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From the ashes of Webvan, Amazon builds a grocery business
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 responsibly.”
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 story.)
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 Mark Zaleski, president of operations, argued the company should press on because of promises made to Wall Street investors, Hegde said. Zaleski could be not be reached for comment.
Webvan “committed t
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