How to Read a 10Q: Webvan
Posted Sat Apr 28 17:07:06 2001 by sbaldwin |
By Steve Gilliard
Source Document: http://www.sec.gov/Archives/edgar/data/1092657/0001012870-01-001485.txt
BUSINESS
Webvan is an Internet retailer offering delivery of
consumer products through an innovative proprietary
business design that integrates its Webstore, distribution
facility and delivery system. Webvan's current product
offerings are principally focused on food, non-prescription
drug products and general merchandise including housewares,
pet supplies, consumer electronics and entertainment
products and books.
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In other words a supermarket. The company was designed in a fit of
arrogance to compete with the hundreds of thousands of supermarkets in
America. The supermarket which is one of the prime achievements of
American capitalism. Fresh goods of every description from around the
world. Why would anyone pass up the supermarket, which is a social
center and appeals to our basic hunter/gatherer sense? Yes, delivery
services could work, if they were part of a supermarket's supply chain.
But to set up a seperate one is to invite disaster.
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BROWSING
Webvan's Webstore displays a store directory which allows
visitors to browse through all the categories of
products Webvan offers. The categories are intuitively
organized into discrete units and enable the user to
drill down from general to more specific categories.
The browsing tool also enables customers to see all
products in a particular category before making a
selection, similar to scanning the shelves of a
neighborhood store. In addition, each item on the site
has an image and many grocery products have
nutritional information attached, which further
enhances the user experience.
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mean like shopping? But unlike the Stop and Shop down the block from my
sister's place, I can't buy a cup of coffee and a donut or pick my own
watermelon. They won't have Legal Seafood Chowder either. The modern
supermarket has changed to offer a range of goods to appeal to the
shopper's impulse buying instinct.
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Webvan's facilities are comprised of distribution
centers of approximately 350,000 square feet as well
as customer fulfillment centers (or CFCs) of
approximately 100,000-125,000 square feet acquired
pursuant to the HomeGrocer transaction. Each facility
is a clean, climate-controlled building segmented into
separate ambient, refrigerated and frozen areas that
store grocery items at optimal temperatures. Webvan's
facilities are located generally in industrially zoned
areas, which typically have lower real estate costs
than traditional supermarkets located in commercial
areas.
The larger distribution centers are located in
Oakland, California (serving the greater San Francisco
Bay area and Sacramento markets), Suwanee, Georgia
(serving the greater Atlanta market) and Carol Stream,
Illinois (serving the greater Chicago market). The
smaller CFC's are located in Renton, Washington
(serving, in conjunction with a facility located in
Wilsonville, Oregon, the greater Seattle and Portland
markets), Fullerton and Carson, California (serving,
in conjunction with facilities in Azusa and Irvine,
California, the greater Los Angeles/Orange County
market) and San Diego, California (serving the greater
San Diego market).
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these areas are supermarket deprived? Have the people of San Diego been
starving? Look, any sociologist can tell you that there is more to
shopping than getting food. The Saturday ritual of shopping is about
getting the family out, stopping for fast food, running errands. It is
family time. How were these markets picked? Seattle? Atlanta? Why not
New York and Boston and Washington, areas where people are busy and
need delivery services.
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COMPETITION
Local, regional, and national food chains, independent
food stores and markets, as well as online grocery
retailers comprise Webvan's principal competition as
an on-line grocery retailer, although Webvan also faces
substantial competition from convenience stores,
liquor retailers, membership warehouse clubs,
specialty retailers, supercenters, and drugstore
chains.
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who doesn't it compete with? Crack dealers and gun stores? This is
everyone from Kroger and Piggly Wiggly to CVS and Rite Aid to Wal-Mart
and K-Mart. They are taking on American retailing.
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As of December 31, 2000, Webvan had approximately
4,476 full-time employees consisting of approximately
129 in software development, approximately 509 in
operations, administration and customer service,
approximately 133 in merchandising and marketing and
approximately 3,705 at Webvan's facilities. None of
Webvan's employees are represented by a labor union.
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is an enormous staff, most of whom do scut work. And the supermarket
business is unionized. You can bet if the company survives, they will
be hit with a massive unionization drive. But that's like guessing
which airplanes the Japanese would have flown in 1946. Irrelevant when
the share price is $0.12.
