Webvan has pulled out of Atlanta and Sacramento.
The closure of its Atlanta, Georgia operations will be a bitter blow to the company. The warehouse was opened at the cost of $40 million only last year, and was the first full-scale facility to built after its original launch in Oakland, California. The closure will involve the lay-off of most of its 885 employees.
Webvan blames its downfall on weaker than expected sales, which it says are the result of lower than expected retail prices in the area. It also blames Georgia state law, which prohibits the home delivery of alcoholic beverages that make up as much as 7% of order value in Webvan’s other markets. But these factors are fairly lame excuses as they were entirely foreseeable before Webvan set up shop. The real reason for its demise is that Webvan’s high cost model has failed to attract the large number of frequent customers it needs to survive.
Atlanta is not Webvan’s only problem. Only two days ago Webvan decided to close its doors in Sacramento, blaming lower-than-expected sales. In truth high costs were also a factor, as the company needed to ship goods from Oakland, undermining its already low margins. The company also recently withdrew from Dallas and faces serious challenges in its quest to make profits in San Francisco and Seattle. The one bright spot is that its depot in Fullerton, Southern California has begun to generate positive cash flow.
During Q1, Webvan spent some $97 million – too much of it on an advertising campaign that it could ill afford – leaving the company with just $115 million in the bank. This rate of spending suggests that the company could well run of cash by the summer, forcing it to ask investors to bail it out once more. Whether they would be prepared to do so is unlikely. At the end of the day, Webvan may be forced to concede that its high cost model just isn’t viable.
