For Web Grocer, the Time Is Overripe

OAKLAND â€”  Sean Cumby hears the same kind of sympathy from his customers every day.

“Are you guys going to be OK?� asks Gillian O’Connell, a stay-at-home mom with a baby in her arms and a toddler at her feet in an upscale Oakland residence. “I’m very concerned.�

Cumby is a driver for Webvan, the online delivery service that has become wildly popular among shoppers who dread going to the store to buy groceries. Unfortunately for the company, the loyal support of its customers is not reflected in Webvan’s bottom line--it is losing $2.4 million per day.

Today’s Internet failures rarely elicit more emotion than a yawn. But for O’Connell and at least tens of thousands of other online-grocery buyers, Webvan is a lifeline--and living proof that the Internet can conquer one of life’s essential drudgeries.

Their loyalty is based partly on a rare quality for a dot-com: a human face. Cumby, a tall, 32-year-old former high school track star, is unfailingly polite and endlessly patient. He jokes and socializes with customers even after four trips up 35 steps carrying armfuls of bottled water and a week’s worth of groceries. Regular customers bond with Cumby or other drivers, and some rely on Webvan for nearly all of their food shopping.

But those coveted regulars are in short supply, and the future looks grim for Webvan. The company lost $217 million in the last quarter and could run out of cash by year’s end. Webvan’s stock has plummeted by 99% since its first day of trading in 1999, and the company’s chief executive recently quit.

The death toll for Internet retailers keeps rising. Since last year, 342 consumer e-commerce companies have folded, according to the analyst group Webmergers.com. The list includes Los Angeles-based eToys, and Pets.com--which spent heavily on ads to lure customers to cement brand loyalty. But they went out of business as customers kept searching for the lowest price and didn’t care which online service sold the product.

For an economist, an Internet failure is a cold statistic. But for someone working at a struggling dot-com, each workday becomes a personal challenge to find the discipline to keep working hard while hoping their company can find a way to stay alive.

Cumby, a Webvan driver since the service began two years ago, relishes the chance to prove doubters wrong. But his confidence in the company’s ability to survive has recently wavered. “Right now, the reality is it would probably take a small miracle.�

To try and hang on, Webvan’s strategy resembles an army in retreat. The company quit operations in Atlanta, Dallas and Sacramento and is circling its delivery trucks around seven remaining major metropolitan areas--Los Angeles, Orange County, San Diego, the Bay Area, Portland, Seattle and Chicago.

Meanwhile, Webvan competes in a business with razor-thin profits. Traditional grocery chains earn only one to three cents of profit per $1 of sales. Webvan hopes to do better by eliminating costly retail stores. But unlike other online stores, which rely on FedEx or other delivery services, Webvan handles its own deliveries--at great cost.

Ken Cassar, analyst for Jupiter Media Metrix, estimates that Webvan spends $103 to buy, sort and deliver $100 in groceries--not counting the cost of marketing, maintaining the huge factories, buying equipment, corporate overhead and the like. “Webvan is probably 10 or 20 years ahead of its time, and I don’t mean that in a good way,� Cassar said.

In a sense, Webvan’s couriers--with their uniform polo shirts and baseball caps--are an update of the old-fashioned white-capped milkmen who were driven out of business by supermarkets decades ago. But Webvan planned to succeed by replacing the entire market, not just the dairy case. Efficient online ordering and the lure of convenience, Webvan’s executives reasoned, would surely lure plenty of business from supermarkets.

But Webvan’s business model has so far failed. In the last quarter, excluding special accounting charges, Webvan spent $143 for every $100 of food sold.

Unlike most dot-coms, Webvan is largely a blue-collar company, and its rapid unraveling has dashed the dream of Internet riches for rank-and-file drivers and warehouse workers.

Jose Galindo, 24, was among Webvan’s original couriers. He enticed his computer-neophyte parents to become weekly customers, “except for a few items--my mom, being Mexican, needs some special items� that Webvan doesn’t carry, he said.

For a few fleeting months in late 1999 and early 2000, Galindo and Cumby were each worth a small fortune because of Webvan stock options. “The concept we had . . . was ‘Who wants to be a millionaire?’ � Galindo said. But he failed to cash any stock options when he had the chance.

“We all [believed] it was going to be bigger. So everybody held on to the options,� Cumby said.

So far, Webvan has lost more than $1 billion and laid off 1,200 workers across the country, including 150 in Oakland. So Cumby is more skeptical of management’s confidence that it will find white knight investors to deliver the $25 million Webvan says it must have to stay in business.

Employees “wonder if it’s really true,� Cumby said. “You’d have to be made of stone not to think of that.� But he added: “I like taking chances.�

His co-workers seem similarly upbeat, joking and laughing outside the company’s Oakland warehouse. “The customers make the job a lot easier and more fun,� Cumby said. “You’re always glad when someone’s happy to see you.�

And why shouldn’t customers be happy? Webvan’s prices are about the same as those at local Safeway stores, yet someone else picks, packs, drives and delivers--with a smile.

