What lessons can be learnt from the biggest dotcom failure since the internet bubble burst? Julian Hunt reports Few people in the grocery industry on either side of the Atlantic can have been surprised ­ or all that upset ­ to hear the news that Webvan had made its final deliveries. The American pureplay internet grocer has been struggling financially for months, despite slashing costs and closing depots. And only last week it agreed to implement a 25-to-one reverse stock split to prevent its shares being banished from the Nasdaq. How quickly things change. When it launched early in 1999, Webvan was hailed by analysts, bankers and investors alike for exemplifying perfectly the way in which the internet was going to reshape our everyday lives. The firm quickly became one of the darlings of the new economy, and with plenty of blue-chip backers went public in November 1999. Within days, it was valued at $8.7bn ­ even though it had hardly sold a bean online. So how did this pioneer of the new economy meet such an ignominious end? Simple: there was never any logic behind its plan for taking on America's food establishment by opening fulfilment depots around the country and offering consumers the chance to buy groceries at supermarket prices with free delivery. Sure, Webvan managed to attract a loyal customer base of 750,000 shoppers over two years. And its distinctive tan and green delivery trucks soon became a familiar sight ­ particularly on the west coast. But there were not enough customers to make the Webvan model financially viable. For starters, its fulfilment depots were expensive to build ­ about $30m to $35m each ­ and costly to run. They also needed to handle huge volumes to be truly efficient. Delivering groceries in hi-tech vans within 50 miles of each depot only added to Webvan's overheads. That meant each delivery ­ according to one estimate ­ was costing the firm a crippling $25. Worse still, Webvan had to spend heavily on marketing to lure consumers away from better known supermarket chains, and then incurred extra costs in retaining them as loyal shoppers. And because Webvan lost money on every transaction, any success in encouraging more consumers to shop online or getting existing customers to spend more ­ vital if it was to achieve any sort of critical mass ­ only forced it deeper into the red. In such a low margin environment as grocery retailing, the Webvan model has proved to be a recipe for disaster. Losses for the three months ended March 31 were $217m on sales of just $77.2m. In all, losses totalled $830m by the time it closed for business. It has also managed to burn through almost $1bn of cash in two years. "The problem that Webvan had was that while there were a number of customers that absolutely loved it, it was built to be a company that millions of people loved," said one US analyst this week. Webvan's CEO Robert Swan believes that the idea was sound, but needed more time to be made to work: "Webvan has weathered numerous challenges and in a different climate our business model would have proved successful." But the truth is that Webvan would never have worked out. Its overheads were too high from day one and its prices never reflected the true cost of its operations. Building state-of-the-art fulfilment depots is fine ­ so long as you have tens of thousands of orders that need fulfilling; something Webvan never achieved. The firm last year attempted to improve its cost structure by belatedly charging a delivery fee for orders under $75. But that appears only to have alienated existing punters who had got used to free deliveries and put off newcomers. At the same time Webvan had to face up to the fact that traditional retailers were not going to sit back and let it recruit the customer numbers it required. The smarter operators are now pursuing a twin clicks and bricks strategy. But the cost of fulfilling their clicks element can be kept under tighter control through store picking and can be offset against the bricks side of the business. In many ways, Webvan was not entirely to blame for its downfall. When the business was launched in 1999 investors believed the priority was to build up the online brand and market share ­ at whatever cost. So they enthusiastically endorsed Webvan's aggressive expansion plans. When the dotcom bubble burst last year, investors wanted to see Webvan switch towards a more profit orientated strategy. Despite plenty of cost cutting, profit was something the online grocer was never likely to deliver. {{FEAT. GENERAL }}