Online grocer Webvan has closed its operations and filed for bankruptcy. It’s no surprise; the company has been dying for months. Webvan built hugely expensive distribution centers rather than employing pickers in local supermarkets, and online grocery is currently too small a market for this approach to be viable. But as the market matures, accounting for nearly 5% of US grocery sales by 2005, the warehouse approach may see a comeback.

Online grocer Webvan today confirmed media reports that it would shut down its operations and file for Chapter 11 bankruptcy, having closed its website at the weekend. The closure does not come as a surprise. While Webvan maintained it only needed $25 million to reach profitability, investors were understandably reluctant to pay up. After all, it had already managed to turn a billion dollars of cash into nothing.

Part of the demise is the traditional dotcom story of too much cash burn, too little revenue, and public distrust of online-only firms. But it also reflects the specific conditions of the online groceries market. Enough people loathe grocery shopping that ordering and picking groceries online should be profitable. But fulfillment is the key issue – you can’t send someone their weekly shopping through the post. Two models have been used: purpose-built distribution centers, as used by Webvan; and employing pickers in existing grocery stores, as used by the world’s leading online grocer, Tesco.

As shown by its recent alliance with Safeway to take on the US, not to mention the fact that its original UK operation is already profitable, Tesco’s model clearly has the upper hand at present. The reason? Each Webvan warehouse required 3000 orders a day to break even on operating costs. A store picking service costs next to nothing to set up. In a market that’s worth just $1.79 billion a year in the US, or 0.4% of the groceries market, minimizing upfront costs is vital. Store picking is the way for firms to make money while eGroceries is in its infancy.

However, Datamonitor expects the online groceries market to reach $32.3 billion in the US by 2005, representing 4.8% of grocery sales. Picking will start to become a more serious disruption to stores’ regular activities – and order rates may be consistently high enough to make distribution centers viable in some areas. Maybe Webvan’s biggest problem was trying to run before it could walk.

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