Webvan Group

Nov 9, 2017

WEBVAN GROUP INC  Company Description Webvan is an Internet retailer offering same-day delivery of consumerproducts through an innovative proprietary business design that integrates ourWebstore, distribution center and delivery system. Our current product offeringsare principally focused on food, non-prescription drug products and generalmerchandise. Description of Business Webvan is an Internet retailer offering same-day delivery of consumerproducts through an innovative proprietary business design that integrates ourWebstore, distribution center and delivery system. Our current product offeringsare principally focused on food, non-prescription drug products and generalmerchandise.INDUSTRY BACKGROUNDGROWTH OF THE INTERNET AND E-COMMERCE The rapid growth of the Internet and e-commerce is revolutionizing the wayin which businesses and consumers communicate, share information and conductbusiness. International Data Corporation estimates that there were 63 millionweb users in the United States at the end of 1998 and anticipates this numberwill grow to approximately 177 million users by the end of 2003. This growth inInternet usage is being fueled by a number of factors, including: - a large and growing installed base of personal computers in the workplace and at home; - advances in the performance and speed of personal computers and modems; - improvements in network security, system and bandwidth; - faster, easier and cheaper access to the Internet; - proliferation of content and services being provided on the Internet; and - consumers' growing level of comfort and experience with e-commerce. The unique characteristics of the Internet create a number of advantagesfor online retailers and have dramatically affected the manner in whichcompanies distribute goods and services. Specifically, online retailers use theInternet to: - provide consumers with a broad selection of products and services, increased information and enhanced convenience; - operate with reduced overhead costs and greater economies of scale; - frequently adjust featured selections, editorial content and pricing, providing significant merchandising flexibility; - "display" a larger number of products than traditional retailers at lower cost; and - obtain demographic and behavioral data about customers, increasing opportunities for direct marketing and personalized services. The Internet provides a powerful and convenient means for consumers toorder products and services. As a result of the increased use of the Internetand the benefits of online retailing, consumer spending on the Internet isgrowing rapidly. International Data Corporation estimates that consumerpurchases of goods and services over the Internet in the U.S. will increase from$12.4 billion in 1998 to $75.0 billion in 2003. In addition, Forrester Researchestimates that online grocery spending in the U.S. will grow from $235 millionin 1998 to $10.8 billion by 2003 which will represent only 2% of the totalmarket for grocery products in 2003.TRADITIONAL GROCERY RETAILING The U.S. grocery market is large, with retail supermarket sales equal toapproximately $449 billion in 1998, according to Progressive Grocer. Inaddition, the market for prepared meals or "home meal replacements" is growingrapidly and, according to ACNielsen, comprises an incremental $100 billionsegment of the food industry. According to the National Association of ChainDrugstores, traditional drugstore sales, including prescription drugs, wereapproximately $106 billion in 1998. Based on thisindustry data, the combined market for groceries, drugstore merchandise andprepared meals was over $650 billion in 1998, which we believe is the largestopportunity in the e-commerce consumer category. Many consumers find supermarket shopping to be a time-consuming andinconvenient experience. Traditional store-based supermarkets face manychallenges in providing a satisfying shopping experience for consumers. Physicalspace availability in stores limits the number of products supermarkets canoffer and reduces merchandising flexibility. This forces traditional store-basedsupermarkets to limit their product selection to the most popular products,further impairing customer selection. Traditional grocery retailers also facesignificant costs associated with building and operating large brick and mortarstores, including costs associated with personnel, real estate, construction,store set-up, inventory and fixed assets. The challenges facing thesetraditional retailers have created an opportunity for online grocery retailersto provide a more compelling and cost-effective solution. The Internet provides a medium that could significantly improve theconsumer grocery shopping experience. The Internet provides 24-hour shoppingconvenience and the ability to monitor order and information accuracy, andeliminates the need to wait in line. With an efficient business model, onlineretailers will also be able to reduce labor, real estate and other operatingcosts.ONLINE GROCERY RETAILING Consumers are increasingly seeking a grocery shopping solution which willallow them to save time and effort without sacrificing the wide