Using Bricks to Build Clicks
- By Linda Briggs
You probably heard the noise when online grocery store Webvan slammed its virtual doors for good in July. Because it represented a resounding dotcom failure ($1 billion in losses before admitting defeat), its closure got lots of press.
It seems pretty obvious where the business model failedWebvan, like lots of e-tailers last year, became, shall we say, irrationally exuberant about how quickly people would adapt to a new way of buying stuffand believed customers would agree to pay more for products in the process. Here's a quote I read somewhere from a Webvan spokesperson that reveals their mindset pretty clearly: "We didn't anticipate how long it would take to change customer spending habits." Oops. Guess it takes more than a flashy Web site, tons of capital and some TV ads to get people to shop in a radically differently way. Webvan's anticipated 8,000 users a day per metro area peaked at about 2,000 or so insteadnot enough to support the huge regional warehouses that were a key part of the business model.
While Webvan's death got a good deal of coverage, what's gone largely unnoticed is that a few small online grocery delivery services have continued to thrive. An example is WhyRunOut.com, a small Southern California online grocer that is doing just fine, thank you.
The difference is all in the business model. WhyRunOut didn't try to launch with huge warehouses and tons of venture capital and prime-time TV ads. It started with less than $10 million in funding in late 1998 (compare that to the $1 billion that Webvan burned through).
Instead, WhyRunOut partners with local Stater Bros. grocery stores in a model so simple, it's elegant. WhyRunOut doesn't buy and store food; it's a middleman. Workers take grocery orders from customers, make their purchases from the local Stater Bros. just like you and I would, then deliver the goods, often that afternoon. Customers are charged a $7 delivery fee. Stater Bros., which is getting new shoppers without any advertising costs, happily pays WhyRunOut an undisclosed fee for each new customer (sales at Stater Bros. stores that use WhyRunOut have risen 2 percent, according to The Los Angeles Times). In a low-margin, highly competitive business like grocery stores, that's not a bad return on zero investment.
Thus, a brick business and a click business feed each other, without the huge outlays of cash and massive warehouses, advertising costs, and so forth that the Webvan model demanded.
Maybe this modest hybrid model isn't nearly as exciting as what Webvan offered, but others besides WhyRunOut.com have seen the light. For example, GroceryWorks.com is Safeway's online arm. U.K.-based Tesco, which is Britain's largest grocer and has a bricks-and-clicks combination model like WhyRunOut.com, recently paid $22 million for a 35 percent share of GroceryWorks.com. Instead of the overblown idea that Webvan and Peapod and their ilk offered, this is the business model I believe we'll see in the future in lots of vertical markets-smart partnerships that take advantage of existing retailers and the specialized expertise of online companies.
Sometimes, small really is better. Even more often these days, bricks and clicks are what will survive. What's your company's experience with combining online and conventional stores? And are you kicking yourself for never shopping at Webvan? I'm at email@example.com.