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United Food & Commercial Workers International Union
Unfair Labor Practice Complaint: Filed January 31, 2001
with the National Labor Relations Board. UFCW alleges
that Webvan maintains illegal rules that restrict the
employees' right to organize and support and join a
union. UFCW seeks equitable relief against Webvan in
the form of a discontinuation of the alleged wrongful
activity. Webvan has responded to the charges and
intends to vigorously defend its case against the
UFCW.
UNION ACTIVITIES AT WEBVAN FACILITIES COULD ADVERSELY
AFFECT EMPLOYEE MORALE, PRODUCTIVITY, OPERATING COSTS
AND THE ABILITY OF WEBVAN TO FULFILL AND DELIVER
ORDERS.
Webvan has experienced union solicitation
activities at several of its facilities and has been
the subject of unfair labor practice complaints filed
with the National Labor Relations Board. Webvan
expects to continue to experience unionizing
activities at one or more of its facilities. These
unionizing activities may have an adverse impact on
employee morale and productivity and could potentially
lead to work stoppages which would adversely impact
our ability to fulfill or deliver customer orders. In
addition, the success of any of these unionizing
activities at one or more facilities could result in
higher operating costs, reduced operational
flexibility, and reduced employee morale and
productivity, which could have a material adverse
effect on Webvan's net sales and results of
operations.
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I said, a major union target. This is a unionized industry. Drivers,
store employees, all union members and the reason is simple: it's hard
work and often 24 hour work.There is no way Webvan could avoid a
massive UFCW drive. Nor should it have. If their plan includes avoiding
unionization over the life of the company, they will face a brutal
shock.
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Since its inception, Webvan has incurred significant
losses, and as of December 31, 2000, Webvan had an
accumulated deficit of $612.7 million. Webvan
incurred net losses of $453.3 million in the twelve
months ended December 31, 2000, including a
restructuring charge of $40.8 million related to the
HomeGrocer acquisition, and $144.6 million and $12.0
million in the years ended December 31, 1999 and 1998,
respectively.
Webvan's facilities do not currently operate at
or near their originally designed capacity. Webvan
does not expect any of its facilities to operate at
designed capacity in the foreseeable future. Webvan
cannot assure you that any facility will ever operate
at or near its designed capacity.
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means they were designed very badly to begin with. Webvan occupies
350,000 square foot facilities in San Francisco, Sacramento, Atlanta,
and Chicago. 100,000 sq ft facilities are in Fullerton, Los Angeles and
San Diego. Their underutilization represents an amazing waste of space
and resources. And the long term leases don't help matters either. They
lost $453.3 million in ONE year? One? How? And they thought they could
run 26 of these monsters? Who was going to pay for it? The Pentagon?
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To meet these challenges, Webvan intends to continue
to invest in marketing and promotions, to maintain
distribution facilities and equipment, and to
efficiently utilize technology and personnel. While
Webvan expects to reduce its rate of operating
expenses on a facility by facility basis, Webvan will
continue to incur substantial operating losses on a
company-wide basis and there can be no assurance that
such reduction in operating expenses will not
adversely impact Webvan's operations and service
levels.
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bankruptcy serve everyone better at this point? Allow for a proper sale
of facilities and severance? This is an amazing loss of capital in one
year. More money than most dotcoms ever had by a factor of ten. When
you lose $453m in one year, you have failed. You'll never see
profitability. There is no chance of it. The public has seen your
product and rejected it. They might be sold to Safeway, or AholdUSA, but these facilities are so large that only a few retailers can use them.
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GENERAL AND ADMINISTRATIVE. General and administrative
expenses include costs related to fulfillment and
delivery of products, real estate, technology
operations, equipment leases, merchandising, finance,
customer service and professional services, as well as
non-cash compensation and related expenses. General
and administrative expenses increased to $292.3
million in 2000 from $92.4 million in 1999 and $8.8
million in 1998. Of this $199.9 million increase in
2000 over 1999, $141.3 million pertained to aggregate
distribution center operating expenses for our Bay
Area, Atlanta and Chicago locations, and $35.7 for
HomeGrocer locations following the merger, compared to
only a partial year of the Bay Area operation in the
prior year.
