Webvan: When a company fails to deliver
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This is the second of two parts.
Mike Smith was on Interstate 5 the morning of June 26 when he heard the news: HomeGrocer.com had been sold to its chief competitor, the Webvan Group.
"That was my kick in the groin," said Smith, one of HomeGrocer's earliest employees. "I knew something was up. Our Atlanta facility was two days away from opening and they pushed back the date two or three weeks. They kept making excuses as to why we couldn't open."
The sale brought a stunning turn to one of the Internet boom's most widely known start-ups.
The company that Terry Drayton, Ken Deering and Mike Donald founded here in May 1998 had been part of a larger revolution - a slice of history that tested the boundaries of economics and, for a time, dazzled Wall Street.
Now, only a year after the merger, Drayton and his team find themselves on the outside looking in, while former rival and eventual victor, the Foster City, Calif.-based Webvan, struggles for survival.
"It was a huge disappointment," said Drayton, who still believes the concept that launched HomeGrocer is a viable business model. "A lot of folks put their heart and soul into that business. We were awful close."
At the time of the merger, HomeGrocer and Webvan were set to compete head to head for the first time in Atlanta and other markets. HomeGrocer executives already heard rumors that Webvan planned to spend five times more money acquiring customers in Atlanta.
They ran the risk of spending each other into the ground.
And the companies were set to seek additional funding from the capital markets at the same time. Wall Street made it clear it would not support two online grocers.
A merged company would have $650 million in cash - enough, perhaps, to reach profitability without gaining more financing, a proposition that grew riskier by the day.
In the end, Webvan paid $1.2 billion in stock to acquire HomeGrocer.
The day of the merger, Drayton, a perennial motivator, gathered his troops and talked about the promise that lay ahead. Instead of driving one another into the dirt, the combined companies could focus on their real competition: the brick-and-mortar grocery chains.
"You just had a lot of emotion because of Terry and the way he built the company," said Stacy Drake, HomeGrocer's spokeswoman. "It didn't feel so much like we lost; it was that it was over."
HomeGrocer executives say the promise of a smarter, more muscular organization never materialized. Webvan, they say, was not interested in investigating and comparing the different technology platforms and processes.
"We had a wealth of information in our brains and in our files," said Drake, who was paid time-and-a-half to stay through the end of the year - time she said was wasted.
Executives say Webvan experienced a steep decline in business when it converted HomeGrocer Web sites to its own technology in San Diego. Sheri Southern, Webvan's vice president of technology, confirmed this but said the company got better with subsequent switches.
And even though Webvan said it would add nongrocery items that brought in more profits, internal projections showed that 95 percent of its 2001 sales would come from groceries, executives say.
Webvan spokesman Bud Grebey said the company took from HomeGrocer what it thought was valuable. The company, for instance, now uses prewrapped meats and produce; before, Webvan used internal butchers.
At the same time, Grebey said, the company had to make hard decisions such as which technology platform to use. In the end, it chose its own.
Stock drops
After the merger, as the dot-com economy slowed, Webvan's stock begin a rapid descent: Shares dropped to $3.90 on Sept. 5, when the merger was complete, and slid further to 94 cents by late November.
The price now hovers in the low teens. The $1.1 billion in stock Webvan paid HomeGrocer for the merger is now worth less than $17 million.
Paul Malatesta, a University of Washington finance professor, said grocery delivery is not a new business; it has worked in densely populated areas where grocers offer delivery without building expensive and complicated distribution systems.
"If you have a relatively low-wage delivery person who is pretty much packing grocery boxes and riding elevators, you don't have a large capital investment," he said. "But if I have to run $100,000 trucks through the suburbs and pay a driver $25 to $35 an hour, when they spend part of the day idling in traffic, that just isn't going to work."
Webvan's largest blow came last month when it announced that George Shaheen, the former Andersen Consulting head, would step aside. Robert Swan, the company's chief financial officer, was named the interim CEO.
Swan has already instituted massive cuts. Among other things, the company said it is closing its Atlanta distribution center and laying off 885 employees.
The one bright spot was that Webvan's Fullerton, Calif., operations exited the first quarter with a positive cash flow. The site, however, was still running on HomeGrocer's technology platform at the time.
Drayton said the Fullerton site, as well as San Diego and Renton, were on track to become cash-flow positive by the end of 2000, before HomeGrocer was acquired.
While Webvan's Grebey acknowledged the Fullerton site was still using HomeGrocer's platform, he said it takes more than technology to reach profitability.
"That profitability milestone is not a technology profit," he said. "It's an operations profit."
These days, HomeGrocer executives speak of the chicken-and-the-egg dilemma. If HomeGrocer had worked the kinks out of its model before moving to other cities, it probably would still be around. But if HomeGrocer hadn't planned such an aggressive launch, it would have never gone public, raising the capital required to execute their vision.
"We probably should've followed our own instincts more than Wall Street," said Dan Lee, who was HomeGrocer's chief financial officer. "Wall Street was pushing us to go into too many cities faster than we should have. It was like building a car while you're driving it."
Ramp technology
Drayton walks through a dimly lit maze of empty cubicles, past a cluster of office chairs pushed in a corner. He is unsure, at first, what office to use and then picks a conference room in the corner. Someone has left a paper plate and napkins on the conference table.
"Obviously someone has been using this as a kitchen," he said, apologetically, discarding the trash. For now, Drayton, one of the most prominent local figures of the Internet boom, is his own maid.
After five start-ups, Drayton is familiar with the obscurity associated with starting a new company - and he is at it again.
Drayton founded Ramp Technology Group with members of his old information-technology team. HomeGrocer, he said, had built software internally that he sold to businesses at a prime rate.
Ramp now offers technology services to dot-coms that need to scale their systems. Its first client is Kirkland-based Captura, which makes software that automates payment processing online.
The company also formed a small start-up, Count Me In, which sells software to clubs and organizations that want to register and schedule events online. Its first client is the Bellevue Boys & Girls Club.
Drayton is rounding up investors for the start-up, but he is somewhat sidetracked by a project he calls HG2.
Some observers said Shaheen's departure spelled the beginning of the end for Webvan. Drayton has entertained the thought of buying back the HomeGrocer name and starting out slow, like their original business plan: Ramp up in Seattle, work the kinks out of the model, open in Portland and then along the West Coast.
"Most of our investors in the original HomeGrocer have been supportive," he said. "Right now, it would be a very different game."
Drayton is trying to be realistic in a tough economic environment. Last time, HomeGrocer bowed out midmarathon. Drayton believes it can still finish the race.
"It's a great business," he said. "Somebody's going to get it right. We had it right. Maybe we'll get a second crack at it."
Monica Soto may be reached at (206) 515-5632, msoto@seattletimes.com.