online grocer Webvan was the poster child for doing just that, making the celebrated company our number one dot-com flop. In a mere 18 months, it raised $375 million in an IPO, expanded from the San Francisco Bay Area to eight U. S. cities, and built a gigantic infrastructure from the ground up (including a $1 billion order for a group of high-tech warehouses). Webvan came to be worth $1. 2 billion (or $30 per share at its peak), and it touted a 26-city expansion plan. But considering that the grocery business has razor-thin margins to begin with, it was never able to attract enough customers to justify its spending spree. The company closed in July 2001, putting 2,000 out of work and leaving San Francisco's new ballpark with a Webvan cup holder at every seat.”

Getting Big Fast

Ironically, in the case of Amazon, the same business principle of getting big fast was said to be the most important decision that lead to its success. In an interview with Jeff Bezos by Fortune Magazine, he said that the initial strategy was very focused and very uni-dimensional…It was GBF: Get Big Fast…What once looked foolish can seem smart now. When we started the company on July 15, 1995 we offered one million titles. We were advised by very knowledgeable people to offer only three hundred thousand titles.

That was twice the size of the inventory carried by the largest physical bookstores. The catalogue was hard for us but doable. Obtaining the books was really hard. But the success generated word of mouth. (Brooker, 2000) Supply-chain management was also a crucial lesson in the experience of Webvan and Amazon. The company that was able to efficiently and effectively manage its online retail business with minimal inventory cost and risk was the company that turned out to be successful.

The difference in the supply chain management of both companies ultimately distinguished between the company that was financially viable and which one was not.

References

1. Bogler, Daniel and Edgecliffe-Johnson, Andrew (2000). Jeff Bezos: The Man of Last Year Revisited. Brooker, Katrina (2000). Beautiful Dreamer. Fortune Magazine. Burgelman, Robert and Meza, Philip (2001). Amazon. com: Evolution of an e-tailer. Graduate School of Business. Stanford University. Knowledge@Wharton (2001).
2. Webvan Finds that Shopping for Food Online Hasn’t Clicked with Consumers. [Online]. Available: http://knowledge. wharton. upenn. edu/article. cfm? articleid=321 German Kent (2009). Top 10 dot-com flops. CNET Networks Incorporated. [Online]. Available: http://www. cnet. com/1990-11136_1-6278387-1. html Mcaffee, Andrew and Ashiya, Mona (2006).
3. Webvan. Harvard Business School. President and Fellows of Harvard College. Strom, David (2001). Where Webvan Went Wrong. TidBits #588. [Online]. Available: http://www. strom. com/awards/255. html

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