selection, highquality and low cost they have come to expect from traditional supermarkets. Webelieve that market demand for high-quality reliable grocery services isenormous and is very much like the pent-up demand for high-qualitywide-bandwidth communication. However, we cannot assure you that our assessmentof the demand for online grocery services will prove to be accurate or that suchmarket demand will emerge in the short-term or at all. Attempting to capitalizeon the benefits of the Internet, several companies, including NetGrocer andPeapod, have begun offering a variety of grocery products online. Many of theseservices charge membership, delivery or service fees and often offer many oftheir goods at prices higher than those of traditional supermarkets. Inaddition, many of these online grocery efforts only offer a limited selection ofproducts, do not offer frozen foods or perishables and do not stock a wide rangeof high-end items such as wine, prepared meals and specialty products. Theseonline grocers generally do not offer same-day delivery and guarantee deliverywithin narrow time parameters. Many of these early online grocers currently lacka highly automated distribution and delivery model which would enable rapid andefficient expansion on a national level. As a result, these companies rely onmanual systems to fill the orders they receive over the Internet and often relyon third parties to deliver orders to their customers.THE WEBVAN SOLUTION Our online shopping experience offers customers a broad selection ofhigh-quality, competitively priced grocery and related product offeringsdelivered directly and conveniently to their homes. Our Webstore is designed tocreate a user-friendly, informative and personalized shopping experience forcustomers while providing them with the time savings and convenience of shoppingonline. We believe that our innovative business design addresses the challengeof e-commerce fulfillment by integrating a retail web site with an advanceddistribution center and delivery system which enable us to efficiently fill ahigh volume of orders and deliver products to our customers on the same day. Ourdelivery channel also enables us to create brand awareness and customer loyaltythat we believe will help to strengthen our market position. Our solution provides customers with the following key benefits: - prices that are generally at or below everyday supermarket prices; - a broad selection of high quality products; - no membership or service fees and no delivery fees for orders over $50; and - same-day home delivery within a customer-selected 30-minute window. The principal components of our solution include our: BROAD SELECTION OF HIGH QUALITY PRODUCTS AT COMPETITIVE PRICES. Ourscalable Webstore and distribution system are designed to enable us to offerover 50,000 different items to our customers. As of September 30, 1999, we wereoffering consumers a broad selection of approximately 18,000 grocery andspecialty items including: - farm fresh produce; - premium meats hand cut in our butcher shop; - fresh fish and other seafood including live lobsters; - a variety of chef-prepared meals; - bakery items including specialty breads, bagels and pastries; - non-perishable grocery items typically found in large supermarkets; - non-prescription drug products and health and beauty items; - specialty items including fine wines and premium quality cigars; and - general merchandise such as office products and small appliances. From July 10, 1999 through September 18, 1999, produce representedapproximately 17% of our revenue. According to Progressive Grocer, in 1998,produce represented approximately 10% of revenue of traditional grocers. Sincewe only commenced operations on June 2, 1999, the percentage of our revenue fromproduce is derived from very limited data and is expected to fluctuate fromperiod to period. As a result, we cannot assure you that the percentage of ourrevenue from produce will remain at approximately 17% in the future. INTERACTIVE AND PERSONALIZED WEBSTORE. Our Webstore is an easy-to-useonline alternative to the traditional supermarket providing customers withsignificant time savings and convenience. The Webstore is organized to provideinformation about the products we sell as well as interesting generalizedcontent. We believe our Webstore promotes customer loyalty by making the groceryshopping experience easier for the consumer. Through our Webstore, consumers canpersonalize their shopping experience by creating their own shopping lists andby spending as much or as little time browsing and selecting products as isappropriate for their specific needs. Customers may shop for products by: - browsing clearly organized categories such as Produce, Meat and Seafood, Prepared Food or Health and Beauty; - going directly to a specific product by using our keyword search technology; or - accessing one of their personal shopping lists for immediate purchase or editing. Our Webstore utilizes a proprietary logistics technology to offer adelivery window to the customer. A point-and-click time schedule will indicateto the customer the 30-minute delivery slots which are currently available intheir