SINESSSCHOOL 9-602-037 REV: MARCH 13. 2003 ANDREW MCAFEE Webvan On January 12, 2001, the Webvan Group was notified that it had 90 days to bring its stock over a dollar for 10 consecutive trading days to avoid being delisted from the Nasdaq: it had failed to meet a minimum bid price of $l for 30 consecutive days. In April, the company sought $25 million to stay afloat. At the end of trading on July 6, 2001, Webvan s stock stood at 6 cents a share. The following Monday, Webvan, the second best-ever-financed on-line retailer, announced that it was filing for Chapter 11 bankruptcy protection and would lay off most of its 2,000 employees. On the morning of July 9, many workers learned of their fates as they arrived at work only to find the gates locked This fall from grace in the eyes of investors was in some ways puzzling. At one point, the ompany had been the best capitalized of the online grocers, with a war chest of approximately $800 million raised from private investors and the public via an initial public offering(IPO).Many customers who had used Webvan's delivery service loved it; and for three straight quarters in 2000, it had been voted the best online grocer of 12 in a survey. In some markets, the company had exceeded the average consumer order size that it had projected for itself at this point in time and in the last quarter of 2000, it had posted a gross margin of 27% that compared favorably with the 27% to 30% seen by large conventional grocers. It had also continued to innovate initiating a successful program to take advantage of under utilized daytime delivery capaci However, Webvan had also projected in its 1999 prospectus that the expensive distribution centers DCs)it used were likely to be operating at breakeven capacity within five quarters of being launched. At the end of fourth quarter of 2000, six quarters had passed since Webvan's flagship DC in Oakland, CA, began operation and the company had not yet hit this widely publicized target. In addition, the company had faced several unanticipated difficulties with its operations and with convincing enough consumers to purchase groceries often enough. In September 2000, Georg Shaheen, the companys CEO, announced that Webvan would indefinitely delay expansion into the Washington, D.C., Baltimore, and Bergen Country, N] markets as had originally been planned although the company had already spent $45 million on the DCs to serve these areas. At the start of 2001, the company had $212 million in cash and a perilously high cash"burn rate. It chose to cut back marketing expenses stating that it would instead focus on getting current customers to order more lently. Customers were using the companys services only 1.7 times a month, and were often having difficulty getting a close-in"delivery window. ed this case under the supervision rew mcAfee. This case was HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management Copyright o 2001 President and Fellows of Harvard College. To order luce materials, call 1-800-5-45-7685, rite Harvard Business School Publishing, Boston, MA part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or form or by any means-electronic, mechanical photocopying, recording, or otherwise--without the permission of Harvard Business School
9-602-037 REV: MARCH 13, 2003 Research Associate Mona Ashiya prepared this case under the supervision of Professor Andrew McAfee. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. ANDREW MCAFEE MONA ASHIYA Webvan On January 12, 2001, the Webvan Group was notified that it had 90 days to bring its stock over a dollar for 10 consecutive trading days to avoid being delisted1 from the Nasdaq: it had failed to meet a minimum bid price of $1 for 30 consecutive days.2 In April, the company sought $25 million to stay afloat.3 At the end of trading on July 6, 2001, Webvan’s stock stood at 6 cents a share.4 The following Monday, Webvan, the second best-ever-financed on-line retailer, announced that it was filing for Chapter 11 bankruptcy protection and would lay off most of its 2,000 employees.5 On the morning of July 9, many workers learned of their fates as they arrived at work only to find the gates locked.6 This fall from grace in the eyes of investors was in some ways puzzling. At one point, the company had been the best capitalized of the online grocers, with a war chest of approximately $800 million raised from private investors and the public via an initial public offering (IPO). Many customers who had used Webvan’s delivery service loved it; and for three straight quarters in 2000, it had been voted the best online grocer of 12 in a survey.7 In some markets, the company had exceeded the average consumer order size that it had projected for itself at this point in time and in the last quarter of 2000, it had posted a gross margin of 