US e-grocers fail to deliver the goods

It is only a year or so ago that America was supposed to be the promised land for internet grocery deliveries.

Lavishly funded operations such as WebVan, Homegrocer and NetGrocer sprang up to join more established firms such as Peapod and Streamline. But one by one they are falling.

Last week saw a further retraction at WebVan, the firm that had even attracted George Shaheen, head of Andersen Consulting, to become its chief executive officer. WebVan stopped its service in the Dallas area and announced another 220 redundancies. The aim – now so familiar – was to conserve cash and focus on making its nine other regions profitable.

Webvan's rivals have also been imploding. Streamline ended its service in November, having exhausted fundraising options. It had already sold its Washington and Chicago operations to Peapod, which was itself bought by Ahold, the huge Dutch supermarket group, last year. Homegrocer was absorbed by WebVan last year as the two decided to work together rather than tear each other apart.

WebVan, once seen as sector leader, had little choice but to wield the axe. Losses hit $109m (£75m) in the last quarter alone, and its share price has sunk from $14 to 27 cents in the past year. It is a steep fall for a business that started out with the aim of conquering America, with plans to deliver in at least 26 cities.

What went wrong? First, like many dot.coms, the key problem was a slump in investor sentiment, which meant WebVan was unable to raise the funds required to make acquisitions and fund its burgeoning losses.

Second, it was operating in crowded markets where it was not always first in town. These problems appear to have outweighed the supposed benefits of WebVan's strategy of delivering its goods from purpose-built picking centres and its laudable promise to deliver within 30-minute time slots.

With consolidation continuing, the next step must surely be alliances with bricks-and-mortar rivals. That means teaming up with the big US supermarkets such as Kroger and Safeway, using their stores as picking centres and their warehouses and delivery fleets to save costs. The problem is that America does not really have truly national chains; the market is divided into regional strongholds.

The failure of some of these dot.coms is a shame, as some of their ideas were original. Streamline was founded as long ago as 1993 – before the internet – as a phone and fax service that offered to act as a virtual butler. Its innovation was the development of large wardrobe-sized boxes it installed in customers' garages. Deliveries of groceries, videos and dry cleaning were made when customers were out, so Streamline was the first company to try to solve the problem of the "last mile".

The company that must be feeling pleased with itself as these stars fall to earth is Tesco. Its grocery delivery service was derided as being distinctly low-tech when it launched in Britain. Critics giggled at the way Tesco picked internet customers' orders from its stores using staff who wheeled round trolleys, picking several orders at a time.

Now Tesco is the world's biggest internet grocer, with 60,000 orders a week and sales last year of £210m. There has
been talk of taking the know-how to the US with a series of joint ventures. How the tables have turned.

Urbanfetch has given up and Kozmo.com never even launched its London service after the cash ran out. But pedal power is back in London for e-deliveries with a new service called StreetBike.net. Launched in November with the backing of former East 17 record producer Neil Stainton, StreetBike.net started out as a business-to-business service delivering documents for clients such as AOL, British Pathé and Richard Rogers. Now it hopes to break into the business-to-consumer market with a contract to deliver mobile phones.

The company has eight cyclists who are paid a salary and also have 10 per cent of the business. They ride glow-in-the-dark bikes and wear sponsored uniforms. And boy, can they ride. StreetBike.net claims to have taken an order from AOL in Hammersmith and delivered it to Docklands in 63 minutes using three riders. Each bike can carry loads of up to 21kg.

The hook is same-day delivery with an environmental edge. And it is good to see StreetBike avoiding the swanky head office overheads of many first-wave dot.coms; it is based in an NCP car park in Soho.

Could this be the start of a trend? Three directors of J2C, the new name for Just2Clicks, have offered to work for nothing for three months as part of the company's drive to save cash. They include Karl Watkin, the founder, and Luke Johnson, the entrepreneur. Will frustrated City institutions demand similar action from heads of other cash-constrained dot.coms?