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Wow. There was scant evidence that the company was successful in 1999
and now they try to expand. Amazing. Rethinking one's plans is never
encouraged in the dotcom set, unless it reeks of desperation.
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Why Webvan is Failing
- No basic knowledge of the sector
The company made an arrogant assumption that they were a technology
business and not a supermarket. They were a supermarket and run by
people who had no retailing experience. Consultants, techies, all were
made officers or directors. No one who had actual, real world food
experience was thought suitable enough to become an officer. Just
because you can sell books does not mean you can sell raw food.
Food retailing is not an easy business and the margins are thin.
Even with good management, you can lose money. Webvan had bad
management. George Shaheen, a former consultant, had less experience in
the food business than a bar owner. It is hard to make money with food.
No one at Webvan understood that.
My friends own several bars. Every time they have tried to serve
food, they give up after a couple of months. The profit margins are so
low, and the hassles so intense, that it easier to go with the margins
on booze, which range in 75-150 percent range. In a case of bottles,
they charge $4 a beer and buy a case for $12. So, the first three
bottles pay for the case, the next three cover operating costs, and the
rest is profit. Kegs make even more money. A keg of Bud is $35. You
charge $2 a glass. You can sell 112 pints per
keg. Notice the profit margin at that price. They can give away soda it is so cheap, dollars a syrup container.
Beer is the profit center, since almost every customer orders a
beer. They could sell the beer for $.50 and not lose money. If they
only charge for bottled beer, they could give the tap beer away. Most
places charge $3-5 a beer. Here's a secret: many of your favorite
restaurants stay open because of wine, beer and soda sales.
Online liquor sales are a minefield. Forget liability issues. Each
locality has their own laws and the distributors act on their own. So
while the LA Webvan has a wide variety of beer and liquor available,
the Chicago Webvan had a meager selection. In New York, liquor stores
are the only ones allowed to sell hard liquor, and only Monday through
Saturday. New Jersey has a different set of rules, where stores can
sell beer, wine and hard liquor seven days a week. When you go into a
New York liquor store only wine and hard liquor are for sale. Which is
why they tend to be small stores. In New Jersey, you can sell food and
ice. You would go nuts trying to serve both markets.
Why would they add food to that mix, where the profit margins are much lower?
- Posed a threat to competitors with vast investments
Royal Ahold's US subsidiary Ahold USA,
invested in Peapod, but not in a serious, branded way until this year.
They are now planning to tie it to their New England-based Stop and
Shop chain and their Midatlantic Giant chains. Priceline had one great
idea: pre-pay for food at home. Delivery or pick up could have been
arranged, if Webvan had made Ahold a partner from the start. As it was,
the whole food supply business has a vested interest in seeing
companies with no ties to the industry fail. If Webvan became a player,
they could have disrupted key relationships, like Coke and Pepsi's
deals with supermarket chains. Those sodas don't get to the front of
the store by accident. The local bottlers pay good cash for that
privilege. Paying for a banner ad isn't the same thing.
A glance at their Chicago site shows a selection which includes
Corona, Old Milwaukee and Miller High Life, not exactly a primo choice.
Not even Old Vienna, for god's sake. The LA store had a decent
selection, but here's the problem: obviously the distributors in
Chicago were extremely cool to Webvan, while those in LA, the largest
beer making center in the US, were going to deal with them. The
difference is striking and reflects the problem of national food
retailing.
- Leadership without any serious experience in the sector
Louis Borders sell books. Books do not expire. Books cannot be
eaten. The methods Borders uses to ship books are not the same methods
one uses to ship foods. George Shaheen, who's experience in food
retailing is basically telling his wife what the maid should pick up,
was a lifelong consultant running a retail operation. There is a reason
none of the companies which actually run supermarkets decided to go in
this business. They didn't see a profitable bottom line here. Common
sense dictates the following: if none of your competitors are following
you into a space, there is every reason to wonder why. Maybe it's that
you're a scary genius, but the odds are that they looked on it and
passed.