27% that compared favorably with the 27% to 30% gross margins typically seen by large conventional grocers. It had also continued to innovate, initiating a successful program to take advantage of under utilized daytime delivery capacity. However, Webvan had also projected in its 1999 prospectus that the expensive distribution centers (DCs) it used were likely to be operating at breakeven capacity within five quarters of being launched.8 At the end of fourth quarter of 2000, six quarters had passed since Webvan’s flagship DC in Oakland, CA, began operation and the company had not yet hit this widely publicized target. In addition, the company had faced several unanticipated difficulties with its operations and with convincing enough consumers to purchase groceries often enough. In September 2000, George Shaheen, the company’s CEO, announced that Webvan would indefinitely delay expansion into the Washington, D.C., Baltimore, and Bergen Country, NJ markets as had originally been planned although the company had already spent $45 million on the DCs to serve these areas.9 At the start of 2001, the company had $212 million in cash and a perilously high cash “burn rate.” It chose to cut back marketing expenses stating that it would instead focus on getting current customers to order more frequently.10 Customers were using the company’s services only 1.7 times a month, and were often having difficulty getting a close-in “delivery window
602-037 Webvan Observers of Webvan had long voiced doubts about the companys viability. As news of the losedown spread, many people recalled an April 1999 Wall Street Journal article that wondered whether the company would become the Internet eras equivalent of the movie"Waterworld, "a disaster so epic it becomes American legend. This had, in fact, come to pass, but why? Why did Webvan fail so dramatically? And why had no other company decided to purchase its assets ts including elaborate nationwide physical and IT infrastructures? Were these really without values? Company Founding Genesis of idea Louis Borders, the founder of bookseller The Borders Group Inc, had an epiphany when he opened a Fed Ex package containing some Japanese spices and other specialty items that he had ordered from a catalog in 1997. He recalled, "I kept thinking that I would need a loading dock outside my house to use the Internet to buy things. And on top of that, I'd have to pay $10 per package He came to believe that online retail would never make it unless there could be a faster of the growing number of people making purchases online by creating an enterprise that would offer greater variety than conventional stores and yet provide the convenience and instant gratification chat online shoppers missed Borders incorporated Intelligent Systems for Retail in December 1996 and in April 199 ts name to the Webvan Group. The mission of the new Foster City-based company was"to deliver the last mile of e-commerce, "meaning the delivery of merchandise from a DC to a customers doorstep. The last mile was also referred to as"the gilded pathway into the homes and hearts of Americas consumers that everyone from Amazon. com to Wal-Mart to Fred Smiths FedEx lusts The Webvan Group planned to begin by offering groceries which people shop for frequently build critical mass, order frequency, and economies of scale. With an established customer base, it then planned to leverage its distribution system to expand to other categories, adding items such as consumer electronics and books whose profit margins were considerably greater than for groceries but were ordered less frequently. That is, they planned to attract an audience first and then monetise those eyeballs"to bring in additional revenue and do this on a global scale. From 1997 to May 1999, the company focused on developing the web store and constructing its first distribution and fulfillment center in the San Francisco Bay Area. Following a trial of its grocery delivery service in May 1999 to 1,100 people, the web store was launched in June 1999 as a venture, whose mission was to deliver everything from groceries to palm pilots to consumers in a cheap and Borders stated, " Intuitively, I knew I'd have a great financial model if I could eliminate osts. However, where he saw"a cornucopia of opportunity, "there were those who wondered whether people were in fact going to migrate their purchases of groceries and many other items to the Internet, and whether the new company could crack the"last mile"problem
