Q&A With Webvan's New Head Man

Baldwin Louie — Fri, 27 Apr 2001 18:00:00 -0400

Bob Swan, Webvan's former CFO and COO, was promoted to CEO on Thursday, replacing George Shaheen, who left earlier this month. On Friday, he sat down with senior writer Miguel Helft to discuss Webvan's prospects, its struggles with profitability, and the lessons it has learned along the way. Here is an edited transcript of the conversation:

TheStandard.com: Webvan has been retrenching for some time. How do you reverse that?

Swan: We have made some tough decisions in the past couple of weeks and in the past couple of months. As tough as those decisions were, the intention was clearly to contract, get a footprint that we believe with our current resources, both human and financial capital, that we can execute a business plan that fundamentally address the two questions that we get asked the most by outside world. One is: "Does the model work?" And two: "Do you have enough capital to survive?"

Q: On Thursday, you said your Fullerton, Calif., facility – one of the smaller facilities you inherited in your acquisition of HomeGrocer – turned cash-flow positive on an operating basis for the month of March. Is that a big deal?

A: That was our first and major step along the way to prove the fundamentals of the model: that this thing can generate cash on an operating basis. We believe that based on what we have learned along the way, we will be able to bring each one of the remaining facilities to cash-flow profitability in the near term. We haven't given a date. What we have said is we keep [improving] the metrics associated to bringing this model to break-even. Like the order size that continues to grow. Like the gross margins that continue to grow. And most recently, on the cost structure required to fulfill those orders that continues to shrink.

Q: What's the difference in getting to cash-flow positive in Fullerton, in the "small box" format, compared with doing so at the "big box" facilities in Oakland and Chicago?

A: There are few [things] that are replicable regardless of whether it is a large box or small box. One in particular: In the Fullerton facility, we operate with picking [in one shift] and delivery over a course of 12 hours. In the Bay Area, we pick on two shifts. We believe that given the improvements that we've made in our pick-rates, that we can consolidate picking to one shift in the Bay Area and thereby reduce our cost structure.

Secondly, in big boxes, historically we have had a bias to make everything: We cut our own meat, and seafood and produce. In the Fullerton facility, they relied much more on buying their product. That is much more attractive economically at lower volumes. In the Bay Area and Chicago, we have been migrating over the last 90 days to more [buying] of our fresh market product, and as such have been able to reduce our cost structure significantly.

Q: You have been retrenching for some time. Do you foresee any time when Webvan will be able to expand again?

A: Yes, clearly. Our ambitions 18 months ago were to establish a national footprint. Obviously, that assumed a certain capital-market environment, which is no longer a valid assumption. With the contraction of the capital markets, we have had to contract our footprint. But clearly our ambitions are no different today than they were 18 months ago. The time-horizon has changed. When we break even on a consolidated basis in the second half of [2002], we will be generating capital that we can use to re-embark on our national footprint aspirations.

Q: But even if you do turn profitable and have money to expand, the competitive landscape a couple of years out will be vastly different than it was 18 months ago. You really believe that Webvan can achieve the original vision of operating across the country, delivering just about everything to everyone in America?

A: The competitive environment I don't think has changed a whole lot. What you have seen happen is a lot of entrants in the market have come and gone. Our position, with a technology that has developed over the last four years and the relationships in our current markets, will serve as quite a bit of a barrier to entry in the markets that we are in. And those capabilities give us a three- to four-year headstart as we enter new markets. We have a very powerful integrated technology platform that is not easily replicable. We think we have a pretty good competitive position.

Q: During the earnings call Thursday, you said the path to profitability was dependent on operating improvements, not order growth. Can you explain?

A: The path to profitability is less dependent on order growth. What we are trying to do is make it more dependent on things that are within our control. Changing consumer behavior, we can influence. Our marketing programs are tailored to influence getting consumers out of their practice of going to the brick-and-mortar [stores]. But along the way, we want to bring as much of the control of our operating model within our own destiny. And that is by focusing on offering more products, based on customer suggestions and being more productive in terms of our ability deliver into the home.

Q: Have you given up on order growth?

A: Absolutely not. Order growth will be more to enhance our operating plan. We think we can deliver our operating plan with the things that are more directly within our control.

Q: There are analysts out there who believe that Webvan's best bet is to team up with a brick-and-mortar grocery chain. What do you think about that?

A: I would say that we are teamed up with a brick-and-mortar and that is Fleming. They are a very strategic partner of ours. As a national wholesaler, they bring us a lot of buying leverage with their $20 billion in annual buy.

What people on Wall Street are referring to is something more like a relationship with a supermarket chain lie Kroger or Albertson's modeled after the partnership that Peapod has with Royal Ahold-owned chains Stop&Shop and Giant in the East Coast.

I think the strategic alliances can come in a variety of different forms. There is a variety of different relationships we can form with supply-chain companies and other retailers to enhance our offering.

Q: Are you ruling out a sale of all or part of the company to a brick-and-mortar supermarket chain like Peapod has done?

A: I think our challenge is to continue to explore alliances and relationships that enhance the proposition we offer to the consumer, while addressing the economics required to deliver value to our shareholders.

Q: I realize that the capital markets have changed dramatically. But beyond that, what do you think was Webvan's biggest mistake? If you were to start over, what would you do differently?

A: Given the current environment: Build a model, prove a model and expand the model, is, I think, the approach we would have taken. With the capital markets as they are today, I think that proof-of-concept before expansion would probably make a little more sense.

Q: Did it make sense 18 months ago to expand the Webvan model before proving it was viable?

A: I think first-mover advantage is a very powerful strategic advantage to have, provided there is capital sufficient to enable you to establish that first-mover advantage. As external factors change, good companies adapt. And that's what we at Webvan have been forced to do.

Q: As a new CEO coming in, what do you see as the biggest challenges ahead?

A: Proving to the outside world what the employees here totally believe: the viability of the business model.

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Q&A With Webvan's New Head Man