specific location, based on the time of day, location and items purchased. HIGHLY AUTOMATED DISTRIBUTION CENTER. Our technologically advanceddistribution center is highly automated and is designed to provide economies ofscale and create significant cost savings compared to traditional supermarketsand existing online grocers. Our distribution center is designed to processproduct volumes equivalent to approximately 18 supermarkets and allow for ahighly flexible inventory selection of over 50,000 SKUs. The distribution centeris designed to fill customer orders using proprietary software and labor-savingautomation technology such as carousels and conveyors which bring individualproducts directly to the worker, compared to traditional warehouse designs whichrequire the worker to move throughout rows of products to fill individualorders. Our first distribution center is located in Oakland, California andserves the San Francisco Bay Area. We plan to open a second distribution centerin Atlanta, Georgia in the second quarter of 2000 and to further expand withdistribution centers in other key geographic markets. Our distribution center is designed to accommodate both a wide productselection as well the finest in product quality. The design allows forappropriate storage temperatures for individual product categories includingproduce, meats and frozen foods and enables us to offer specialty products suchas premium wines and cigars. In addition to product storage, our distributioncenter is designed with food preparation facilities which allow us to offerchef-prepared meals, individually cut meats and fish and made-to-order fruitbaskets. We have designed our initial distribution center in Oakland, California tobe a prototype that we can readily replicate in other locations. In July 1999,we entered into an agreement with Bechtel Corporation for the construction of upto 26 additional distribution centers for us over the next three years. Thesedistribution centers may not necessarily be in 26 different markets. EFFICIENT DELIVERY PROCESS. To facilitate rapid and predictable productdelivery to the customer's home, we utilize a hub-and-spoke fulfillment modelthat is designed to minimize product and order handling. Customer orders arepackaged in individual plastic containers or "totes" at the distribution center,or hub, and are transferred by temperature-controlled trucks to local stations,or spokes. At the local stations, the totes are transferred to smallertemperature-controlled vans for delivery to the home. Each distribution centerwill supply shipments to up to 10 - 12 stations, varying by market, which willbe strategically positioned throughout a particular delivery region within anapproximate 50 mile radius of each distribution center. Our hub-and-spoke model,centralized order fulfillment and decentralized delivery, combined with ourproprietary route and load planning technology allows for a highly efficient,low cost fulfillment solution. As a result of our automated distribution centerand efficient delivery process, our produce and other grocery products arehandled an average of eight times compared to an average of 14 times for atraditional supermarket that utilizes typical distribution channels. We believethat reduced handling enables us to deliver better quality produce to theconsumer than traditional grocery retailers. SUPERIOR CUSTOMER SERVICE. Our home delivery model also provides us with animportant opportunity to interact with our customers. Because of the highfrequency of grocery purchases, our couriers will be able to help continuallyreinforce our brand with the customer. Our couriers are valued employees and areincentivized with competitive salaries and stock options. Our couriers have alsobeen trained to answer questions about the service and handle routine serviceissues directly and promptly at the customer residence. Each couriercommunicates with the route planning and delivery scheduling systems throughoutthe delivery process through the use of a wireless mobile field device. If thecustomer is not satisfied with the products received, the courier is able toinitiate a transaction to replace items or credit the customer's bill. Webelieve this approach helps develop couriers who are highly focused on customerservice and on creating long-term consumer relationships. Use of Proceeds The net proceeds we receive from the sale of the common stock offered herebywill be approximately $350.5 million, based on the initial public offeringprice of $15.00 per share and after deducting the underwriters' discounts andcommissions and expenses payable by us estimated at $2.0 million. We expect touse the net proceeds from this offering principally to fund the construction ofand equipment for distribution centers in other geographic markets at anestimated cost of $25.0 million to $35.0 million per distribution center. Thisestimated cost is based on our experience to date and efficiencies we expect toresult from our relationship with Bechtel. Our contract with BechtelCorporation contemplates the construction of up to 26 additional distributioncenters over the next three years. The cost of constructing and equipping 