602-037 Webvan 2 Observers of Webvan had long voiced doubts about the company’s viability. As news of the closedown spread, many people recalled an April 1999 Wall Street Journal article that wondered whether the company would become the Internet era’s equivalent of the movie “Waterworld,” a disaster so epic it becomes American legend.”11 This had, in fact, come to pass, but why? Why did Webvan fail so dramatically? And why had no other company decided to purchase its assets, including elaborate nationwide physical and IT infrastructures? Were these really without values? Company Founding Genesis of Idea Louis Borders, the founder of bookseller The Borders Group Inc., had an epiphany when he opened a FedEx package containing some Japanese spices and other specialty items that he had ordered from a catalog in 1997. He recalled, “I kept thinking that I would need a loading dock outside my house to use the Internet to buy things. And on top of that, I’d have to pay $10 per package.”12 He came to believe that online retail would never make it unless there could be a faster, cheaper and more efficient way of delivering items to consumers.13 Borders wanted to take advantage of the growing number of people making purchases online by creating an enterprise that would offer greater variety than conventional stores and yet provide the convenience and instant gratification that online shoppers missed. Borders incorporated Intelligent Systems for Retail in December 1996 and in April 1999 changed its name to the Webvan Group. The mission of the new Foster City-based company was “to deliver the last mile of e-commerce,” meaning the delivery of merchandise from a DC to a customer’s doorstep. The last mile was also referred to as “the gilded pathway into the homes and hearts of America’s consumers that everyone from Amazon.com to Wal-Mart to Fred Smith’s FedEx lusts after.”14 The Webvan Group planned to begin by offering groceries which people shop for frequently to build critical mass, order frequency, and economies of scale. With an established customer base, it then planned to leverage its distribution system to expand to other categories, adding items such as consumer electronics and books whose profit margins were considerably greater than for groceries but were ordered less frequently.15 That is, they planned to attract an audience first and then “monetise those eyeballs” to bring in additional revenue and do this on a global scale.16 From 1997 to May 1999, the company focused on developing the web store and constructing its first distribution and fulfillment center in the San Francisco Bay Area. Following a trial of its grocery delivery service in May 1999 to 1,100 people, the web store was launched in June 1999 as a venture, whose mission was to deliver everything from groceries to palm pilots to consumers in a cheap and efficient manner. 17 Borders stated, “Intuitively, I knew I’d have a great financial model if I could eliminate store costs.”18 However, where he saw “a cornucopia of opportunity,” there were those who wondered whether people were in fact going to migrate their purchases of groceries and many other items to the Internet, and whether the new company could crack the “last mile” problem.19
Webvan 602-03 Management Team To realize his vision, Borders recruited a management"dream team. "Borders himself served as first Chairman and CEO of the company. Borders had developed the advanced information systems used by the company he had founded earlier, Borders Books, to manage inventory across the count and had also co-founded another company, Synergy Software, in 1989. He was also instrumental i designing the warehouses with intricate processes that the Webvan Group would rely on In September 1999, Borders recruited George Shaheen from his role as CEO of Andersen Consulting. Shaheen, whose first job was bagging groceries and trimming beef part-time in Elmwood, IL, had spent 32 years at Andersen and had helped create the world's largest consulting firm. He stood to collect a $10 million bonus upon retirement from Andersen Consulting in 11 months plus additional payouts from his group's venture investments. At the Webvan Group, with a salary of $500,000, a ninth of what it was at Andersen Consulting, Shaheen held 1.25 million shares of stock, in addition to 15 million options. If the company did well, Shaheens stake would have been worth $100 million. The company also hired senior executives from Goldman Sachs Co, Oracle Corporation, Federal Express, American Stores Company, Marriott International, and General Electric. See Exhibit 1 for more background on the companys management team. David Beirne, a managing member of Benchmark Capital, served as a member of the board in addition to Christos Cotsakos who was the ceo and Chairman of the board for e+Trade. Tim Koogle, the CEO of Yahoo! Inc, and Michael Mortiz, general partner at Sequioa Capital, also sat on Webvan's board funding Sequoia Capital, two leading venture capital firms. There had been no online grocery successes at this point in time: the best known online supermarket, Peapod Inc, had a $21 million loss on revenue of only $69 million in 1998 and another competitor, Netgrocer Inc. had laid off employees in the fall of 1998 after poor results. The Webvan Group, however, pointed to the inability of these online grocers to offer same-day delivery, a narrow delivery window or a highly automated and scalable business model. 