Will Surf for Food

I'm Sold; Now What?

OK, I'm sold on this service. Anything that helps me avoid the grocery store, those annoying people who block an entire aisle with their carts, and schlepping $100 worth of food from the car works for me. Great produce and decent prices are a bonus.

So before I get used to this extravagance, I have a question for the folks at Webvan. How the heck can you make money doing this?

Webvan makes money by eliminating the middleman, cutting real-estate costs, and filling orders very efficiently, says spokesperson Amy Nobile.

The company buys food and produce directly--not from grocery stores--which saves money and nets the best fruits and vegetables, she says.

Its distribution centers are warehouses, so it doesn't spend top dollar on premium land in multiple locations, she says. My food came from Webvan's huge Oakland center, which Nobile says moves the same volume of food as 18 supermarkets. A few smaller centers help serve the suburbs.

The most important aspect of Webvan's operation is its ability to accept an order, pack it, and deliver it with a minimum of wasted time, energy, and money, she says. Its goal is "multiple orders picked and packed with great speed and accuracy."

To do that, Webvan runs a proprietary distribution system that depends on both computers and humans that navigate the Oakland center's 350,000 square feet of space and more than five miles of conveyor belts.

Efficiency, Efficiency, Efficiency

Nobile says Webvan expects each distribution center to break even by its fourth quarter of operation and to make money by the fifth. Webvan's surviving lean times, in part, with $600 million raised in its initial public offering last November 1999.

Webvan has a solid strategy, says Ken Cassar, senior retail analyst with Jupiter Communications. However, its operating efficiencies have yet to be proven.

"It's not clear-cut if it's really less costly," Cassar says. Plus, outside forces like the recent spike in gas prices could wreak havoc on its finely tuned system.

The company also faces some very basic consumer challenges, he says. The largest is probably inertia: People have been going to the grocery store and selecting their own tomatoes for a very long time.

However, the service offers some very compelling features, he adds. It's very convenient, offers a huge selection, plays well to time-starved consumers, and easily handles large orders.

Webvan has competitors, but there should be room for several players. Jupiter forecasts a growth in online grocery shopping in the United States from about $800 million in 2000 to about $7.5 billion by 2003.

Those number sound impressive, but Cassar points out that even the larger number represents a small percent of the total U.S. grocery market.