An example of an E-Commerce failure and its causes

There are many companies that proved successful in e-commerce especially companies like Amazon.com, AOL, eBay and Dell just to name a few. However there are also those that did not quite get it right and sunk badly. A shining example of a dot-com company that failed is Webvan.com.

Webvan was an online 'credit and deliver' grocery business that was founded by Louis Borders, the same man that established Borders book store. Borders saw opportunity in harnessing the power of the internet to deliver goods to customer's homes in a simple, inexpensive manner, targetting the entire American retail market. There were many companies that invested in the venture including Yahoo!, CBS, and Benchmark Capital. Webvan began its operation on 2 June, 1999, went bankrupt and closed down by 2001. In June 2008, CNET hailed Webvan as one of the greatest dotcom disasters in history.

There were several reasons for its failure:

1) Webvan's e-tailing model

Webvan used the funds obtained from its venture capitalist to build a high tech infrastructure with the logic that huge investments in technology would result in high productivity hence allowing them to be far superior compared to other online supermarkets and brick-and-mortar stores. This was not the case however as Webvan's investment on infrastructure far exceeded sales growth and the company eventually ran out of money.

2) Logistical problems

Despite investments in high-tech machinery, Webvan began to face logistical problems by 2001. For example, there were malfuntions of the conveyor belts caused by the warehouses' cold temperature to preserve fresh food products, there was an overflow of cartons because many items were placed in the carts and so on. Because of these problems, Webvan had to invest more money to handle them.

3) Overambitious

Webvan entered into a market it was unfamiliar with and quickly proceeded to committed almost $1 billion to build expensive warehouses and other infrastructures. In addition, the grocery business generally has low-margins and was never able to attract enough customers to justify its huge spendings.

4) Overall impractical business idea

Webvan, although gave online selling a good try, showed that selling groceries on the web turned out to be an unworkable business idea. "Webvan has proved that right now, the online grocery market is niche at best, and this won't change until there is far greater Internet adoption", says Jasjit Mangal of Swander Pce & Co., a retail industry consultancy.

A core lesson to be learned from Webvan's fall is that even if you have a good idea, it's best not too grow too fast too soon.

Related links:

http://www.witiger.com/ecommerce/dotcomfailures.htm

http://www.cnet.com/1990-11136_1-6278387-1.html

http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/BSTR090.htm