24 $400 million in four rounds of venture capital financing, the most for an Internet company in 1999 Commenting on the companys valuation, Jim Barksdale, the former CEO of Netscape, observed, "I've never seen anything like it. Webvan announced in August 1999 that it planned an initial public offering where it hoped to raise an additional $300 million. David Beirne of Benchmark Capital, one of the first to finance the company noted, " This could be the biggest company to come out of Silicon Valley. By the time of its postponed initial public offering on November 5, 1999 which was underwritten by Goldman Sachs Co, the company had a only a meager operational record and had collected only $4 million in revenue. Nonetheless, the company managed to raise an additional $400 million in its IPO. On its first day of trading, the companys initial share price of $15 rose at one point to $34 giving it $15 billion capitalization before falling to $25 by the end of the day( Exhibit 2 provides a chart showing the company's stock price
Webvan 602-037 3 Management Team To realize his vision, Borders recruited a management “dream team.” Borders himself served as first Chairman and CEO of the company. Borders had developed the advanced information systems used by the company he had founded earlier, Borders Books, to manage inventory across the country and had also co-founded another company, Synergy Software, in 1989. He was also instrumental in designing the warehouses with intricate processes that the Webvan Group would rely on.20 In September 1999, Borders recruited George Shaheen from his role as CEO of Andersen Consulting. Shaheen, whose first job was bagging groceries and trimming beef part-time in Elmwood, IL, had spent 32 years at Andersen and had helped create the world’s largest consulting firm. He stood to collect a $10 million bonus upon retirement from Andersen Consulting in 11 months plus additional payouts from his group’s venture investments. At the Webvan Group, with a salary of $500,000, a ninth of what it was at Andersen Consulting, Shaheen held 1.25 million shares of stock, in addition to 15 million options. If the company did well, Shaheen’s stake would have been worth $100 million.21 The company also hired senior executives from Goldman Sachs & Co., Oracle Corporation, Federal Express, American Stores Company, Marriott International, and General Electric. See Exhibit 1 for more background on the company’s management team. David Beirne, a managing member of Benchmark Capital, served as a member of the board in addition to Christos Cotsakos, who was the CEO and Chairman of the Board for E*Trade. Tim Koogle, the CEO of Yahoo! Inc., and Michael Mortiz, general partner at Sequioa Capital, also sat on Webvan’s board. Funding By April 1999, the Webvan Group had already attracted $120 million in funding from high-profile backers such as CBS Inc., Knight-Ridder Co., Softbank Co. of Japan, as well as Benchmark Capital and Sequoia Capital, two leading venture capital firms.22 There had been no online grocery successes at this point in time: the best known online supermarket, Peapod Inc., had a $21 million loss on revenue of only $69 million in 1998 and another competitor, Netgrocer Inc. had laid off employees in the fall of 1998 after poor results.23 The Webvan Group, however, pointed to the inability of these online grocers to offer same-day delivery, a narrow delivery window or a highly automated and scalable business model.24 By July 1999, Webvan had garnered an additional $275 million by selling a 6.48% stake to Goldman Sachs & Co., Softbank Co. and Sequoia Capital.25 In the end, it had raised a total of about $400 million in four rounds of venture capital financing, the most for an Internet company in 1999.26 Commenting on the company’s valuation, Jim Barksdale, the former CEO of Netscape, observed, “I’ve never seen anything like it.”27 Webvan announced in August 1999 that it planned an initial public offering where it hoped to raise an additional $300 million. David Beirne of Benchmark Capital, one of the first to finance the company noted, “This could be the biggest company to come out of Silicon Valley.”28 By the time of its postponed initial public offering29 on November 5, 1999 which was underwritten by Goldman Sachs & Co., the company had a only a meager operational record and had collected only $4 million in revenue. Nonetheless, the company managed to raise an additional $400 million in its IPO. On its first day of trading, the company’s initial share price of $15 rose at one point to $34 giving it $15 billion capitalization before falling to $25 by the end of the day30 (Exhibit 2 provides a chart showing the company’s stock price
