We ended Webvan, Episode I: The Phantom Menace by asking a key question: Is online grocery delivery an industry -- an important industry? At present, the grocery market itself is about $650 billion a year, according to this recent posting from Pankaj Bahl, whose research also lists online grocery delivery last year at $0.5 billion. Company CEO George Shaheen has reputedly said in the past that the total market for all Web shopping is $1,500 billion -- that is, $1.5 trillion. (Not just groceries -- that's ALL the stuff, much of which has to be delivered.)
Anyway, if you take the industry sales of $500 million last year and double the number consecutively over each of the next 5 years, the market size would come to $16 billion, still less than 3% of the overall groceries market. (After its merger -- more on that, below -- Webvan Group expects to jump its sales from $300 million to $1.1 billion next year -- a great start toward a 100% annualized five-year growth rate.) Three percent still isn't a whole lot. Ten percent would get me interested.
But I must further admit that I have a hard time seeing these numbers cohering in such a way that a few powerhouse companies control most of the sales, with "online grocery delivery" perceived as its own distinctive industry. It's the same way that I didn't see "online book delivery" as its own industry even when Amazon.com started with just books. To me, these various e-commerce opportunities lead over time to fragmented industries that blur across categories. It seems likely that when it comes to Web-initiated deliveries, numerous players will wind up delivering all sorts of different consumer goods. This contrasts with the notion of individual oligopolies dominating a collection of discrete categories.
Ultimately, as I look for help in answering this question, I refer back to an intuitive principle introduced in Rule Breakers, Rule Makers. To determine if an industry candidate is sufficiently important, we ask ourselves these questions:
If this company and its industry disappeared overnight, would everyone notice? Would anyone notice?
In the case of Webvan and online grocery delivery, at present precious few would notice. As of the close of the second quarter, Webvan Group listed customer accounts at 160,000, well less than one-tenth of one percentage point of the U.S. population. Most of what I'm reading and hearing from these customers is extremely positive, of the "can't do without them now" variety. But it's hard to for me to eyeball this company and industry and say with a straight face that what they are doing is "big-idea important," and constitutes an industry.
Again, I believe it is more likely that what will eventually constitute an "industry" within Webvan's fragmented business environment is what I'll call "Web-initiated instant delivery" across numerous consumer product categories. That's a bigger idea, a couch potato's dream, but it's going to be coming to you from numerous players. And I frankly doubt that such a personnel-intensive business is going to show very high margins.
Webvan Group will almost certainly work hard to broaden its business. (Notice its name has nothing in there about just food.) Read this post -- mentioning how Webvan would be delivering the new Harry Potter book to the correspondent on the Saturday it came out, in addition to his groceries -- and you'll find someone emphatic on the point that Webvan IS a Rule Breaker. But I'm going to have to see more serious progress by the company to either completely dominate its primary category (the way that Amazon dominated books), or a clear demonstration of adept ability to deliver many different sorts of things, or both, before I personally will consider Webvan a true Rule Breaker possibility. That's my take. Give us yours on the Webvan or the RB Companies discussion board.
Given that I don't believe Webvan is at present operating in a sufficiently important, emerging industry as its clear top dog, the other RB criteria are worth looking at only as a sidelight. Keep in mind, of course, that just because we don't consider Webvan a Rule Breaker does NOT mean it isn't a good company or won't be a good stock. It's just to say that it doesn't perfectly fit our six criteria.
To learn more about this dynamic entity, we'll take a snapshot look at the other five criteria on the next page (linked below). I hope you'll click on over there.
If you've had enough of Webvan for now, then check out our Fool Survivor special. Peter Lynch, Meg Whitman, and David Bowie are among the castaways. You get to determine who stays and who goes!