Engineering Costs and Cost Estimating: Webvan Hits the Skids.

Webvan, an on-line supermarket, aimed to revolutionize the humdrum business of selling groceries. Consumers could order their weekly provisions with a few clicks and have the goods delivered right to their door. It sounded like a great business plan, and the company had no trouble attracting capital during the dotcom boom of the late 1990s.Eager investors happily poured hundreds of millions into the company.

With that kind of money to spend, Webvan investedlavishly in building infrastructure, including large warehouses capable of filling 8000 orders a day. The firm rapidly expanded to servemultiple cities nationwide and even acquired a competing on-line company, Home Grocer.

But the hoped-for volume of customers never materialized. By early 2000, Internet grocers hadmanaged to capture only a small part of the food salesmarket-far short of the 20%they had anticipated. When the dotcom boom went bust, Webvan suddenly looked much less attractiveto investors,who quickly snapped their wallets shut.

Without newmoney coming in,Webvan suddenly had to face an uncomfortable fact: it was spending far more than it was earning. Finally, in 2001, Webvan went bankrupt. A rival on-line grocer, Peapod, narrowly escaped the same fate-but only because a Dutch retailer was willing to buy the company and continue pumping money into it. Interestingly, at the same timeWebvanwas burning through millions in dotcom cash, a bricks-and-mortar supermarket chain in Britain called Tesco also decided to get into the on-line grocery business. Tesco invested around $56 million in a computerized processing system and, instead of building warehouses, had employees in each store walk the aisles filling orders. UnlikeWebvan,Tescomade a profit.


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