Webvan is a name synonymous with dotcom failure. At the turn of the millennium, the heavily funded startup and its many investors bet that the time was right to sell groceries online. They were wrong. Very wrong.
But more than a decade later, tech-savvy retailers and retail-savvy tech companies are ready to try again. In San Francisco, bright green Amazon Fresh trucks rumble through downtown, delivering groceries straight to apartment doors. Walmart is sending its own grocery trucks down the same streets. Even eBay and Google will bring packaged food right to your door. And at least one app-powered startup -- a latter-day Webvan in spirit, if not in strategy -- promises to deliver nearly any groceries you want.
Online grocery shopping is back. The question is whether it will work this time.
Apoorva Mehta thinks so. He's the founder and CEO of Instacart, a San Francisco startup that will buy all your groceries from your favorite store and deliver them within an hour or two. "We're in the early stages, but we have the data to prove this is becoming more and more mainstream," says Mehta, who knows something about delivery and efficiency as a former developer of software for Amazon's order-fulfillment operations. "Grocery delivery is going to be the way people get their groceries."
Though Mehta won't share exact numbers, he says his 18-month-old company is delivering groceries to a measurable percentage of San Francisco households, and he believes that, unlike Webvan, it will continue to grow. The difference is that Instacart isn't trying to build a delivery infrastructure from scratch. It's operating much leaner than Webvan, tapping into existing infrastructure to get the job done.
Big companies like Amazon and Walmart, meanwhile, have already invested so much in delivery infrastructure for other businesses, and they have the dollars needed to ensure they can take groceries the last mile. The differences between Webvan and these modern grocery outfits highlight just how much technology, and attitudes, have changed over the years, and why online groceries could have a more realistic chance of succeeding today.
Back in 1999, Webvan decided the path to success depended on its own infrastructure. As was the norm back then, the company went public before it had proven it was a viable business, then proceeded to invest its capital in warehouses and fleets of delivery trucks. The strategy was much like the way Amazon approached books when it started in the mid-1990s, except that Amazon was able to contract the shipping to UPS. Webvan didn't have that option. Weighed down by those upfront costs, tepid sales sent the company hurtling into bankruptcy less than two years after its IPO, as it racked up hundreds of millions in losses.
"While the company built up its empire of tech warehouses and fleets of delivery trucks, shoppers weren't signing up quite so quickly," WIRED noted in a 2001 article on Webvan's epic demise.
Just a Smartphone and a Car
Instacart, by contrast, exemplifies the lean strategy of today's tech startups, which are cautious to avoid the excesses of the first dotcom crash. Whereas Webvan built warehouses, Instacart opted to use existing fulfillment centers -- a.k.a. grocery stores. Working with such chains as Whole Foods and Costco, as well as local independent grocers like Berkeley Bowl, Instacart streams inventory lists from brick-and-mortar stores to its mobile app. Users can search the inventory and fill their in-app shopping carts just as they would on Amazon. They can also make custom requests and identify acceptable substitutes, since the order is going directly to a real person who will act as an offline surrogate, filling an actual cart in the store's aisles.
Instacart saves millions in startup costs by not having its own facilities or inventory. What's more, it relies on an Uber-style "sharing economy" model for its labor force. Workers log into the Instacart system when they're available to shop and take orders. Instead of warehouses, trucks, drivers, and servers, all Instacart needs to operate are people with smartphones and cars.
Mehta says Instacart's leanness gives it the flexibility to offer the widest selection, thanks to the variety of stores on its platform, and the fastest delivery times, since its workforce is out in the world instead of waiting at some central hub. He also believes that online grocery delivery will push into the mainstream this time around because customers and workers are carrying mobile devices.
When Webvan started, Mehta says, "people didn't even necessarily have broadband," much less a handheld computer that could do most of what a PC does. Plus, most people still weren't used to shopping on the internet.
"The behavior to transact online was not there," Mehta says. Nowadays, "people are transacting more and more on mobile devices, making it a very seamless experience."
A $1 Trillion Market
Meanwhile, the company that has played a more pivotal role than any other in acclimating the world to shopping online is also moving into groceries -- if rather gingerly. During its first ten years, Amazon raced to expand from an online bookseller to an online seller of just about anything -- toys, electronics, jewelry, housewares, music, and movies. For groceries, on the other hand, Amazon spent years testing its delivery program in its home city of Seattle before launching its Amazon Fresh service in Los Angeles last spring and in San Francisco in December. That the world's most successful online retailer has taken such cautious steps is an indication of just how difficult groceries can be.
