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Webvan Case Analysis
This analysis will consider the Webvan strategy and its market position to serve as a basis for recommendations to Webvan's management team. Webvan was once the largest online grocery enterprise in the United States. However it is now considered a classic large investment failure despite the fact that the total industry volume was over one billion dollars per year while the online segment was over two hundred million dollars annually. Webvan failed to live up to its expectation despite the large amount of capital it had at its disposal.
Webvan began in 1998 as an innovative business idea that excited and drew support from investors already caught up in the dot-com phenomenon. However, the company finally botched the opportunity to attract and develop a customer base large enough to justify the large investments it made in the development of technology systems and elaborate distribution warehouses.
It was found that the consumer acceptance of the model was relatively low. With hindsight, it was recommended that the company should incorporate more outsourcing and strategic partnerships to keep its capital requirements at lower levels. Furthermore, the company needs a new strategy to attract and retain customers. The company could narrow its target market and focus on tribal marketing to narrow groups. By partnering to reduce the capital utilized in the business model, this would have allowed the company more flexibility in its development.
Executive Summary 2
Situation Analysis 6
Vision and Mission 7
Market Opportunity 7
Industry Profitability 8
Porter's Five Forces 8
Threat of Substitute Products 8
Competitive Rivalry 9
Threat of New Entrants 9
Bargaining Power of Suppliers 9
Bargaining Power of Buyers 10
Customer Analysis 10
Competitive Review 11
SWOT Analysis 11
Company Assessment 13
Marketing Strategy 14
Target Market 15
Value Proposition 15
Distinct Competency 16
Marketing Mix 16
Financial Plan 18
Pro-forma Income Statement 19
Sensitivity Analysis 20
Challenges / Risks 20
Additional Research Needed 21
Webvan developed a unique and innovative business model that was heavily dependent on developing technology. The company's product mix was composed of about 20,000 high-quality grocery items, including fresh fruits and vegetables, meats, and frozen foods, and delivered the orders to customers throughout a large metropolitan region. Webvan had no retail outlets, but instead it operated out of massive regional distribution centers of about 350,000 square feet each. Using warehouse space allowed the organization to save money relative to the traditional model for groceries that required prime real estate. This in turn provided the company the opportunity for higher margins.
Vision and Mission
The vision and mission serve as the foundation of the analysis and recommendations, as they are also the drivers of the Webvan's business model.
Webvan's vision was to provide a faster, cheaper and more efficient way of delivering items to consumers.
Webvan's mission was to deliver the last mile of e-commerce to the increasing number of people making purchases online by creating an enterprise that would provide a greater variety of products than a conventional store while still providing the instant gratification that online shoppers miss.
The grocery industry is one of the largest in the world, with annual retail store sales that are estimated at $650 billion. However, despite the industries size, it is difficult to operate in this industry because profit margins are slim, sometimes as low as one to two percent of total revenue. Furthermore, the industry is very price sensitive. The most successful Web retail sales of grocery items involved delivery of products several days after the order was placed via parcel delivery services such as UPS or FedEx. However, Webvan wished to change the distribution channels to make delivery much quicker so that the consumer could still have some sense of instant gratification. Yet this business model required an aggressive strategy to overcome many obstacles that would make such a distribution channel possible.
Most people prefer fresh groceries that need to be delivered quickly to avoid spoilage. Products such as milk, ice cream, fresh vegetables, and meats are difficult to keep fresh during third party shipments. A number of companies, such as Peapod, HomeGrocer.com, Kozmo.com, and Safeway struggled to effectively establish online grocery delivery services. However, the executive management at Webvan felt they could revolutionize the platform. Webvan Group Inc. Of Foster City, California was headed by Louis Borders, who was the cofounder of the very successful Borders bookstore chain. Consequently Webvan's visionaries believed they had the talent to develop a model that could overcome the challenges to the online grocery industry that the others were facing.
Porter's Five Forces
Porter's Five Forces analysis provides insights into the industry and the external environment. Webvan subsequently has to contend with a high threat of substitute products, an intense competitive rivalry in the market, and a situation in which consumers have a high level of bargaining power. Webvan is attempting to use an aggressive strategy to enter a market that is challenging, to say the least.
Threat of Substitute Products
Although Webvan only had to compete with a limited number of online grocery operations, consumers have many options for purchasing grocery items. Consumers can easily visit traditional brick and motor operations for their grocery needs. There are also convenience stores that also carry many items that consumers need quickly. There is also the opportunity to eat out, order carry out, or to have some food delivered so that fresh groceries are not required at all. In fact, as consumers often are pressed for time, dining out or grabbing fast food is becoming an increasingly popular option.
Since the industry is mature, incredibly fierce competition already existed among traditional grocery stores, such as Kroger and Wal-Mart. There was also some rivalry among the emerging distribution channels with online vendors. Both types of competition must be considered since Webvan was trying to craft something of a hybrid model between the two existing model.
Threat of New Entrants
The threat of new entrants to the market was incredibly low. The immense capital requirements it takes to break into the industry are prohibitively large. Large amounts of capital investment are required to create economies of scale that allow for a manageable profit margin. Webvan was able to gather the needed capital to develop an entirely new distribution channel however this feat was most likely not reproducible by many other organizations.
Bargaining Power of Suppliers
Most of the products that grocery retailers acquire products from have very limited power. This stems from the fact that there are a large number of vendors who compete in virtually every product category. Despite some locally grown fresh products, such as fruit and vegetables or milk that must be sourced from local distributors most vendors are largely price takers. In fact, companies like Wal-Mart have been known to dictate the terms to their suppliers. Therefore, Webvan had a large pool of suppliers which will compete for their business. The case notes that Webvan had already created strategic partnerships with companies such as Pillsbury, General Mills and Proctor & Gamble.
Bargaining Power of Buyers
The bargaining power of buyers is incredibly high in this industry. Although do not directly negotiate prices, there are relatively low switching cost when moving from one vendor to another. Many of the products and the distribution channel are fairly well standardized and consumers can shop for the same product or something similar at a wide variety of different locations either online or through brick and mortar establishments. If customers are not completely satisfied with the online service, there are low switching costs to go back to their previous vendor. Furthermore, it is also difficult to retain customers because of the low switching costs. Many consumers are price sensitive because of the ease of switching.
By the year 2000, it was estimated that about half of all home in the U.S. would have a computer at home and about sixty million people would have access to the internet. In 1998 the average internet user was spending close to an hour a day working online. The most common category of internet user was those in urban or suburban areas with incomes that exceed fifty thousand dollars per year. A majority of this demographic was also college educated. Suburban families would likely spend over one hundred dollars per grocery order. In a majority of these families females generally made online purchases and typically within the hours between 8:00 and 1:00. Many of these families had a stay at home mom who placed tremendous value on free time and would make an ideal target market for the company to pursue.
Webvan's two main competitors are Peapod and Home Grocer. Peapod is the larger of the two vendors and has been able to reach a level in which they can provide some quantities of scale. Peapod adds value to consumers by…[continue]
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