A year ago, HomeGrocer made a big push into Orange County with a slew of catchy ads and the opening of distribution centers in Irvine and Fullerton. The goal: tapping OC’s potentially lucrative market for online grocery delivery service.
Now, HomeGrocer’s new parent, Foster City-based Webvan Group Inc., is shifting gears in OC and elsewhere. Webvan, an online grocery and consumer products delivery service, has dramatically scaled back operations at its Irvine facility. And next month, Webvan plans to swap the HomeGrocer name and bright peach logo with its own moniker and a newly designed, green-and-blue “WV.”
These and other changes are part of Webvan’s strategy to streamline operations and get profitable before its cash runs out. The company, which acquired HomeGrocer last June, has about $118 million in cash and an additional $260 million in marketable securities as of Sept. 30. Webvan posted a net loss of $120 million on sales of $87 million for the three months ended Sept. 30.
The company has indicated it needs to raise an additional $80 million to $100 million by next sum-mer if it wants to continue expanding into other areas.
Webvan is facing a “much more capital-constrained environment,” said Bob Swan, the company’s chief operating officer. Webvan has opted to table plans to expand into Baltimore and New Jersey, and concentrate on its existing markets, he said.
“We’re really focused on bringing our existing markets, including Orange County, to cash-flow profitability,” Swan said. “From our standpoint, Southern California is the second-biggest market in the U.S. It’s very important to the overall success of the company.”
Webvan’s decision to slow growth is critical, according to Clay Ryder, an analyst at Zona Research Inc. in Redwood City.
“If Webvan runs out of money, they’ll have no satisfied customers,” said Ryder, who said he frequently orders from Webvan. “They need to show profitability in the markets they have prior to going out and conquering more markets.”
The new strategy has hit home in Orange County. The company recently laid off 115 of its 190-person crew at the 100,000-square-foot Irvine facility, which the company is maintaining as a cross-docking station.
A crew of 40 drivers, loaders and warehouse staff has been retained in Irvine to handle shipping to South County. Some 35 others were shifted to facilities in Carson, Azusa, San Diego and Webvan’s 110,000-square-foot distribution center in Fullerton, which counts 350 employees and now houses Irvine’s inventory.
Swan said production improvements and the integration of Webvan’s technology, which he said is more advanced than HomeGrocer’s, should allow the company to serve the same geographic area with fewer facilities.
The biggest changes for OC customers will be in the HomeGrocer Web site and delivery service.
Webvan has launched its new logo, which replaces its former grocery bag logo, in four markets, including San Francisco. Plus, it has unveiled a newly designed Web store, with 11 product categories ranging from books to personal electronics, groceries, household items, pet food, pharmaceuticals and videos.
The new Web site and logo will roll into six HomeGrocer markets, including OC and San Diego, by mid-January. Soon, customers logging on to HomeGrocer will be linked to the new Webvan site, and can purchase a full-range of products beyond groceries.
“A critical aspect of the transition is to be sure we have something to offer customers,” Swan said.
Cameron Meierhoefer, an Internet analyst at Reston, Va.-based market tracker PC Data Inc., said Webvan had to change its image in order to communicate its expanded services. HomeGrocer only delivers groceries, and its name is limiting, he said.
“They have to cast themselves in a different light in order to give people a reason to take notice of them again,” Meierhoefer said.
Risky Business
But Webvan runs a risk in dropping the HomeGrocer name in OC and elsewhere. HomeGrocer’s catchy commercials and trademark delivery trucks have helped register the brand with consumers here. Webvan, big in the Bay area, is unknown in Southern California.
“You have to translate and transfer brands carefully, but it’s not impossible,” Ryder said. “They’re going to have to promote it, and do all the usual things you would do in a successful marketing campaign.”
Webvan, which spent about $24 million on sales and marketing in the third quarter, plans to use a combination of newspapers and online marketing to communicate the change.
The company plans to tout its changes to add more early morning deliveries and cut turnaround times from 90 minutes to 60 minutes in six markets formerly served by HomeGrocer, including OC and Los Angeles. In the four markets currently served by Webvan, including San Francisco and Sacramento, delivery windows will increase from 30 minutes to 60 minutes.
PC Data’s Meierhoefer credits Webvan with attacking one of the Web’s biggest weaknesses: the so-called “last mile,” or the lag time from when customers make a purchase to when they receive it.
“Instant gratification is a very important part of the buying experience for an individual,” Meierhoefer said. “If customers can actually get something in 60 minutes, Webvan can tap a demand that other Web retailers can’t.”
Stiff Competition
Still, Webvan has its work cut out for it. Building and operating a distribution network is expensive and difficult. Plus, Ryder said Webvan could find itself competing with big established deliverers such as United Parcel Service Inc. and the United States Postal Service as it looks to offer more than groceries.
“If you start seeing refrigerated food services from UPS, Webvan is in deep doo-doo,” Ryder said.
Despite the challenges that lie ahead and a dismal stock price,Webvan’s stock was trading at 53 cents from about 25 a year ago,company officials are banking on a smooth transition between the brands.
“Clearly there has been a shakeout in the business-to-consumer community and that shakeout will continue,” Swan said. “But we believe strongly that the combined company will weather the storm, if you will, and be one of the few tall trees standing at the end of the day.” n