"I'm not sure why Amazon thinks this is a great sector to play in," says Sucharita Mulpuru, a retail analyst at Forrester Research. "It's very capital intensive and there are probably better ways for them to use their money."
But it is moving forward, and this shows that the company sees promise somewhere. Mulpuru surmises that Amazon is betting it can use its heft to change the landscape for groceries as it has so many other consumer product categories. The prize is a big chunk of the $1 trillion grocery market.
Like Instacart, Amazon has much less at stake than Webvan. Much of the infrastructure it needs is already there. It has to add its own delivery trucks, but groceries aren't the only reason Amazon might want to build out an alternative to UPS and FedEx. What's more, if groceries don't work out for Amazon, its core business doesn't suffer.
Amazon may also succeed based purely on reputation. As the default destination for online shopping, due largely to its relentless reliability and efficiency, shopping for groceries on Amazon might seem like a natural extension of shopping for everything else.
"Consumers are far more accustomed to e-commerce overall than they were in 2000," says Jason Goldberg, vice president of commerce strategy at Razorfish, a digital agency that traces its own roots back to the early dotcom days. Goldberg points out that back then, companies had to preach the gospel of online shopping to get anyone to buy anything online. Now he believes resistance to shopping for groceries online is finally fading. "I don't think Amazon, Walmart, or Instacart, will have to evangelize in the same way their predecessors did."
The Walmart Delivery Zone
During the past two decades, Walmart has upended the grocery industry by applying the same aggressive pricing strategy it used to capture the market for everyday consumer goods. In the process, the discount chain has become the nation's largest grocer. It's an example that can't be far from the mind of Amazon CEO Jeff Bezos. And Amazon is clearly on the mind of Walmart, which dominates overall retail sales but lags far behind Amazon online.
Like Amazon, Walmart is moving slowly into online grocery shopping and delivery, testing the Walmart To Go same-day delivery service in San Francisco, San Jose, and Denver. It recently began offering an interesting new service in some of its Denver-area stores that combines online shopping with offline pickup. Instead of ordering groceries online for delivery to your home, you can have the company gather and bag your order and place it in a designated delivery zone outside a local store for pick-up.
Beyond saving the time otherwise spent in store aisles, this hybrid service eliminates a subtle but key hurdle to selling groceries online: Where they go when they're delivered. Unlike a cardboard box containing a book or pair of shoes, a delivery driver can't leave a carton of milk or package of chicken breasts on the porch. Amazon is trying to overcome this problem using insulated bags chilled by bottled water. But for many shoppers who don't want to come home to see their orders spoiled, grocery shopping online means being home to receive the order, which removes one of the key conveniences of online shopping.
The Persistent Appeal of In-Person
This long list of complexities help to explain why, while some traditional grocery chains do offer online ordering and home delivery, few seem to push the option hard. "Warehousing and delivering perishables is still more expensive than other product categories," says Goldberg, who points to some bright spots such as dotcom survivor Peapod, which delivers an estimated half-billion dollars of groceries bought online for the Stop & Shop and Giant grocery chains.
Instacart hopes it can be the bridge that lets far more chains finally bank the efficiencies online retail makes possible without the accompanying costs. It recently expanded into Chicago and Boston, Mehta says, where it's seen even faster growth than it had in the early-adopter haven of San Francisco. Mehta says the harsher winter weather in those cities is one reason. Instacart has tracked orders going up as the weather worsens. That kind of convenience, combined with its promise of the shortest wait possible, give him hope that Instacart's minimalist strategy will be the approach that finally makes grocery shopping online mainstream.
But aside from perfecting the logistics, both startups and the biggest retailers have one more obstacle to overcome. Much like clothes, which remain a tricky sell online, grocery shopping typically involves gathering lots of information you can't get without directly engaging your senses. Buying, say, a box of cereal online is no big deal. Cheerios are Cheerios. But selecting anything fresh, the stuff you find at the perimeter of a grocery store, still involves a degree of subjectivity. We want to examine the apple, inspect the best cuts of beef. And it's not just about concern over quality. For many of us, going to the market--perhaps the oldest form of human commerce--is a distinct pleasure we would be reluctant to give up.
"In the U.S., grocery shopping really isn't that hard, expensive or inconvenient for most people," Mulpuru says. "That's really the heart of why it's been tough to grow much in this space."
At the same time, Goldberg points out, "we all used to get our dairy delivered to the front porch." In the U.S., that practice had faded by the 1960s, replaced by the supermarket. In other words, consumer behavior can change, and maybe it will change again. Perhaps all that was needed for the return of the modern-day milkman was a smartphone.
