A long, strange trip for Webvan

No one at Webvan's San Diego operations saw it coming. In mid-January, four months after acquiring rival HomeGrocer.com Inc., Webvan was set to unite the two most powerful online grocers under one brand and one technology platform. It was a milestone, the first step toward the efficiency the companies had promised Wall Street at the time of the US$1.2 billion merger. HomeGrocer's San Diego warehouse would switch over to Webvan's technology, and other facilities would follow.

But the integration didn't go smoothly; some customers were thwarted by technology snafus, others put off by an unfamiliar Web site. In the days after the conversion, San Diego patrons vanished; orders dropped from 700 a day to about 300.

A more cautious company might have paused, but not Webvan. One by one, it converted HomeGrocer sites in Los Angeles and Orange counties and Portland and Seattle to the Webvan platform. It was a risky move, especially since several facilities were close to breaking even; one was already profitable. Indeed, after each conversion, orders dropped 10 percent to 30 percent, according to several senior managers. In Fullerton, Calif., the one profitable operation, the decline was crippling. "That put us back into the red," says Rich Munday, who was senior director of operations at several of the Southern California facilities.

If the top execs at Webvan saw a problem, they didn't show it. On May 24, the day the operations of the two companies were finally integrated, they trumpeted the accomplishment in a press release. Webvan, they said, would be more efficient.

Maybe - but not for long. Last week the most audacious and second-best-financed attempt to rewrite the rules of retailing came to an abrupt end. On Monday, the gates of Webvan's Oakland, Calif., warehouse were shackled with thick chains. A security guard turned away workers and delivery trucks.

CEO Robert Swan blamed a considerable decline in orders and Webvan's inability to raise additional funds as the most immediate reasons for its demise. The drop in orders was due to a number of factors, the company says, including the economic downturn, cutbacks in marketing and bad press surrounding the company. Execs declined to elaborate further for this story.

But a dozen current and former employees, including several senior marketing, operations and technical managers, suggest other problems: a spendthrift culture, inflexible management and a rollout in multiple cities before the business model was proven. Most of all, insiders point to the botched merger between Webvan and HomeGrocer as emblematic of a single-minded corporate obsession that led to ruin. Webvan was so intent on meeting its long-term goal of building a behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day. In the process, it jeopardized the shorter-term goal of being a modest but profitable online supermarket.

"This is a really sad development, but I think it is entirely self-inflicted," says HomeGrocer co-founder Terry Drayton, who left the company shortly before the merger was completed in September 2000. "All of us from the HomeGrocer.com team were astonished at the staggering level of ineptitude and incompetence that we saw."

Some at Webvan dismiss Drayton's comments as sour grapes over losing control of his company to a better-financed rival. But Webvan insiders, who spoke on condition of anonymity, agree that the merger helped drag down the company. "We bought them out, we killed their stock, we killed their company, and then we killed ourselves," says a former senior technical manager at Webvan. "Unmitigated disaster" is how a second Webvan senior manager describes the merger.

Blinded by their grand vision, Webvan's execs made a string of bad decisions. Even as it was running out of money, the company spent millions on a rebranding campaign to avoid being pegged as a mere grocer. The marketing push promoted Webvan's sterile new blue-and-green "W" logo. Gone were Webvan's earthy grocery bag and HomeGrocer's fuzzy peach. Additionally, the costly plan to unify all facilities under one technology became the overriding priority of the technical teams. Whenever midlevel managers brought up cost concerns, they were told by senior executives not to worry about money - Webvan would have access to as much capital as it needed.

In the months after the merger, Webvan squandered millions more. It kept employees with identical jobs on both sides, paying scores of workers retention bonuses and time-and-a-half on their already high salaries - even as many of them had little to do. "The last month I sat in my office answering maybe one question a day," says Mike Smith, director of distribution for HomeGrocer. Shortly after the merger, Smith had gone to Foster City, Calif., to meet his Webvan counterparts. At the meeting, five Webvan employees introduced themselves and described their responsibilities. When his turn came, Smith said: "I am the director of distribution, and I do all of your jobs." It was all part of a culture where money was no object. At the time of the merger, the combined companies had $650 million. Nine months later, most of it was gone.

Of course, there were issues besides the merger that brought down Webvan - and they all derived from the sheer ambition of its plan. In an Internet era of lofty dreams and gargantuan miscalculations, Webvan founder Louis Borders laid out the biggest, boldest and brashest of all e-commerce bets. Borders, who had founded the Borders Group Inc. Books and Music chain, had total faith in technology's potential to overturn the retail establishment.

For Borders, delivering groceries was just a way to get Americans to open their front doors. Once they did, he'd sell and deliver anything and everything. With automated warehouses - each the size of seven football fields and equipped with more than four miles of conveyor belts - he thought he could beat others at efficiency. Borders' plan, first laid out in 1996, sought to outsmart the biggest players around, from Amazon.com Inc and Wal-Mart Stores Inc. to United Parcel Service of America Inc. (UPS) and the U.S. Postal Service.

Despite the audacity of his vision, Borders had no trouble raising money. Then the pace picked up. Webvan unveiled its plans in April 1999. Within months, it launched its service in the San Francisco area, raised additional funds from private investors and signed a $1 billion deal to build 25 more warehouses. Borders also recruited George Shaheen, the man behind Andersen Consulting's success, to be Webvan's CEO. In November 1999, Webvan raised $375 million in an IPO.

Orders picked up quickly, and Webvan barreled along in its expansion plans. By April 2000, when the stock market began turning - and the gusher of money available to Internet companies was tapped out - it was too late to rein in Webvan. Plans for launching its service in Atlanta and Chicago were well under way, and the company had signed leases costing millions for scores of other sites.

It was then that Shaheen turned to plan B. Merging with the only rival that could pose a challenge to Webvan made sense. By exchanging some of its stock, Webvan would acquire about $150 million in additional cash and a fully operational service in six more cities. HomeGrocer, whose smaller- scale business was faring better than Webvan's, also faced dwindling cash reserves and welcomed the deal.

Combined, the two companies had raised $1.2 billion, more than any online retailer except Amazon.com. Among their investors were some of Silicon Valley's brightest stars: VC firms Benchmark Capital, Kleiner Perkins Caufield & Byers, Sequoia Capital and Softbank Venture Capital. Others included Amazon, Goldman Sachs and former Netscape chief Jim Barksdale.

But that wasn't enough. Webvan was forced into brutal cost-cutting. It pulled the plug on plans for further expansion and shuttered service in Atlanta, Dallas and Sacramento, Calif. It slashed marketing expenses and began charging for deliveries. Sales fell, and the business unraveled.

Webvan never proved that its plan was viable. Demand for its service didn't reach even half of the 8,000 orders a day that its pricey warehouses were equipped to handle. The company might have prospered - or hung on a bit longer - if it had at least partially adopted HomeGrocer's more frugal model. But instead Webvan imposed its own systems on HomeGrocer. In fact, former HomeGrocer managers blame the company's collapse on the ego of the Webvan execs, who wouldn't stray from the brash course set by Borders. Webvan insiders liked to dismiss these embittered HomeGrocer managers as the "save the peach" folks.

Borders always knew his plan was a gamble. Early on he was asked by investors whether he thought it would be a billion-dollar business, according to Randall Stross' book eBoys. "Naw," Borders answered, "it's going to be $10 billion. Or zero." He was right.

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