Commentary: Webvan should shift thinking

Consumer e-commerce dot-coms such as Webvan will not survive simply by raising more capital--they must shift their business models to focus on what they can do best.

A year ago, just as the dot-com bubble started to burst, Gartner was told by one dot-com executive, "Sure, if you call running out of money and not turning a profit 'failure,' then we've failed. But to me it just means we're just undercapitalized." That type of attitude has prevented many dot-coms from coming to grips with flawed business models. Those who go along with such thinking and pump in more money become enablers of a business situation that can never improve or change for the better.

	See news story: Webvan scales back, names CEO

Gartner believes that just investing more in Webvan will not solve its basic problem. Internet delivery companies, such as Webvan, Kozmo and PDQ have provided a wonderful service that many customers enjoy--but not often enough. Moreover, it is difficult for players in this business to expand into new markets without investing in expensive infrastructure.

However, companies could improve on their business in two ways. First, they can greatly expand services and sales of products that can be sent to customers via standard shipping. In that way, they can achieve economies of scale.

Second, they can establish links, partnerships or physical stores that can form a consistent and cost-effective base. Examples of this approach include Amazon.com's partnerships with Borders Books and Toys "R" Us--both brick-and-mortar retailers. Amazon had to make that kind of move to create the underlying steady cash flow it needs to support the virtual business model.

For Webvan's business, established grocery chains have a much better chance of getting Web operations to work--they have brand recognition and a customer base, and they can operate at far lower cost.

As another possibility, Gartner would not be surprised at some point to see a franchise approach. The Web infrastructure of a dot-com could be used as a central ordering hub for local franchisees, which would get exclusive rights to an area and freedom to develop the local delivery route. They could shop for stock wherever it made sense and charge a fair fee for services rendered. That would be a much more cost-effective way to grow than the central warehouse approach.

Either way, the lesson is clear: Brick and mortar companies still have value, while virtual businesses that require strong logistics support do not seem to work very well. The brick-and-mortar companies are having the last laugh, and many dot-coms have nowhere else to turn.

(For related commentary on dot-com meltdowns, see TechRepublic.com--free registration required.)

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