(Corrects to remove reference to Mark Zaleski in paragraph 18)
By Alistair Barr
SAN FRANCISCO, June 16 The online grocery
start-up Webvan may have been the single most expensive
flame-out of the dot-com era, blowing through more than $800
million in venture capital and IPO proceeds in just over three
years before shutting its doors in 2001.
Twelve years later, though, Webvan is rising from the dead -
in the form of an online grocery business called AmazonFresh.
Four key Amazon.com Inc executives - Doug
Herrington, Peter Ham, Mick Mountz and Mark Mastandrea - are
former Webvan officials who have spent years analyzing and
fixing the problems that led to the start-up's demise.
Kiva Systems, the robotics company that Amazon bought last
year for $775 million in one of its largest-ever acquisitions,
was built on ideas and technologies originally developed at
Webvan and is a key part of the AmazonFresh strategy.
Even Webvan's old Web address, webvan.com, is now part of
the Amazon empire.
"We had a lot of Webvan DNA in the room and we drew on that
experience a lot," said Tom Furphy, who helped start AmazonFresh
with Herrington and Ham before leaving to become a venture
capitalist. "That was a good formula for building the business
Amazon declined to comment for this story, or make any
AmazonFresh executives available for interviews.
Former Amazon and Webvan officials say Amazon drew three big
lessons from the Webvan debacle: expand slowly, limit delivery
to areas with a high concentration of potential customers, and
focus relentlessly on warehouse efficiency.
The opportunity for Amazon is huge. The grocery business in
the United States generated $568 billion in retail sales last
year, with online accounting for less than 1 percent, and it's
among the last major retail sectors that the online giant has
yet to tackle.
But the risks are large as well. Groceries are a notoriously
low-margin business, and the aggressive expansion of discounters
like Walmart has made the business even more cutthroat than it
was in Webvan's day.
And competition in the online grocery business is heating
up. FreshDirect and Peapod have been plugging away for years,
while traditional grocery chains like Safeway also do online
ordering and delivery. Walmart is testing its own fast delivery
service in some markets in the United States now.
AmazonFresh now serves Seattle and Los Angeles, and it plans
to launch in the San Francisco Bay Area later this year. If
these cities go well, Amazon is eyeing 20 new markets for 2014.
But the big plans belie what has been one of Amazon's most
cautious entries into a new business since founder and Chief
Executive Jeff Bezos started selling books online in the 1990s.
The grocery service started in just two Seattle
neighborhoods, Medina and Mercer Island, in 2007, and then
slowly spread to other Seattle communities over the next five
years. It didn't expand beyond Seattle until June 10 of this
year, when it launched in Los Angeles.
The Los Angeles roll-out is similarly modest, covering only
a few zip codes initially. "We know customers value this service
but the economics remain challenging," an Amazon spokeswoman
said when describing the L.A. launch.
Webvan - which ironically was also the brainchild of a
book-seller, Louis Borders - expanded to nine major metro areas
just 18 months after it began serving the San Francisco Bay
Area, former executives recall. (Borders, co-founder of the
now-defunct Borders Books & Music, declined to comment for this
Webvan began its big expansion in Atlanta while the San
Francisco service was still "wobbly," recalls Krishna Hegde,
Webvan's vice president of deployment and systems engineering.
After the Atlanta launch in April 2000, Hegde said he
recommended that the company slow down. But another executive
argued the company should press on because of promises made to
Wall Street investors, Hegde said.
Webvan "committed the cardinal sin of retail, which is to
expand into a new territory - in our case several territories -
before we had demonstrated success in the first market," said
Mike Moritz, a Webvan board member and partner at Sequoia
Capital, one of the company's venture capital backers. "In fact,
we were busy demonstrating failure in the Bay Area market while
we expanded into other regions."
Webvan not only launched in many cities, it also offered
service across entire metro areas. That resulted in the
company's delivery trucks making many trips where they only
dropped off a few orders.
"The biggest failure of Webvan was delivery density," said
Gary Dahl, vice president of distribution at Webvan from 1997 to
2001. In the Bay Area, he said, Webvan made money delivering in
San Francisco and Oakland, but lost a lot of money delivering in
suburbs such as Orinda and Moraga.
"Mean travel time between delivery stops is the key to
success in the home delivery business," Dahl explained. "Travel
one block in San Francisco and you have passed 200 people,
travel one block in Moraga and you have passed about six
AmazonFresh has tackled this problem by only delivering to
densely populated areas of Seattle, and it's taking the same
approach in LA, according to Keith Anderson, an executive at
consulting firm RetailNet Group.
"If you drive into certain neighborhoods in Seattle you will
see a lot of front doors with AmazonFresh totes," he said.
"That's because Amazon expanded gradually into specific
neighborhoods and tried to deliver to lots of homes in those
FreshDirect covers more than 80 percent of the New York
metro area, but it took the company about a decade to expand its
delivery network this wide. Last year, FreshDirect launched in
KIVA ROBOTS PROVE KEY
Webvan also suffered severely from weaknesses in the design
and technology of its giant warehouses. At its first facility,
there was a single conveyor belt that snaked about five miles
through the building bringing items to workers, who would then
pick and pack the products into totes, Webvan Chief Technology
Officer Peter Relan said.
When the conveyor belt broke, the operation would grind to a
halt, he recalled.
Mick Mountz, an MIT-trained Webvan executive, oversaw the
picking and packing process, along with Mark Mastandrea, and
together they tried out lots of technology to make the warehouse
run more efficiently, according to Relan.
For each $100 bag of groceries, it cost Webvan about $30 to
pick and pack; the company had to get that down to $10 to make
the process economically viable.
Mountz came up with a solution based on multiple robots that
would bring products from different parts of the warehouse to
human workers for picking and packing. Unlike a conveyor belt,
if a robot broke down it could be fixed while the other robots
continued their work.
However, Webvan had spent so much on its original warehouse
- about $100 million, according to Relan - that the company was
loath to completely change the process in favor of robots.
After Webvan went bust in 2001, Mountz founded Kiva Systems,
which designed and built robots that now zip around the
warehouses of retailers including Staples Inc, Walgreen
Co and Gap Inc.
Amazon bought Kiva in 2012 for $775 million. Mountz is still
running Kiva, while Mastandrea became director of delivery
experience at AmazonFresh in March.
"When there are a large number of products and the shapes
and sizes vary, as they do in grocery, you still need a human at
the end to do the picking and packing," said Ajay Agarwal of
Bain Capital Ventures, which was an early investor in Kiva. "The
Kiva System is the best solution out there for that combination
of warehouse technology and human workers."
Amazon has one other thing Webvan never had: a huge,
existing customer base. While Webvan had planned to expand into
delivery of other goods once it had developed a base of grocery
customers, Amazon is going the other way, and can help defray
the cost of delivering groceries by delivering books or
electronics at the same time.
There are other advantages that have accrued over time. The
spread of cloud computing services - pioneered by Amazon's Web
Services business - makes it cheaper to run online businesses,
while consumers are more comfortable buying online through
faster Internet connections.
Online shoppers who type "webvan.com" into an Internet
browser today will find a website selling more than 45,000
non-perishable grocery items. In the top right-hand corner, it
says Webvan is "part of the amazon.com family" and consumers can
use their existing Amazon accounts to buy.
"Amazon purchased the name a couple of years ago," Dahl
said. "Maybe they will revive it if sales are slow in the Bay
(Reporting by Alistair Barr; Editing by Jonathan Weber and