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Webvan faithful bemoan their loss

Hordes of fans, from harried yuppies to the elderly, are lamenting the fact that they will have to return to their old way of grocery shopping.

    As an undergraduate student at Georgia Institute of Technology, Pablo Macouzet Jr. used to suffer through crowded subways, crushed eggs, and armfuls of plastic bags in order to stock his fridge--until he discovered online grocer Webvan.

    "I thought it was a great convenience for college students like myself," said Macouzet, a 20-year-old industrial and systems engineering student in Atlanta. "I did not have access to a car, and I thought it was the perfect way to do my grocery shopping. The prices were comparable to the local grocery stores, and I could do my shopping anytime I wanted."

    But the struggling e-commerce company from Foster City, Calif., ceased operations Monday and announced plans to file for Chapter 11 bankruptcy protection. Its demise means that Macouzet and other Webvan zealots must return to more inconvenient shopping tactics, usually involving a car or walk to the local market.

    Hordes of faithful Webvan fans--from harried yuppies who don't have time for shopping to elderly people who no longer drive--bombarded online chat groups Monday to bemoan their loss.

    The failure of Webvan--a company that customers generally applauded--raises troubling questions for e-commerce companies trying to establish brand identity and profits chiefly through customer service. Companies ranging from e-commerce giants Furniture.com and Amazon.com to smaller players such as Petopia and Kozmo have touted customer service, but Wall Street has increasingly turned a deaf ear to that strategy.

    Experts say that executives banging the customer service drum should take Webvan's demise as a clear message from investors: The days of brand building and market share ended more than a year ago, and companies that have not already switched to a profitability-oriented business strategy will quickly follow in Webvan's footsteps.

    "Any business could provide infinitely good customer service. But in reality you have to balance the need to serve customers with profits," said Steve Heckler, president of WestLake Internet Training in suburban Washington, D.C., and an expert on online customer service. "The biggest thing this teaches us is that customer service is important--but only to the degree that it's one tool to build a profitable business. It's not a means to an end."

    Webvan's demise may also portend an unhappy fate for other companies that strive chiefly for a happy clientele. Often, e-commerce companies fail to extend their brand identity outside of a relatively small segment of consumers, so they never make up small margins with large volume. Although Webvan was popular with people who could afford its delivery fees or who did not have a means of shopping in a traditional store, for example, it never truly penetrated mainstream America--a requirement in the grocery industry, where products' profit margins rarely exceed 3 percent.

    According to research from New York-based Cyber Dialogue, it is unlikely that any online grocer will catch on with a broad spectrum of shoppers. Although 24 million American adults seek information related to the purchase of major supermarket categories online (such as gourmet food or beauty products), few actually purchase these categories online. Only 34 percent of those shopping for groceries online actually purchase them online, Cyber Dialogue found.

    More ominously for e-commerce companies, researchers also found a similar trend for non-grocery shoppers. Although they may use the Internet to research new cars, bicycles or salsa online, they rarely finalize the deal via e-mail or the Web. According to Cyber Dialogue, 57 percent of all "Internet-influenced dollars" are spent at traditional, brick-and-mortar retailers.

    Webvan's problems may have been compounded by the shifting demands of Wall Street. When Webvan went public in November 1999, investors demanded that it build its customer base at any price. Like many e-commerce companies that came of age in the late 1990s, it felt little immediate pressure to produce profits and concentrated instead on building customer lists, creating marketing promotions, and compiling consumer profiles.

    Wall Street changed its thinking in early 2000, when a stock market collapse particularly stung e-commerce companies. Webvan investors demanded that the company produce profits, which required executives to revamp their growth-oriented business strategy.

    Once focused on acquisitions and building customer lists, the company found it tough to rein in costs and focus on purely financial benchmarks, said Ken Cassar, a Jupiter Media Metrix senior analyst. In June 2000, Webvan bought rival company HomeGrocer.com in an all-stock deal valued at $1.2 billion. Several analysts criticized the deal at the time, saying it tied up too many resources and could divert the company from profitability.