602-037 Webvan point,bristled,"They have the sales of two of our stores and one fourth of our market cap. "29 over time). Its day-end $8 billion market capitalization was about 40% of the market value of the nation's largest supermarket chain, Kroger, which had 2, 200 stores and a share price of $23. Noting the companys valuation, one Safeway executive whose company had a share price of $40 at that Size of market In its prospectus filed with the Securities and Exchange Commission( SEC) in November 1999, the Webvan Group noted that the total US market for groceries, drugstore merchandise and prepared meals alone was over $650 billion in 1998, and that International Data Corporation(IDC)estimated that the 63 million web users in the United States at the end of 1998 were projected to grow to 177 million users by the end of 2003. Consumer purchases of goods and services online were projected to increase from $12.4 billion in 1998 to $75 billion by 2003. Specifically, online grocery purchases that amounted to $235 million in 1998 and $519 million in 1999 were expected to grow to $3. 5 billion by 2002, $10.8 billion by 2003, and rise to $16.8 billion by 2004; they would represent 2% of the total grocery market. Forrester Research projected that 5% of U.S. households would be buying groceries online in a few years while Jupiter Communications forecast in 1999 that the online grocery market would be worth about $3.5 billion in 2000 and $6.5 billion by 2003. Webvan's aim was to capture a substantial chunk of this growing market. The company noted that traditional grocery stores had to limit the number of items they carried in their stores. In addition, traditional stores had to face the costs of building and operating stores near residential areas,and had significant costs associated with personnel, store set-up and inventory. Webvan sought to provide a more cost-effective solution. Ultimately, Shaheen never saw groceries as the companys"end-game"-he saw the market as $1.5 trillion, an IDC projection for 2003, which encompassed all web-based purchases. Original Business model Based in Foster City, CA, the Webvan Group aimed to deliver dry and perishable goods to consumers' homes, at competitive prices, within a specified 30-minute window. Customers who logged onto the Webvan Groups web site upon launch were able to choose from 15,000 grocery tems at prices that were initially competitive with off-line retailers. Offerings at the company drugs.Customers were able to place orders anytime, pay by credit card wel s sakery items, non- included fresh produce, premium meats, fresh seafood, prepared-meals perishable items found in conventional supermarkets, wines, cigars,as s non within a 30-minute window the same day or up to four days later. Webvan did not require any membership fees, and delivery was to be free for orders over $50 with smaller orders carrying a $4.95 surcharge. With its staff of courteous and friendly drivers who did not expect tips, the company hoped to quickly gain a large number of customers who would be happier about convenience and they planned to expand across the country to other markets as well as expand their product offerings The challenge faced by the Webvan Group was the delivery of perishable and dry goods at competitive prices to consumers within a 30-minute window chosen by the customer on a scale never
602-037 Webvan 4 over time). Its day-end $8 billion market capitalization was about 40% of the market value of the nation’s largest supermarket chain, Kroger, which had 2,200 stores and a share price of $23.31 Noting the company’s valuation, one Safeway executive whose company had a share price of $40 at that point, bristled, “They have the sales of two of our stores and one fourth of our market cap.”32 Size of Market In its prospectus filed with the Securities and Exchange Commission (SEC) in November 1999, the Webvan Group noted that the total US market for groceries, drugstore merchandise and prepared meals alone was over $650 billion in 1998,33 and that International Data Corporation (IDC) estimated that the 63 million web users in the United States at the end of 1998 were projected to grow to 177 million users by the end of 2003.34 Consumer purchases of goods and services online were projected to increase from $12.4 billion in 1998 to $75 billion by 2003.35 Specifically, online grocery purchases that amounted to $235 million in 1998 and $519 million in 1999 were expected to grow to $3.5 billion by 2002, $10.8 billion by 2003, and rise to $16.8 billion by 2004; they would represent 2% of the total grocery market.36 Forrester Research projected