- Refusing to admit the need for help
The board of Webvan has no retail experience. You can
hire all the VP's you want, but there has to be
someone in the room, someone who has a voice among the
directors, who can say "look, we build in this market,
you have to consider factors x, y and z." There has to
tbe someone at the top who knows the business, not from
a theoretical sense, but from the ground up. They
needed someone to be able to walk in the room with the
people who matter and get them to listen. Louis
Borders walks into the room, George Shaheen walks in
the room, and he's going to be stared at when he tell
these people how he can help them. They needed a food
retailing executive on the board, not just their
techie friends. Trust is the core of business
relationships, and when you deal with food, one error
can kill people. If you don't speak the language, no
one will listen.
- Refusing to acknowledge how consumers shop
There is a psychology of food and shopping and people
use it innately. Supermarkets are not designed by
accident. In my local Pathmark, I have to go to the
back to buy bread. That is not an accident. Nothing
like an accident. They want you to walk past
everything, including the cookies, so you may buy them
before the bread. The sodas are displayed prominently
because Coke and Pepsi pay good money for them to be
there. That space is expensive and with good reason.
People like supermarkets. They like shopping for food.
Supermarkets are consciously designed to appeal to the
hunter-gatherer instinct in our genes. For people to
not go to a supermarket, there has to be a reason. The
market was the first place where humans traded goods.
There is history in how we shop for food.
For a new, untested company to challenge all of our
assumptions about food, and how we get it, they have
to appeal to something more than a good idea. We're
not talking about electronics, where you can return
it,but food, elemental to our existence.
- Poor demographic studies
Why would you place a warehouse for food in Atlanta and LA? These
areas do not lack supermarket space. Just from a casual study, one
could suggest that there are various cultural folkways which would
cause problems. The South is a region where people are picky about
food. They do not just buy what comes along. While the idea of Webvan
might have appealed to transplants, locals would have resisted the
idea. One example: if you don't have Hellmann's, Kraft Real Mayonnaise
is not a substitute when someone is making potato salad, You use White
Lily in your biscuits. How do you talk to the Webvan butcher?
Specificity in ingredients is no small issue.
Also, it is easier for people to drive to the store than wait for
delivery in a region where everyone owns a car. Why would an Atlantan
use an untested service when they know their local supermarket will
provide what they need?
In LA, there is such a diverse local population that Webvan could
not hope to serve them all. How do they service ethnic populations over
time? That's no small proposition. Also, LA is in a very good growing
region. Why would you want to use Webvan's produce when your local
store may have fresher goods.
The problems grow only more pronounced in Orange County and San
Diego, with the Latin American and Asian populations. Local merchants
will always have the edge. Both regions are also extremely large and
traffic heavy. Atlanta's traffic problems are bad and growing. LA's are
legendary. These are basic questions that the company should have
answered before spending dime one.
- Poor customer targeting
The target customer for a Webvan service are people who have
problems with getting to the store. Not just upscale internet users.
Working with senior centers, new mothers, the handicapped, fraternities
and late shift workers. Specific target markets who would need to be
marketed to in very specialized ways. Instead of trying to convince the
soccer mom and yuppie to change their shopping patterns. Webvan's
marketing was clearly not targeted enough to make inroads with
consumers who would have used the service repeatedly.
- The costs of doing business online
The company reportedly spent $40m on their Atlanta warehouse alone.
I doubt the local chains spent that on their regional warehouse because
all they have to do is ship the goods to stores in bulk. The problem
with internet only operations is that they have to bear the cost of the
last mile. It is vastly cheaper for you to go to the supermarket than
for me to come to you. Also, it is vastly cheaper for you to pick your
own products. Hell it's cheaper to send a kid at $10 p/h to shop for
you around the store. Why? Because three kids could fill a delivery
truck off the same shelves you use. No cold storage, no automation, no
fleet of expensive vans and insured drivers.
