The final mile in online shopping

Webvan is not just another dotcom out of Silicon Valley. It wants to enter your home, become part of your life, your new best friend... then pull the rug from under every other retailer you normally buy from

Webvan - the name is purposefully vague so as not to be identified with any one product - launched its grocery business last June in San Francisco. A senior vice-president says with a straight face the company chose groceries because it's the toughest business around.

Webvan - the name is purposefully vague so as not to be identified with any one product - launched its grocery business last June in San Francisco. A senior vice-president says with a straight face the company chose groceries because it's the toughest business around.

Ultimately, the company wants to sell almost everything. It already stocks wine, office supplies, kitchenware and most recently, books. Soon to come: music, dry cleaning, film processing and prescription drugs. And that's just for starters.

"This is really a game-changing business model," says Lowell Singer, an analyst with Robertson Stephens in San Francisco.

The guiding principle is to control "the last mile" of Internet commerce - delivery - and in so doing become an integral part of people's lives. "Our delivery guys are every bit as important as the technology that runs this place," says Bud Grebey, corporate affairs director.

If there's an Achilles heel to the plan, it's the massive and costly infrastructure needed to support the operation. Unlike most e-tailers, it can't build a single warehouse and service the entire country; it must build infrastructure in every market in which it wants to compete. In the San Francisco market alone, the company has spent more than $35m.

And then there's delivery. For just one market, the company has leased 120 vans and hired 170 drivers (at $14 an hour plus the same stock option package given to all but the most senior executives). But as the Webvan sees it, their fleet accounts for more than a courier service: the ubiquitous vans, which deliver seven days a week from 7am to 10 pm, are a constant source of promotion. The drivers - thoroughly screened, trained and "empowered" - represent more than a means of delivery, they are the company's front-line of customer service.

A key part of the strategy is their pledge to deliver within a 30-minute window specified by customers. Gone are the days when companies could offer "to be there sometime in the morning". Route mapping software and sophisticated logistics give each driver a feasible schedule to make a delivery every 10 to 30 minutes. If the driver shows up even a couple of minutes late, Webvan will take $3 off the bill.

"We actually have the capability to offer a narrower window," says Mark Zaleski, the company's senior VP of area operations. "But our research showed that made people more nervous - they were afraid they might miss us."

In 1999 Webvan landed the former Anderson Consulting chief, George Shaheen, 55, as its CEO. Shaheen signed on for the relatively paltry salary of $750,000 plus a tidy 5 per cent of Webvan stock and options, currently valued at about $92.3m.

Webvan reaped huge dividends in November 1999, when in went public and raised $405m in working capital virtually matching the nearly $400m it had already in venture capital. The war chest will come in handy, with plans to spend about $1bn over the next three years expanding into 26 new markets across the US.

Ground zero for the Webvan assault is a surprisingly derelict industrial neighbourhood in Oakland - across the Bay from San Francisco with access to a market of about six million. The company's sparkling 330,000 sq ft distribution centre, though, is nothing like its dreary, dilapidated neighbours.

Inside, the facility resembles a cross between Willy Wonka's chocolate factory and Charlie Chaplin's "Modern Times". There are five miles of looping computer-controlled conveyor lines which send bar- and colour-coded crates filled with groceries whizzing about the plant.

The plant is divided into three sections with plastic "tote" cases, which hold the orders as they are filled throughout the warehouse, to match. Yellow is for the dry goods stored at room temperature, green is for chilled goods, and blue for frozen.

In fact, the latest marvel at the plant is the insulated blue totes which do away with the need for loose-packed dry ice previously used to keep frozen products cold. In a litigious country like the US, an accidental home delivery of something as hazardous as dry ice is a worrisome thing. Many of the company's trucks still contain stick-it reminders which read: "Don't bring dry ice into people's homes."

The most remarkable part of the operation is the massive, revolving carrousels which hold thousands of storage bins. Totes come to a stop on conveyor lines in front of the carrousels which automatically spin to a spot where the needed items are instantly accessible. Using this system, pickers can load 300-400 items an hour compared with about 100 per hour at stations with standard shelving.

But even the "standard shelving" is highly evolved. Products are organised according to buying patterns, not brands or product types. Stock pickers wear bar code readers which fit over their index fingers and attach to a console on their wrists.

The wristband screen tells what should be loaded next, and once the bar code is swiped, informs of the progress of the order. The scanner emits a piercing "beep" and the wrist screen flashes "error" if the wrong product is picked.

The distribution centre is said to have the capacity of about 18 standard supermarkets. It takes a staff of about 900 to operate the Oakland centre compared with about 2,400 needed to run 18 supermarkets - a 2.5 to 1 personnel advantage. The company also reaps huge savings in real estate, needing to purchase mainly inexpensive land far from urban centres.

But while sales have improved steadily - fourth quarter revenues were up 136 per cent at $9.1 million from $3.8 million in the third quarter - the company is bleeding money, losing $95m in the first nine months of operations. And there is little chance that will change anytime soon.

Though it claims each market should run positive cash flows within about a year of operation, Webvan as a whole probably won't be in the black for years. "That [net profit] is driven by our infrastructure rollout. I hope we grow so fast we never catch up to it in the foreseeable future," CEO Shaheen said in a recent interview.

Webvan also faces some tough competitors around the country. Homegrocer.com, Peapod.com, Netgrocer.com and Streamline.com among others offer similar services, though none is as well-funded nor offers delivery in a 30-minute window - a big competitive edge.

Josh Israel, a San Francisco psychiatrist, has ordered from Webvan three times and considers himself "hooked" on the service. The deliveries have all been on time - which is critical, because he schedules them for 7-7:30am, just 15 minutes before he leaves for work. The Webvan drivers, as they are supposed to, have refused his offers of tips, and the orders have been filled flawlessly.

His local supermarket is crowded, he says, parking is difficult and the last time he went there, two homeless men were fighting outside the front door.

"Who needs the grief," he says. "I'm not leaving my house again, the world's too crazy."