Given the razor-thin margins in both the online and brick-and-mortar grocery market, Webvan's national expansion plans are indeed ambitious for a privately held company that began operating about five weeks ago. Webvan delivers fruits, vegetables, over-the-counter drugs, and other groceries in the San Francisco Bay Area. Analysts estimate that it services about 10,000 customers.
The billion-dollar strategy is raising eyebrows, given that the online grocery market is likely to grow to $3.5 billion in 2002 from $350 million in 1999, according to research released earlier this year by Jupiter Communications. The forecast figure represents less than 1 percent of the total grocery market in the United States, said Jupiter's digital commerce analyst Michael May.
"It's an extremely complicated and competitive market, but I think it is a good idea to use distribution as a Trojan horse into the home to sell a range of categories beyond groceries," said May.
"Distribution is expensive but leveraging that distribution across health and beauty products, dry-cleaning, and other services that can be picked up and dropped off would help defray those distribution expenses," he said.
Until now, online grocers have staked regional claims: Webvan in the San Francisco area, Netgrocer in New York, Peapod in Chicago, and HomeGrocer in the Seattle area. Webvan's next target is Atlanta, and it is deciding which markets to enter afterward.
"We certainly think our warehouse systems will overpower our competition," said Webvan's vice president of marketing Chris Mannella. "The size of our distribution centers will allow us to push through a higher volume of groceries and deliver benefits to a larger number of clients."
But Webvan and other online grocers have more than their own kind to face. Some major brick-and-mortar players are nervously watching how the segment shakes out before perhaps jumping in.
"If the [national grocery chains] feel a threat coming from the online category, you can be sure they are going to leverage both their purchasing power as well as their relationship with suppliers and wholesalers to battle the space," said Jupiter's May.
David Simons, the managing director of equity research firm Digital Video Investments, notes that Webvan is "less an Internet business per say than it is a distribution business which is taking advantage of the Internet."
The company is one of a small handful of Internet companies making the ultimate Internet brick-and-mortar play, he said.
For example, online retailer Amazon.com raised about $1.25 billion in junk bonds in January to finance an automated distribution center and to fund international expansion. Although Amazon has so far shown that it can compete and even overwhelm the nationally branded land-based booksellers as they migrate online, analysts note that the grocery business is a little different.
While books and CDs are the same across the country, there are regional culinary preferences and tastes. Here, analysts agreed, local branding and regional players could put a dent into Webvan's ambitious plans.
"In order to compete regionally, Webvan, as they plan to, will have to make tremendous investments in infrastructure," said May. "But they will have to face the distribution network of each regional player in any attractive market."