- Unusually high executive compensation
FY1999 Pay
Robert Swan, 39
CEO $519K
F. Terry Bean, 52
Sr. VP of HR --
Arvind Relan, 37
Sr. VP, Platform Group --
Mark Zaleski, 37
Sr. VP, Area Operations $351K
Relan, who no longer works for Webvan, sold, exercised
options or gave as a gift nearly $7.3m worth of stock
in less than two years. Swan, despite the company's
failure, made $519K. Shaheen's compensation was the
following:
GEORGE T. SHAHEEN AND WEBVAN
GROUP
POSITION: President, Chief Executive Officer and Board
Member
EFFECTIVE DATE: September 19, 1999
SALARY: $500,000 base plus 50% ($250,000) bonus at
target (as set by the Board
of Directors after conclusion with CEO)
TRANSITION STOCK GRANT:
A. 1,250,000 shares granted on September 19, 1999
without restrictions
STOCK OPTION:
15,000,000 Shares at $8.00 per share
Vesting:
20% (3,000,000 shares) vest on effective date (9/19/99)
80% to vest monthly over 4 years from September 19, 1999.
Early Exercise: Executive may exercise early subject
to a repurchase option at cost as to unvested shares.
These generous packages allowed executives to take millions from
the company in salary and stock. Relan had the ability to sell millions
of his shares in a short period of time. Keep in mind, the stock price
is now 12.9 cents. The institutional investors
have a fraction of their investment left, while the executives are
taking home salaries at the high end of the dotcom compensation scale.
Conclusion:
Webvan was far too ambitious in its plans, as were many dotcoms.
The problem was that the company never had the kind of experienced food
retail managers at the top of the corporate structure. Bringing in a
consultant when the company was losing tens of millions dollars in
their food operations may turn out to have been a fatal decision.
So many dotcoms, and clearly Webvan, thought that they were in the
technology business. They assumed that they would conquer all their
problems by getting the right mix of marketing and technology, when the
problem was not a technological one to begin with.
Supermarkets spend millions in branding. They want you to go to
Shoprite or Krogers or King's over their competitors. How could Webvan
compete with every chain in America. Even Wal-Mart is entering that
market cautiously, because there is no more complex relationship
between the consumer and their food supplier. Yet, a book seller and
his techie buddies thought they would walk into that relationship and
meet up with few problems. How does the Internet provide for a better
shopping relationship than my supermarket? It can't. It can enhance it,
but who wants to be trapped in their house all day, waiting for someone
to deliver food ?
What niche could they have filled? They could have been a super
Kozmo, in that they would deliver goods, let's say, for a barbecue. You
want to grill on the backyard and it's 3 PM, they'll be there by 5 PM,
with everything, INCLUDING the grill. Or if you're having a party,
they'll be there with the booze and everything else you need. The kind
of services where your average supermarket falls down on. But that
would have required forethought.
The goal would be to develop a local business which would be able
to deliver high quality goods to your door quickly. Or help you with
catering needs. There is a market for home delivery, but it has to be
targeted carefully and tied to an existing revenue base. Instead of
competing with local supermarkets, expanding their offerings would have
worked much better. You don't need people to deliver bottles of Coke
any more than you needed 50 lbs bags of dog food mailed to your house.
A less ambitious offering, tied to local regions and supermarket
chains, offering goods supermarkets do not deliver on well, speciality
goods and catering, for example. Or doing home delivery of speciality
goods like Omaha Steaks would have been a way to gain mindshare without
competing with every store in the US.
You wouldn't need a $40m warehouse to do this, and it would take
years and clever deals to get the help of local chains, but it is
doable. AholdUSA now owns Peapod and is merging it into its existing
distribution chain with its local supermarkets.
The obvious question is why did Louis Borders think that the
supermarket experience needed to be altered? Because of checkout lines?
Yes, checkout lines are a pain, but they are not a reason to create a
new market either. The supermarket line is the exchange for the ability
to pick one's goods in person.
This company has lost over $600m proving that building a new,
national chain of full-service/home delivery supermarkets will probably
not work. Only a few food chains have even attempted it and they serve
prepared goods only. Even a casual examination would have shown that
there are few national chains and no national supermarket chains. How
Borders thought he would invent a new reality is beyond me.
Editor's Note: This is Part 6 of Steve Gilliard's ongoing series. You can read Part 1 (IVillage), Part 2 (Salon), Part 3 (Razorfish), Part 4 (Juno), and Part 5 (Ask Jeeves) on this site).
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