Webvan Model
The fundamental problem with the Webvan model was that they overestimated demand. They tried to expand and grow too quickly and spent too much of the investors’ capital before there was even any revenue. Webvan spent too much on its sophisticated infrastructure in order to establish in multiple areas and the costs far exceeded the sluggish sales growth. You have to eventually make a profit in order to succeed and Webvan never delivered any profit. The first major issue was revenue in relation to capital investment and margins. Webvan’s initial capital investments were enormous. They invested heavily in automated warehouses, logistics software, and a fleet of vans. The company’s distribution centers and warehouses were the most automated and technological advanced in the world. The idea was that technology would help the firm provide groceries more cheaply than its competitors. To make these investments pay, Webvan needed either large numbers of customers spending large amounts per order or great margins. But Webvan never raked in enough sales to make up for its initial expenses.
Webvan’s gross margins compared to cost structure were a huge issue. Webvan was not generating huge sales volumes and needed significant operating efficiencies to make its model work. Operating facilities, marketing the company, and delivering the orders were all more costly than Webvan anticipated. The process of fulfilling customers’ orders was particularly expensive. Webvan lacked the buying power of other large chains. Without the enormous economies of scale its competitors enjoyed, Webvan could not easily keep its costs of goods low.
The last major issue was obtaining customers at an affordable cost. From Webvan’s perspective, enough customers would switch their shopping over to Webvan and make the huge investment worthwhile. Unfortunately, sales volumes were far