    "The problem that Webvan had is that, while there were a number of customers who absolutely loved it, it was built to be a company that millions of people loved," Cassar said. "Investors funded the company because it promised to be very, very aggressive, but then investors changed gears and wanted companies to be profitable. Webvan couldn't make the switch."

    After Wall Street's change of heart, Webvan fell into an unlucky catch 22. The company tried to whittle its selection and simplify its supply chain, mainly to reduce costs and please investors. But in the process, it may have alienated discriminating customers such as Chris Knight.

    The 31-year-old Cupertino, Calif., resident used the service in the winter of 2000 and in early 2001, chiefly because Webvan delivered products unavailable at local markets. Knight also used the delivery service for heavy items but stopped in the spring of 2001, when Webvan stopped offering some of Knight's favorite gourmet products.

    "We witnessed continued reduction in their selection, eventually eliminating most of the products we enjoyed purchasing from Webvan," Knight said. "Personally, I don't understand why they couldn't stock a very large variety of non-perishable products, given that they warehouse their products and are not limited to the location, shelf space and layout restrictions of a traditional market."

    Other customers and potential customers were turned off by another of the company's tactics to reach profitability. In November, Webvan began charging $4.95 to deliver orders that did not meet a $75 minimum. Although some Wall Street analysts approved the deal, customers had become accustomed to free delivery and generally frowned on the fee.

    "I kept intending to sign up with them, but the coupon I had required a $75 purchase, and I wasn't sure I wanted to spend $75 on groceries with a company I had never used before," said Sandra Vannoy, 34, of San Diego. "Then a few people reassured me of their quality, and I had decided to order from Webvan, but it was too late."

    The company was soon forced to scale back even further. In April, COO Robert Swan succeeded George Shaheen as CEO after Shaheen resigned, and the company cut 885 jobs and ceased service in Atlanta.

    Despite making high-profile strategy tweaks to please Wall Street, Webvan never persuaded investors it could reach profitability. In April, Webvan's auditor expressed substantial doubt about the company's ability to survive in a filing with the Securities and Exchange Commission. In late June, shareholders approved a last-ditch plan for a reverse stock split to ward off banishment from the Nasdaq Stock Market.

    Webvan's competitors have not fared much better. The number of companies competing in the niche is dwindling, and many start-ups have pulled out of regional markets. That is largely because the strategy of building $30 million warehouses and trucking groceries to customers' front doors has proven too costly and has lured too few consumers for Internet-only grocers to survive, according to a May report from Jupiter Research.

    In October, WebHouse Club, an affiliate of Priceline.com that offered a name-your-price gasoline and grocery service, shut down. Streamline.com, an online grocer based in Westwood, Mass., began shutting down in November. ShopLink.com, a regional online store that served New York and three New England states, notified customers only days later that it, too, would fold.

    In April, PDQuick began winding down operations, closing some of the 16 brick-and-mortar stores it operates in the Los Angeles area. In March, Webvan rival Peapod stopped service in San Francisco after reporting its biggest quarterly loss and warning that it would run out of cash by the end of the year without additional funding.

    But Skokie, Ill.-based Peapod still delivers groceries in several regions, including Chicago, Boston and parts of Connecticut and the Washington, D.C., area. In May, little-known Aliso Viejo, Calif.-based Web delivery company WhyRunOut.com acquired PDQuick, and the company resumed service to several counties in Southern California.

    Although they may understand Wall Street's logic, Webvan's legions of fans are not comforted by the company's demise. Many complain that Wall Street's fickleness has left them without a favorite shopping tool that saved them time, gasoline and hassle.

    "I now have to dedicate a greater portion of each week to shopping at the grocers...It'll put me back on the road running between each store instead of being able to order everything I needed from a single source," said Steve Greenfield. The 39-year-old San Jose, Calif., resident has seen plenty of e-commerce companies go out of business in recent months, but Webvan's failure struck him as particularly inconvenient.

    "To sum up this particular dot-com failure," Greenfield said, "Damn. Damn. Damn."