By Greg Bensinger
George Shaheen built one of the most glorious flops of the
dot-com bust. Fifteen years later he is a believer again.
Mr. Shaheen is the former chief executive of Webvan Group Inc.,
the online grocery company that in less than three years burned
through more than $800 million in cash, went public, filed for
bankruptcy and then ceased operations.
Today, a new crop of companies are battling once again to drop
off eggs, cold cuts and milk at customer doorsteps.
"This is a service that somebody will figure out," said Mr.
Shaheen, now retired. "No one really wants to go get in their car,
drive to the store and go grocery shopping; this could save real
time for people."
Many investors are betting on Instacart Inc., a San Francisco
company that calls to mind Webvan if only for its soaring sales and
surging valuation.
Two-year-old Instacart is expected to announce on Tuesday it
raised $220 million in fresh funding from venture capitalists. The
round values Instacart at roughly $2 billion, up from $400 million
last June, according to people familiar with the matter. The
company says it expected $100 million in sales in 2014, about 10
times greater than a year earlier, but it is also unprofitable.
Webvan grew at a faster clip, generating $178.5 million in sales
in 2000, its second year in operation. Shortly after its IPO in
November 1999, it was valued at $8 billion.
Still, much is different about these two companies. And in that
way, Instacart stands as a metaphor for how the online business has
evolved over the course of a generation, driven by faster Internet
connections and the rise of the smartphone. In particular,
Instacart, like many online businesses today, vigorously pushes out
costs and risks to others.
Webvan racked up a $453.3 million loss in 2000, largely for
erecting and operating massive refrigerated warehouses with
high-tech conveyor belts that shuttled groceries to big trucks.
Each warehouse cost Webvan $30 million to $40 million to build, Mr.
Shaheen said, who has no connection to Instacart.
Instacart has a far different approach, taking advantage of
existing grocery stores by dispatching couriers to Whole Foods or
Safeway and delivering goods within an hour. The drivers are
independent contractors, meaning Instacart doesn't have to provide
them with salaries or costly benefits.
Venture capitalist Michael Moritz, whose firm Sequoia Capital
invested in both companies, says this system lets Instacart avoid
Webvan's "devastating cost structure."
Instacart charges $3.99 to $5.99 per delivery and makes money by
marking up many items and pocketing the difference--a gallon of
Safeway brand organic milk costs $7.39 through Instacart, compared
with $5.99 in store. The company generally pays the couriers a
minimum $10 per delivery as well as additional fees based on order
size and speed. Couriers say they also accept tips, which can bring
their earnings up.
Instacart also doesn't operate its own trucks--the drivers,
contracted employees, use their own cars and buy their own gas. Nor
does Instacart have to pay upfront to stock shelves, as Webvan and
brick-and-mortar grocers do.
Even so, Instacart isn't yet profitable, say people familiar the
matter, and not all orders eke out even a small profit.
For example, an order of 15 common items like frozen peas, milk,
cereal and fresh fruit costing about $68 from a San Francisco
Safeway store would yield Instacart a roughly $1.50 profit,
according to a Wall Street Journal analysis. If the order were
smaller by one 28-ouce jar of peanut butter, Instacart breaks even,
and a smaller order could push it into the red.
The grocery business is plagued by notoriously slim margins. The
trade group Food Marketing Institute estimates the supermarket
industry as a whole turned in a 1.3% net profit in 2013 on $620
billion in sales.
Those numbers haven't stopped venture capitalists like Mr.
Mortiz from taking a chance again. "After our experiences with
Webvan and the electroshock therapy we needed, none of us thought
we'd venture ever again into the grocery business," said Mr.
Moritz, who sits on Instacart's board. "The one thing we were very
right about is that if there is an easy and reliable way to order
groceries from home, the demand will be insatiable."
Instacart isn't alone. Amazon.com Inc., Fresh Direct LLC and
Good Eggs Inc. are all hoping to win with grocery delivery, not to
mention traditional retailers like Wal-Mart Stores Inc. and Safeway
Inc. Google Inc.'s current arrangement to deliver some groceries
from a Bay Area Whole Foods makes it Instacart's nearest
competitor. In San Francisco alone, there are at least six
different companies doing this kind of work.
Even Louis Borders, a Webvan co-founder, is exploring a delivery
service for groceries and other goods, using existing stores,
according to a description on his startup incubator's website.
Mr. Shaheen says one of Webvan's biggest problems was the speed
of Internet connections at the time, which were slower than the
modern broadband link. Today, customers can order from anywhere
using Instacart's app, while couriers can call to make on-the-fly
changes as well as scan items and use GPS for faster routing to
peoples' homes. That makes the process more appealing than during
Webvan's heyday, he says.
And because Instacart is partnering with grocers, which view it
as a means to bringing in new customers, it doesn't have to worry
about the day-to-day operational risks such as spoiled
tomatoes.
That dependency on grocers, however, is also a big risk for the
company. Instacart co-founder and Chief Executive Apoorva Mehta, 28
years old, said the secret sauce of the company is in its
dispatching software and the exclusive agreements it reaches with
grocers to integrate into their register systems, helping them
monitor inventory and speed up checkout.
Fairway Group Holdings Corp., which operates a chain of grocery
stores in the New York City area, said it has added new customers
as a result of its eight-month-old partnership with Instacart.
"Our goal was to increase same-store sales by enabling customers
who didn't necessarily have convenient access to a store to still
shop with us," said Jackie Donovan, Fairway's marketing vice
president. "Instacart told us we could see a 50% increase in
incremental business, per store, and that's what we've seen."
Not all are so sanguine about Instacart. When the company tried
to expand to Chicago in 2013 by using Trader Joe's stores, the
grocer blocked the effort until a formal agreement could be
reached. Instacart is still not delivering goods from Trader
Joe's.
A Trader Joe's spokeswoman didn't return a call seeking
comment.
Today, Instacart operates in about 15 U.S. metropolitan areas,
more than double Webvan's total when it folded.
Instacart is also experimenting with embedding workers in
stores, such as 28-year-old Erica Jazayeri who winds her way
through a San Francisco Whole Foods six hours a day.
On a recent afternoon, Ms. Jazayeri plucked three pounds of dry
spaghetti, a jar of olives and a box of aluminum foil, among other
items for a customer, and scanned each bar code on her phone. Then
she checked out the roughly $80 haul at a dedicated Instacart
register, bagged it and stowed it on a shelf for a driver to
collect and deliver.
Ms. Jazayeri, who has worked at Instacart for about four months,
says she is expected to pick and scan one item every 1.6
minutes.
Mr. Mehta, a former Amazon logistics software engineer, said
customers who use the service ultimately increase their order sizes
by an average of two-and-a-half times, while also shopping more
frequently.
"The service is perfect for people who simply need more
time--working mothers, young professionals," said Mr. Mehta.
"They're willing to pay a little extra to get that time back that
they would otherwise use to go to the grocery store."
Like Webvan did, Instacart has broader ambitions beyond
groceries. In the coming months, Mr. Mehta said he expects to add
new categories of goods to its one-hour delivery guarantee. That
would put it more in competition with general one-hour delivery
services like startups Postmates Inc. and WunWun Inc.
Still, that business is hardly a sure thing. EBay Inc. has
scaled back the goals of its Now service, which dispatches couriers
to stores, acknowledging the financial difficulties of one-hour
delivery.
Mr. Mehta says that's no deterrent. "Groceries are more than
sufficient for us, but why stop there?" he said.
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