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Tuesday, July 10, 2001 - Page updated at 12:00 AM

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Net grocer Webvan is out of time; 2,000 lose jobs as company closes

Seattle Times technology reporter

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Three years ago, Webvan Group placed one of the biggest bets on the Internet. Yesterday the online grocer lost.

Webvan, the Foster City, Calif., brainchild of Louis Borders of Borders Books & Music, shut its doors and announced plans to file for Chapter 11 bankruptcy protection after burning through more than $800 million in cash.

The decision left 2,000 employees, roughly 200 of them in the Seattle area, without jobs, and customers without the delivery service they had relied on.

This area felt a particular pang because one of the pioneer online-grocery ventures, Kirkland-based HomeGrocer.com, became part of Webvan last year.

Webvan officials blamed the closing on declining sales and their inability to raise more money in a tight market.

Terry Drayton, co-founder of HomeGrocer, which Webvan bought last June, said it was more than that.

"To be where they are now is just staggering incompetence, and I think it's all self-inflicted," Drayton said. "They blame the markets. I think they should just look in the mirror."

Webvan was launched in 1998 during the Internet boom. In an industry known for notoriously thin profit margins, Webvan said it would pad profits by building centralized distribution centers with the capacity of numerous supermarkets, and by selling higher-margin items such as electronics and books.

The company laid out plans to build 26 distribution centers nationwide, at $25 million to $35 million each, essentially transforming the way consumers bought groceries. It hired away George Shaheen from Andersen Consulting, making him one of the first high-profile, Old Economy executives to defect to an Internet start-up.

Good pedigree to start

With a brand-name chief executive and the backing of well-known venture-capital companies such as Silicon Valley's Benchmark Capital, Webvan raised $375 million with its initial public offering.

"In theory it sounded good, but the problem was they spent all this money on infrastructure assuming they would have a certain amount of orders," said David Kathman, a stock analyst with Chicago-based Morningstar. "They just didn't get the orders."

At the same time the markets that provide financing began to shrink last year, Webvan and rival HomeGrocer were set to compete head to head in key markets. Each company also planned to seek additional funding.

Last June, Webvan and HomeGrocer announced a $1.2 billion stock merger that would combine the strengths of each company. With $650 million in cash, they said the venture had enough money to reach profitability without seeking additional funding. It would also bring the service into markets across the country, from Southern California to Chicago to Atlanta.

After the merger, however, Webvan's stock began a free fall, as sales slowed and losses widened.

The company's shares dropped to $3.90 on Sept. 5, when the merger was complete and slid to 94 cents by late November. The price was 6 cents yesterday before trading was halted on the Nasdaq Stock Market.

On Friday, Webvan's board of directors voted to wind down the business after learning orders continued to drop in the second quarter. In addition, Goldman Sachs, the investment banker it hired to look for possible investors, returned empty-handed.

Cuts in advertising hurt

Webvan spokesman Bud Greby attributed the sales decline to negative news surrounding the company, an increase in delivery fees in some markets and less advertising.

"The very success we had in lowering our cash-burn rate and our operating losses means we dramatically cut our marketing and promotions activities," Greby said. "Our customer-acquisition activities, for the most part, grounded to a halt."

Deborah Crabbe, a bankruptcy attorney at Foster, Pepper & Shefelman in Seattle, said Webvan chose the right path by shutting down with money still in the bank. "I think they're making very prudent decisions by taking care of the employees and cutting off the head when it needs to be cut off," she said.

The company filed for Chapter 11 bankruptcy, normally used for protection from creditors while companies reorganize, because it believes it can fetch a better price for assets if it has control over them.

Webvan is offering severance pay to both hourly and salaried workers. In addition, hourly workers will receive $900 each from an anonymous donor and salaried workers will get bonuses scheduled for the first half of the year.

Drayton, who left HomeGrocer before the merger, has continued to watch Webvan closely and said Webvan shouldn't blame the capital markets for its downfall. The company built distribution centers that were too large and its technology was too complex.

Drayton points to the Fullerton, Calif., site, which was the first Webvan facility to have a positive cash flow. It was running on HomeGrocer's technology at the time.

Whiz-bang technology

"I think they always fell in love with whiz-bang technology that provided no benefit," said Drayton, who has since founded a technology-services company called Ramp Technology Group.

"Steven Spielberg said with really good special effects, you really don't notice them. Consumers should be able to use (a Web site) that works well," he said, noting the Webvan site wasn't compatible with popular Internet service providers such as America Online.

With the death of Webvan, Prudential Securities Research analyst Mark Rowen said the online grocery-delivery industry is shifting to a "clicks-and-mortar" approach, where traditional grocers will offer online delivery if customers pay extra for it.

To be sure, the only local online grocery service left is Albertsons.com, run by the Boise-based grocery chain.

"The problem with the (stand-alone) model is their pick, pack and delivery costs were significantly higher than their gross profits," Rowen said. "Could they have executed if they got to full scale? Hard to say. We'll never know."

Still a viable concept

Webvan spokesman Greby said he still believes the business model is viable; Webvan simply ran out of time.

"I think we're walking off the field very exhausted and a bit bloodied, but we're walking off with our head held high," Greby said.

"We really did change the way the world looks at retailing. I think it's validated by investments that are being made (in e-commerce)."

Webvan employees trickled in and out of the Renton distribution center yesterday, signing final documents and picking up paychecks.

David Schinkel, a driver, learned he was laid off as the company began telling employees Sunday night. He drove over to tie up loose ends.

"It was emotional to come here and see everything empty," said Schinkel, who lost about $6,000 he invested in the company.

"When I got hired, I thought, 'This is the beginning of something great,' and now I'm thinking, 'This is the end of something that could have been great.' "

Seattle Times staff reporter Lisa Heyamoto contributed to this report.

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