Online grocer Webvan Group Inc has plugged the plug on its remaining Internet operations after a significant second quarter slowdown and revealed that it intends to file for protection under Chapter 11 of the US Bankruptcy Code.

Launched in 1999 during the height of online optimism, and with about US$800m in funds from venture capitalists and Wall Street, Webvan offered a whirl of revolutionary promises. At one point, the e-tailer served markets in Chicago; Los Angeles; Orange County, California; Portland, Oregon; San Diego; San Francisco Bay and Seattle.

The reluctance of US consumers to abandon their bricks and mortar supermarkets in favour of home delivery was deeper rooted than the company thought however, and CEO Robert Swan said that there are no plans to resume operations.

Reading from prepared remarks, Swan commented: "We have made the difficult decision to end all operations effective immediately and to wind down the company's operations and sell our assets in an orderly manner."

Second quarter slowdown

The drop in order volume during the second quarter has been blamed as the catalyst for the decision to shut up shop, which was made during a board meeting on Friday. Swan notes that the number of orders had "declined considerably", accelerating Webvan's need for capital. "At the end of the day," he mused, "the clock has run out on us." Almost all of the US$1.2bn put up by investors has been spent and the group's investment banker Goldman, Sachs reportedly told directors that it was unable to find further investors.

Meanwhile spending cutbacks in marketing departments and last year's merger with Seattle-based competitor HomeGrocer were not helping to control the sales figures as they continued their downwards spiral.

Swan focused on the achievements of the company. "Webvan has weathered numerous challenges," he said: "We've made significant progress in reducing our operating losses and burn rate, as well as improving the economics on each order we delivered." But the crux of the matter is that Webvan never came close to solvency. Webvan's founder Louis Borders had promised to become profitable in every market after a 15-month set up period, but in reality none of the company's sites turned a profit.

For the first quarter of this year, ending 31 March, Webvan posted a loss of US$217m (€256.1m) on sales of US$77.2m. In April, the grocer closed its Atlanta operations and cut back on 30% of its work force. In its most recent quarterly filing with the US Securities and Exchange Commission (SEC) liabilities listed as of 31 March totalled US$96.5m.

In November 1999, Webvan was publicly traded on the stock market for the first time, and it hit the ground running. Just four months after its first groceries had been delivered; its public offering valued the company at US$7.5bn. Shortly after the IPO, some of the savviest investors were parting with US$34 for a share in the innovative grocer. In stark contrast Webvan's shares have languished below US$1 throughout this year. Trading was halted yesterday [Monday] and Webvan now expects its common stock to be delisted from the Nasdaq Stock Market.
 
Workforce woe

Webvan can now claim the dubious honour of being the largest loser in the dotcom world, both in terms of financial losses and the number of redundancies among its workforce.
 
The closure will lead to the loss of about 2,000 jobs. An anonymous benefactor has put up US$1.35m to give every hourly employee a leaving "gift", but while Webvan workers will be paid through to last Sunday, there is not enough money left for official severance packages.

Those consumers who have placed orders recently will not be receiving their goods. The perishable items have been donated to food banks, the remainder will be returned to the manufacturers. The company also revealed that the 1-for-25 reverse stock split recently approved by its stockholders would not be implemented.

E-grocery glitch?

Filing for protection under Chapter 11 is a common move among companies that need some space to reorganise their operations. It keeps the creditor wolves away from the door and lets the company stay in business. There can be little doubt that for Webvan however it is the final recognition that in the current climate the ambitious aspects of its e-grocer business model simply cannot compete against the traditional, low margin supermarkets.

For companies such as Peapod and Safeway still competing in the Internet field, Webvan offers a cautionary tale. Not least, it seems, in the warning that e-grocers must appreciate that their overarching focus must be not to create and cater for a mass e-market but to carve out a successful niche.

By Clare Harman, just-food.com editorial team