Will Net grocery shopping ever take off?

Borders co-founder plans online megagrocer -- but moving food shoppers online is still a battle.
Written by George Anders, Contributor on

FOSTER CITY, Calif. -- Louis Borders is a little nervous. The 50-year-old former chairman of Borders Books is about to open a new store, something he has done dozens of times in his career. But there has never been a shop quite like the one Borders is masterminding this time.

His latest project is Webvan Group Inc., an Internet megastore that wants to sell $300 million a year of groceries from a single giant warehouse in Oakland, Calif. If it thrives, or even if it doesn't, Borders plans to open another enormous grocery warehouse in Atlanta a few months later. Down the road are plans for at least 20 more such facilities throughout the U.S. in practically every city big enough to support a major-league sports team.

Net groceries: Nothing but trouble?
Webvan won't open its Web site for at least a month. But it has already attracted $120 million in funding -- a huge amount for a start-up -- from such high-profile backers as CBS Inc., Knight-Ridder Co., Softbank Corp. of Japan and two of Silicon Valley's top venture-capital firms. Nearly half that money has been spent already, much of it on the Oakland warehouse, a 330,000-square-foot behemoth adorned with five miles of conveyor belts and $3 million of electrical wiring.

As a result, Silicon Valley and the grocery business are buzzing about Webvan's prospects. If the startup succeeds, venture capitalists say, it could become the biggest consumer company in cyberspace. If it stumbles, it could become the Internet era's equivalent of "Waterworld" or the Hindenberg dirigible: a disaster so epic that it becomes an American legend.

Even so, the Internet's elite is being drawn to the grocery business. This week, reports surfaced that Amazon.com Inc. is preparing to invest in HomeGrocer.com Inc., a small Seattle online supermarket. Both Amazon and HomeGrocer called the reports "speculative" but didn't deny that they are in talks.

Webvan officials acknowledge they are roaring into an industry that has been nothing but trouble for Internet entrepreneurs. In other markets, ranging from computers to books, selling online can be cheaper and easier than running traditional stores. Not so in the grocery business. Online merchants must pack shopping carts with customers' orders and then run a private delivery service -- two big costs that don't exist for traditional supermarkets.

What's more, moving food shoppers online is a "massive uphill battle," says Kate Delhagen, an analyst at Forrester Research Inc., Cambridge, Mass. Most people don't want to pay surcharges to support online grocery delivery, she says. The handful of rich, on-the-go shoppers who don't mind paying extra have maddeningly high service standards. And in the grocery business, one poorly packed fish delivery is enough to lose a customer forever.

Shopping with conveyor belts
The best-known online supermarket, Peapod Inc., had a $21 million loss last year on revenue of just $69 million. Another competitor, NetGrocer Inc., was forced to modify its offerings and lay off employees last fall when results fell short of its plan. A handful of established supermarkets are dabbling in online retailing, but none have had any great successes yet. Typical is Albertson's Inc., which is testing an Internet store in Dallas for nonperishables only. "We aren't yet convinced that perishable items can be delivered reliably," an Albertson's spokeswoman says.

Webvan is betting it can beat the odds by approaching the problems differently from earlier entrants. Other online grocers have blundered by using individual "shoppers" to stroll through a grocery store or warehouse and fill each customer's cart by hand, Webvan officials say. That is easy to put into practice but unbearably costly. "You'll never be able to make that a high-productivity job," Borders declares.

Instead, Webvan has spent two years building an elaborate, mechanized warehouse where machines zip groceries around with hardly any human intervention. A single worker, standing at "Pod 3" in the midst of the Oakland warehouse, is surrounded by motorized carousels holding 8,900 grocery items, legions of conveyor belts, a host of electric-eye bar-code scanners and 16 bins that collect shoppers' orders.

In a single hour, Webvan officials say, that worker should be able to pack 450 grocery items for shoppers -- nearly 10 times the productivity of a traditional "shopper" wheeling a cart through a store or warehouse. Kevin Czinger, the company's chief financial officer, predicts that the automated warehouse will give Webvan a 10-percentage-point edge in profit margins over traditional supermarkets, allowing the company to keep prices down, avoid surcharges and cover its delivery costs with ease.

If everything goes according to plan, Borders declares, his Oakland facility should be profitable within six to 12 months. Other Webvan warehouses might break even in as little as 60 days. "I don't see any reason why an Internet company should take five to 10 years to be profitable," he says.

A hair-raising experience
But getting a company as ambitious as Webvan up and running is likely to be a hair-raising experience. Insiders say that some of their first attempts at designing a conveyor-belt system were laughably wrong and had to be scrapped. Even now, prototypes of the company's Web site are being fiddled with every day as programmers try to figure out where to put the salt, how many different spellings of ketchup to use and other diddly but crucial tasks.

In some cases, Borders's push for maximum selection and prestige has made his employees' tasks even harder. The company plans to run its own butcher shop, deliver live lobsters and keep a wine department stocked with 2,500 different vintages. Each of those tasks is chewing up management time as the launch date approaches, and some are highly unlikely to be major profit contributors. But "it's what we need to be a full-service grocery store," says Chris Mannella, the company's vice president of marketing.

Webvan officials say they are still adjusting prices, but they claim they will be competitive with local grocery stores and occasionally somewhat cheaper. On a 10-item shopping list including such staples as milk, diapers, steak and toothpaste, Webvan's charges totaled $41.88 -- nearly 12 percent below Peapod's cost for an identical basket of goods. Webvan says it won't charge users any membership fees and will waive delivery fees on orders over $50.

One of Webvan's most audacious claims is its assertion that it can schedule deliveries within a 30-minute window of customers' choosing. That's much more precise than other online grocers offer, and it will require a complex, hub-and-spoke delivery system.

To meet its schedule, Webvan will use big trucks to deliver dozens of grocery orders from the Oakland warehouse to 14 staging areas in the San Francisco Bay area. There, goods will be reloaded into smaller vans and taken to customers' doorsteps. Webvan says it thinks each of its 70 drivers can handle about 20 deliveries a day -- though rush-hour snarls could stymie that goal.

The investors with the biggest stakes riding on Borders are Softbank and the two Menlo Park, Calif., venture-capital firms -- Benchmark Capital and Sequoia Capital. All three declined to comment in detail about Webvan, but they are ardent believers in the business potential of the Internet. Collectively they are major backers of such highfliers as eBay Inc., Yahoo! Inc. and e*Trade Group Inc.

Even so, one venture capitalist associated with Webvan refers to the company as a "moonshot" -- his term for a daring but very high risk undertaking.

Borders says his ultimate goal is to use Webvan's home-delivery network to handle a much wider range of items than groceries. "I've thought about this a lot since leaving Borders' several years ago, he says. "Federal Express and United Parcel Service really aren't designed for the growth in home deliveries that is going to take place because of the Internet." Webvan, he says, could provide a way for all sorts of local merchants, ranging from dry cleaners to bookstores, to connect with customers online.

But first, Borders acknowledges, he has to show the world that his Internet grocery store will work. "When I talk to my old friends in the book business about this, they think I'm nuts," he says. And how does he respond? "Some days," he says, "I agree with them completely."

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