Yet Webvan is desperate to entice customers. Some consumers shun chains and online stores in favor of small local groceries, which they view as preserving community diversity. And for other shoppers, squeezing fruit and eyeing the right cut of meat involve intimate choices that they wouldn’t delegate merely for convenience.

“The notion that many of Webvan’s customers would shift their grocery bills to Webvan has played itself out,� said analyst Cassar. “This isn’t like book purchasing. . . . To get people to change their behavior on something this important to their lives is very difficult.�

Even Cumby doesn’t order from his employer. As a full-time courier and part-time student, he eats most meals out. “My motto is ‘don’t cook--no dishes to wash.’ �

Webvan’s strategy is unchanged: to combine unbeatable service with low overhead and high-tech efficiency.

The company’s $40-million Oakland warehouse--the size of seven football fields--is one of the world’s most advanced food factories, moving the equivalent stock of 17 supermarkets along miles of conveyor highways studded with scanners to track and direct every wine bottle and box of cereal. Nine massive carousels each move 5,000 bins of products into place automatically for easy stocking.

Each food picker--the personal shopper who fills orders for Webvan customers--traverses the warehouse selecting napkins, meat, fresh produce or other products found in a typical supermarket. The picker’s route through the cavernous facility is programmed for maximum efficiency by Webvan’s computers, then beamed via infrared signals to a small computer attached to their wrist. Pickers verify each item using a tiny scanner wrapped around an index finger.

“The system is very intricate--sometimes a little too intricate,� said Matt Mahood, the warehouse general manager. “If it was easy, someone would have done it before.� Webvan says software bugs and mechanical failures have occasionally disrupted its operations, and no one knows whether the warehouse systems can function at their capacity of 8,000 orders per day.

Drivers also carry hand-held computers; until they were upgraded last year, the devices would periodically lose an entire day’s orders. But newer devices have proved nearly foolproof.

In theory, Webvan’s technology radically cuts labor costs--if used well. At 9 on a recent morning, the huge Oakland plant stood nearly idle. Webvan’s current order volume can support only one full shift--8:30 p.m. to 6 a.m.

On a recent ride with Cumby, other inefficiencies seemed apparent. What with loading, driving, unloading, chatting with customers and refueling, he managed six stops in three hours. Cumby said that he typically can hit 20 stops a day--roughly one customer every 20 minutes. Yet a checker at a busy Safeway can serve a customer in less than five minutes.

When Internet money was flowing like bottled water, investors poured nearly $800 million into Webvan. So Webvan opened operations across the country and inked a billion-dollar contract to build up to 26 warehouses.

Then last fall, the company’s growth stalled as Internet stocks continued to plummet. At the same time, Webvan’s losses and layoffs piled up.

“We lost some good workers--I lost some friends,� said Cumby.

Safeway absorbed many Webvan employees who lost their jobs in Oakland, said a local Safeway store manager.

Cumby stayed on because he views Webvan as more exciting and flexible than his previous job as a supervisor at a courier service. A few drivers quit as Webvan’s prospects dimmed. But most are believers who want to prove Webvan to the world--even though the company has not taken any special measures to keep them in the fold, Cumby said.

And he even remained sympathetic when George Shaheen, Webvan’s former CEO who presided over the company’s collapse, took a golden parachute of $375,000 annually for life--or as long as the company survives. Shaheen “did what any smart businessman would do--he took the money and ran,� Cumby said. “I probably would have done the same thing.�

But sometimes the longshot of building a profitable business takes a toll. On occasion, “you do ask, what were they thinking?� Cumby said. Such as the time his bosses cut delivery times to raise productivity. “Out here every minute is important. You never know what obstacle you may run into�--a truck may break down, a customer may not show up. Drivers complained and the decision was reversed.

But enlightened management practices may not save Webvan from the disastrous blunder of blowing a fortune on an ill-fated national expansion before it had turned a profit in any region.

“My great-grandmother used to tell me all the time, ‘spend some, save some.’ That applies to business too,� said Cumby. “I don’t think [Webvan executives] figured that by this time they would be counting pennies.�

Cumby figures that if Webvan fails, someone will adopt the concept, make a few improvements and succeed. His confidence resonates with customers, because unlike a multitude of hair-brained dot-com ventures billed as world-changing ideas, Webvan seems to offer some tangible benefits. For each courier, 20 fewer cars per day clog roads and parking lots and 20 fewer shoppers slog through store aisles, fall prey to impulse buys or strain their backs hefting grocery bags.

The common sense of the Webvan ideal draws wide appeal. At the end of a recent run, Cumby stopped for fuel and a grizzled, white-haired station attendant leaned up to the window, cocked his head, smiled and said, “Hope that stock comes back up.