26additional distribution centers is currently estimated at from $650 million toover $900 million. At June 30, 1999, our cash and cash equivalents wereapproximately $647.2 million after including the net proceeds from the sale ofour Series D-2 preferred stock in July and August 1999 and the expected netproceeds from the shares sold in this offering. Thus, the completion of 26additional distribution centers would require us to generate cash flow fromoperations or to sell additional debt or equity securities or obtain a line ofcredit. If such funds are not available when needed or if the cost of thesedistribution centers exceeds our current estimates, we could also be forced tocurtail our expansion plans. The number and timing of opening of newdistribution centers are subject to considerable uncertainty due to a number offactors, including the following:- the availability of appropriate and affordable sites that can accommodate ourdistribution centers;- the actual cost of constructing and equipping our distribution centers;- our ability to successfully and cost-effectively hire and train qualifiedemployees to operate new distribution centers;- our ability to develop relationships with local and regional distributors,vendors and other product providers;- acceptance of our product and service offerings; and- competition.We also expect to use the proceeds for general corporate purposes, includingworking capital and funding of our expected operating losses. We may use aportion of the net proceeds to pursue possible acquisitions of complementarybusinesses, technologies or products; however, we have no presentunderstandings, commitments or agreements with respect to any suchtransactions, and we have not identified the nature of any such businesses,technologies or products. Pending use of such net proceeds for the abovepurposes, we intend to invest such funds in short-term interest-bearinginvestment-grade securities. Competition / Competitors We believe that our business design currently provides us with a two-yearhead start compared to our potential competitors which may seek to replicate ourbusiness design of a retail website integrated with a highly automateddistribution center and a hub and spoke delivery system. However, the groceryretailing market is extremely competitive, and we expect our competitiveadvantage to erode rapidly. Local, regional, and national food chains,independent food stores and markets, as well as online grocery retailerscomprise our principal competition, although we also face substantialcompetition from convenience stores, liquor retailers, membership warehouseclubs, specialty retailers, supercenters, and drugstore chains. Many of ourexisting and potential competitors, particularly traditional grocers andretailers, are larger and have substantially greater resources than we do. Weexpect this competition will intensify as more traditional and online groceryretailers offer competitive services. In addition, although no traditionalsupermarket chain has introduced an Internet based service on a large scale, weexpect competition from such retailers to intensify in the near future. Our initial distribution center in Oakland, California, operates in the SanFrancisco Bay Area market. In this market, we compete primarily with traditionalgrocery retailers and with online grocers NetGrocer and Peapod. We estimate thatas of the date of this prospectus, our potential competitors in markets otherthan the San Francisco Bay Area include between five and ten full-servicegrocery retailers operating exclusively online. The number and nature ofcompetitors and the amount of competition we will experience will vary over timeand by market area. In other markets, we expect to compete with current onlineofferings from these companies and others, including HomeGrocer, HomeRuns andStreamline. Many of these services charge membership, delivery or service fees,and often offer their goods at a premium to traditional supermarkets. Inaddition, most competing online retailers, including Peapod, currently usemanual shopping and retrieval systems which we believe lack the capability toprocess a large number of orders for a large number of customers in a costefficient manner. The principal competitive factors that affect our business are location,breadth of product selection, quality, service, price and consumer loyalty totraditional and online grocery retailers. We believe that we compete favorablywith respect to each of these factors as compared to other online groceryretailers. However, many traditional grocery retailers may have substantiallygreater levels of consumer loyalty and serve many more locations than wecurrently do. If we fail to effectively compete in any one of these areas, wemay lose existing and potential customers which would have a material adverseeffect on our business, net sales and operating margins. We also compete to retain customers once they have registered for Webvan'sservices. Generally, online subscriber attrition rates, or the rates at whichsubscribers cancel an online service, are high. High rates of member attritioncould have a material adverse effect on our net sales and business. Deal Data