that 5% of U.S. households would be buying groceries online in a few years37 while Jupiter Communications forecast in 1999 that the online grocery market would be worth about $3.5 billion in 2000 and $6.5 billion by 2003.38 Webvan’s aim was to capture a substantial chunk of this growing market. The company noted that traditional grocery stores had to limit the number of items they carried in their stores. In addition, traditional stores had to face the costs of building and operating stores near residential areas, and had significant costs associated with personnel, store set-up and inventory. Webvan sought to provide a more cost-effective solution.39 Ultimately, Shaheen never saw groceries as the company’s “end-game”—he saw the market as $1.5 trillion, an IDC projection for 2003, which encompassed all web-based purchases.40 Original Business Model Overview Based in Foster City, CA, the Webvan Group aimed to deliver dry and perishable goods to consumers’ homes, at competitive prices, within a specified 30-minute window. Customers who logged onto the Webvan Group’s web site upon launch were able to choose from 15,000 grocery items at prices that were initially competitive with off-line retailers.41 Offerings at the company included fresh produce, premium meats, fresh seafood, prepared-meals, bakery items, nonperishable items found in conventional supermarkets, wines, cigars, as well as non-prescription drugs.42 Customers were able to place orders anytime, pay by credit card, and schedule deliveries within a 30-minute window the same day or up to four days later.43 Webvan did not require any membership fees, and delivery was to be free for orders over $50 with smaller orders carrying a $4.95 surcharge. With its staff of courteous and friendly drivers who did not expect tips, the company hoped to quickly gain a large number of customers who would be happier about convenience and service than getting discounts. Thereafter, with an established customer base in one geographic area, they planned to expand across the country to other markets as well as expand their product offerings. The challenge faced by the Webvan Group was the delivery of perishable and dry goods at competitive prices to consumers within a 30-minute window chosen by the customer on a scale never
Webvan 602-032 before attempted. The grocery category also provided a challenge because of its razor-thin margins of 1% to 1.5% and the wide product range and temperature requirements. Webvan knew that the last mile to the consumer" posed an enormous logistical problem, especially with groceries, but as Shaheen expressed it, " two or three companies will legitimately earn the right to cross into a persons home. We intend to be one of those Customers Motivating consumers to shop online was viewed as an uphill battle since many people did not want to pay delivery charges and everyone demanded high service standards. Moreover, going to a grocery store on a weekly basis was highly ingrained behavior. However, the company believed that the"market demand for high quality reliable grocery services [was] enormous and [was] very much like the pent-up demand for high quality wide-bandwidth communications. 6. Shaheen saw the company's target customers as women and, more specifically, soccer moms- that is, mothers in urban two-income families with a combined income of more than $75, 000 and little spare time. He noted that 1% to 3% of this target market would make the economics of the new company work. People made an average of 2. 4 trips to the grocery store per week and spent an average of $4, 600 annually in the process, about 10% of their income. In a survey the company conducted in San Francisco to learn how many people would be likely to use an online grocer, 6% of respondents noted "absolutely, "23% said probably. Shaheen believed that 35%of the market would be buying groceries on the Internet by 2003-2004. The Webvan group also noted that most people viewed grocery shopping as an inconvenience and that nearly 55% of all Americans considered time put little economic value on their time in the supermarket. e s had apparently shown that consumers Operations Warehousing and order management To tap into the online consumer market, the Webvan was a highly e pproach that was capital and technology intensive. Central to Webvan's approach tomated central DC that could carry as many as 50,000 items and process 8,000 orders that moved through a series of put-away and pick pods, where goods could be loaded by workers G-4 a day. The company constructed its first DC in Oakland, CA, a 330,000 square feet warehouse that ould serve as many people as 18 conventional supermarkets and contained cooking facilities as well as multiple temperature zones to store items such as wine, cigars and ice cream. The DC had 4 carousels