Pass or Fail?

Online grocer WebVan has become exhibit A for what was wrong with the dotcom boom. Its collapse reaffirmed some of the basic truths that all businesses should be heeding in the days ahead.

First, be realistic about your market. "[WebVan] vastly overestimated the demand for online grocery shopping," says David Kathman, a stock analyst at Morningstar Inc.

Everybody has to buy groceries, says Jupiter Media Metrix senior analyst Ken Cassar, but few people are willing to pay for delivery and wait for the food to show up. "Regardless of how small or profitable a niche you may target, you're never going to make money selling cement online," he says.

WebVan also forgot to focus. It decided to be both a grocery store and a delivery company. To do so, WebVan sunk money into warehouses and delivery vans. While other online companies, such as FTD.com, could achieve profitability by simply cutting back on their marketing expenses, WebVan's expenses weren't cuttable.

In short, WebVan didn't start small and build on its success. It had to build everything, including a customer base. "Smart companies think about who their customers are and how to sell more stuff to them," says Gartner. "Getting new customers is very expensive."

Entrepreneurs are already launching version 2.0 of online grocery shopping. Aliso Viejo, California-based WhyRunOut is partnering with the Stater Bros. Stores grocery chain in Southern California. It provides Stater's existing customers with added value by delivering groceries for $6.99 per delivery. That division of responsibilities sounds familiar to Kathman. "Amazon doesn't deliver [their products]," he says. "They rely on UPS and FedEx."

This article was originally published in the December 2001 print edition of Entrepreneur with the headline: Pass or Fail?.