Webvan, the Internet's largest and best-funded grocer, shut down yesterday and said it plans to file for Chapter 11 bankruptcy court protection.
Even with 750,000 customers and nearly 50 percent market share, the company's expensive distribution system meant it couldn't make a profit.
The Foster City, Calif., company, which began operations in 1999, dazzled venture capitalists and a giddy Wall Street with tales of harried moms doing their food shopping from the family PC. It raised $800 million in the days when investors still believed that Amazon.com would replace neighborhood bookstores.
Webvan had the biggest capitalization in a field of competitors that included Peapod Inc., HomeRuns.com and Streamline, which folded last fall.
"Webvan was the bellwether for not only the online grocery industry but really for online retailers, after Amazon," said Ken Cassar, a senior analyst at Jupiter Media Metrix, who has shrunk his estimate of 2001 industry revenue by 20 percent to $800 million. He expects remaining competitors to pick up some of Webvan's business, which was mainly on the West Coast -- in Portland, Seattle, San Francisco, Los Angeles and San Diego -- as well as in Chicago.
Webvan's failure doesn't mean the online grocery business is dead, according to analysts and competitors. Rather, they say that what's obsolete is Webvan's particular business model -- one that rested on huge investments in stand-alone distribution centers, ambitious turnaround times for deliveries and sophisticated inventory software.
In contrast, Peapod, the online grocer majority-owned by the Dutch supermarket conglomerate Royal Ahold NV, enters only those markets in which it can team up with an existing retailer, allowing it to exploit existing warehouse space and brand recognition. For instance, in the Washington area, Peapod has partnered with Giant Food Inc., the dominant local grocer, which is also a Royal Ahold subsidiary.
With the demise of Webvan, Peapod is now the country's largest online grocer. The company, which also has operations in Chicago, Long Island, southern Connecticut and Boston, had $93 million in revenue last year.
"Our business model is very different from that of a pure-play online retailer such as Webvan," Peapod spokeswoman Paula Wheeler said. "We have a true clicks-and-bricks model," using industry jargon for a combination of Internet and traditional retail.
That cautious strategy is meant to allow Peapod to exploit the lower wholesale prices Royal Ahold can negotiate with its suppliers to widen its profit margins. Peapod has 120,000 customers nationally, but Wheeler would not say how many of those are in the Washington area.
Perhaps most important, Peapod does not have to pour millions of dollars into untested markets, constructing distribution facilities that may never be used to capacity. Instead, the company's delivery service works out of "fast-pick centers," converted backrooms of existing supermarkets.
It's a business model that emphasizes low entry costs and building a customer base before investing in a free-standing distribution center.
And it couldn't be more different from Webvan's "Field of Dreams" model.
"Webvan epitomized the 'if you build it they will come' mentality that defined the Internet retail sector through 2000," Cassar said.
The customers did come. Jupiter Media Matrix had predicted nearly half a billion dollars in sales for Webvan in 2001. But even that kind of revenue couldn't stanch the firm's bleeding -- the company lost $86 million on sales of $77 million in the first quarter.
The British will keep online grocery services alive in California. The British supermarket chain Tesco, which did roughly $450 million of online business last year, has partnered with Safeway Inc., the biggest grocer in California, to revitalize the struggling online retailer GroceryWorks.
Tesco, like Peapod, integrated preexisting stores into its e-commerce plans by having its delivery teams fill orders directly from shelves and has actually turned a profit.