with a storage capacity of 107, 000 locations and contained about 5 miles of conveyor belt Goods received at the distribution center were broken down immediately from cases to"eaches (singular items) and transferred to trays, which were the containers used to store inventory. Each tray carried a unique bar code license plate, which was used to track all movement in the system. Product barcodes were scanned by workers and the number of items on each tray were entered in conjunction with each trays barcode license. To increase throughput, Webvan spread high-demand products across multiple carousels e Q When a customer placed an order online and specined a delivery time, the information was Iveyed to the central DC. There, the appropriate quantities of colored totes were assigned to the der; yellow totes were for used dry groceries, green totes for chilled products and blue totes carried frozen goods. Each tote was given a bar code license plate that linked to a specific customers order and could then be tracked throughout the fulfillment process. A custom-written piece of software
Webvan 602-037 5 before attempted. The grocery category also provided a challenge because of its razor-thin margins of 1% to 1.5% and the wide product range and temperature requirements.44 Webvan knew that the “last mile to the consumer” posed an enormous logistical problem, especially with groceries, but as Shaheen expressed it, “two or three companies will legitimately earn the right to cross into a person’s home. We intend to be one of those.”45 Customers Motivating consumers to shop online was viewed as an uphill battle since many people did not want to pay delivery charges and everyone demanded high service standards.46 Moreover, going to a grocery store on a weekly basis was highly ingrained behavior. However, the company believed that the “market demand for high quality reliable grocery services [was] enormous and [was] very much like the pent-up demand for high quality wide-bandwidth communications.”47 Shaheen saw the company’s target customers as women and, more specifically, soccer moms— that is, mothers in urban, two-income families with a combined income of more than $75,000 and little spare time.48 He noted that 1% to 3% of this target market would make the economics of the new company work.49 People made an average of 2.4 trips to the grocery store per week and spent an average of $4,600 annually in the process, about 10% of their income.50 In a survey the company conducted in San Francisco to learn how many people would be likely to use an online grocer, 6% of respondents noted “absolutely,” 23% said probably. Shaheen believed that 35% of the market would be buying groceries on the Internet by 2003-2004.51 The Webvan Group also noted that most people viewed grocery shopping as an inconvenience and that nearly 55% of all Americans considered time to be their most precious commodity. However, other studies had apparently shown that consumers put little economic value on their time in the supermarket.52 Operations Warehousing and order management To tap into the online consumer market, the Webvan Group took an approach that was capital and technology intensive. Central to Webvan’s approach was a highly automated central DC that could carry as many as 50,000 items and process 8,000 orders a day.53 The company constructed its first DC in Oakland, CA, a 330,000 square feet warehouse that could serve as many people as 18 conventional supermarkets and contained cooking facilities as well as multiple temperature zones to store items such as wine, cigars and ice cream.54 The DC had 41 carousels with a storage capacity of 107,000 locations and contained about 5 miles of conveyor belts that moved through a series of put-away and pick pods, where goods could be loaded by workers.55 Goods received at the distribution center were broken down immediately from cases to “eaches” (singular items) and transferred to trays, which were the containers used to store inventory. Each tray carried a unique bar code license plate, which was used to track all movement in the system. Product barcodes were scanned by workers and the number of items on each tray were entered in conjunction with each tray’s barcode license.56 To increase throughput, Webvan spread high-demand products across multiple carousels. When a customer placed an order online and specified a delivery time, the information was conveyed to the central DC. There, the appropriate quantities of colored totes were assigned to the order; yellow totes were for used dry groceries, green totes for chilled products and blue totes carried frozen goods. Each tote was given a bar code license plate that linked to a specific customer’s order and could then be tracked throughout the fulfillment process.57 A custom-written piece of software