WEBVAN VANGUARD

JON SPRINGER

FOSTER CITY, Calif. -- If Webvan Group here does not succeed, it won't be for a lack of ambition.

The company, founded by bookstore magnate Louis Borders in 1996, intends nothing less than to change the very nature of shopping, with an elaborate plan to conquer the "last mile" of delivery to consumers. To execute its plan, Webvan is investing heavily in marketing and promotion, building the largest and most automated warehouses in the retailing industry, expanding its product offerings beyond groceries and delivering them within a 30-minute window of its customer's choosing.

At the heart of Webvan's strategy are its distribution centers. Webvan's first such model, which opened for business in June in Oakland, is 336,000 square feet -- 42 times the size of the "fast-pick" in-store fulfillment centers to be rolled out by supermarket competitor Ahold. Fully automated and temperature controlled, the centers cost between $30 million and $35 million apiece. Webvan expects to roll them out in Chicago, Baltimore, Northern New Jersey and Seattle before year-end.

The centers, which allow for 50,000 stockkeeping units, process orders using proprietary software and picks them with automated carousels and conveyors. Webvan's hub-and-spoke delivery model transports orders to local stations, enabling the company to meet a 30-minute delivery window at locations within 50 miles of its distribution center.

"We believe the investments we have made in technology are a significant barrier to entry," president and chief executive officer George Shaheen said in a recent conference call. "We intend to extend our technological lead, and scale and replicate the business. There is not another company out there that can do what we do."

Webvan is building such large distribution centers so it can expand its product offerings beyond groceries, Shaheen said.

"We chose groceries to start off building scale, order size, density and frequency," Shaheen said. In San Francisco, Webvan is already offering nonprescription drugs, toys, bus tickets, books, music and apparel.

Such items are being added to boost the average order size and margins -- a key to profitability for Webvan, analysts say. Shawn C. Milne, an analyst for E*Offering, San Francisco, projects average order size at Webvan's standard distribution center will increase to $95 per order after six quarters, a period during which average orders per day increase from 800 to 3,300. That translates to revenues of $28.2 million, with gross margins of 26.5% -- or the break-even point of EBITDA as a percentage of revenue in the life of each center.

After five years, Milne's model projects 7,000 orders per day, an average order size of $105, margins of 32% and revenues of $264 million. EBITDA at that point would be $42,372, or 16% of revenue, according to Milne.

"We believe Webvan is offering investors a significant long-term growth opportunity in a rapidly expanding market," Milne said in a recent report. "Moreover, we believe Webvan's customer economic model, characterized by high velocity and repeat purchase, will deliver strong cash flows and significant return on invested capital for each distribution center. We urge investors to focus on 'unit' economics, as we expect that Webvan's first DC will break even in the fifth quarter of operation."

Other analysts are more skeptical, pointing to an uncertainty of demand, high costs, stepped-up competition and risks in technology.

Barry Stouffer, an analyst for J.C. Bradford & Co., Nashville, Tenn., said he was concerned that while Webvan's number of orders grew significantly in the first quarter, orders also declined in frequency. Stouffer also questioned why Webvan will not divulge its costs to fulfill each delivery, including it instead in corporate overhead. "I'm hoping pressure from the Street changes that," Stouffer said. "Otherwise, we're left guessing."

Webvan's model is based on keeping delivery costs at 4%-5% of revenue, Milne said. In order to accomplish that, the company would need to make five deliveries of $100 per delivery per hour. "Our conversations with drivers in San Francisco suggest that the company is moving toward the five deliveries per hour range in certain neighborhoods," he wrote.

George Dahlman, securities analyst for U.S. Bancorp Piper Jaffray, Minneapolis, said greater competition -- particularly from relatively quiet brick-and-mortar grocers -- could also adversely affect Webvan's plans.

"The jury's still out, especially in light of what's been happening recently with the brick-and-mortar companies," Dahlman said, citing recent agreements between Safeway, Pleasanton, Calif. and GroceryWorks, Carrollton, Texas; and Peapod, Chicago, and Ahold, Zaandam, The Netherlands. "It's going to be very interesting to see what the bricks and clicks do."

And although Webvan finished the first quarter with more than $500 million in cash, its stock has fallen nearly 80% since its December IPO and Dahlman wondered whether investors would return when Webvan needs to return to the market, probably early next year.

Webvan Group

Web address: www.webvan.com

Headquarters: Foster City, Calif.

Areas served: San Francisco; Atlanta.

Delivery options: Next-day delivery in 30-minute time slots. Volume:$13.3 million (partial 1999); $160 million (estimated 2000).

Expansion plans: Chicago (third quarter); Seattle, Baltimore, Northern New Jersey (fourth quarter); 15 U.S. markets by end of 2001.

Stock:WBVN Nasdaq

Major investors: Benchmark Capital, Goldman Sachs, Softbank, CBS, Knight-

Ridder, Sequoia Capital.

Key executives: Louis Borders, founder and chairman; George Shaheen, chief executive officer, Robert Swan, chief financial officer.