I often find myself complaining about the money I spend on groceries. Every year the prices go up, and it costs a little bit more to stock my kitchen.
But with some perspective, I am actually quite grateful – at least I’m not blowing $800 million dollars on food.
That’s exactly what grocery delivery company Webvan did when it declared bankruptcy in 2001 – $800 billion in venture capital right out the window.
But Webvan didn’t fail because of low demand for its product. In fact, Webvan was quite popular. Instead, Webvan failed because of internal impotence and overly indulgent operating costs.
One reason behind Webvan’s downfall was that the company lacked relevant industry experience. Webvan was run by techies during the dot-com bubble and did not diversify its employment pool to include food-retail professionals.
Furthermore, the company’s operating costs were massive. A single warehouse in Atlanta ran Webvan $40 million. The company also bought hundreds of refrigerated delivery trucks and hired and insured all of its drivers.
Tied into high operational expenses, Webvan did not reach efficiency within its infrastructure. For example, the company spread its efforts throughout the U.S. instead of first focusing on one specific area.
Additionally, underdeveloped and expensive automated warehousing technologies were used to distribute goods. For every $100 in groceries, Webvan spent $30 to pick and pack. This operating cost was three times greater than what Webvan needed in order to reach economic viability.
But mistakes are just experiences in disguise, which is exactly why having four former Webvan officials as key executives will help Amazon’s (NASDAQ: AMZN) grocery business thrive.
A Second Go
Amazon doesn’t plan on being the next Webvan – it plans on getting grocery delivery right this time around. And if it succeeds, the growth opportunity is massive.
On-line grocery sales made up for less than one percent of the $568 billion grocery industry last year. If Amazon gets this right, it will be able to grab a large share of that market due to its already immense customer base.
First, Amazon is expanding slowly while targeting urban areas with high concentrations of potential customers. Amazon first piloted AmazonFresh in Seattle in 2007. Six years later, the economics are finally working in the right direction, and Amazon is expanding the service as a result.
With its feet now planted on firm ground, AmazonFresh recently launched in Los Angeles and will expand to the San Francisco Bay Area in 2014.
Perhaps equally as important as this slow expansion is Amazon’s already efficient warehousing system.
In 2012, Amazon purchased Kiva Systems for $775 million dollars. Kiva was originally founded to develop warehousing solutions for Webvan but grew to serve other retailers including Staples (NASDAQ: SPLS), Zappos, Walgreens (NYSE: WAG), and Gap (NYSE: GPS).
Kiva Systems manufactures automated robots that retrieve entire shelving units by reading bar codes on the bottom of the unit. The system holds a nearly perfect pick rate and offers far greater efficiency than the broken conveyor belt system used by Webvan.
With these structures in place, Amazon is set to dominate the grocery delivery market. Amazon’s acquisition of Kiva denies competitors the use of the world’s most efficient automated warehousing system. This provides Amazon with a strong competitive advantage because, as perishable goods, groceries require efficient movement.
Distribution centers have a historically high turnover rate. The workforce is aging (25 percent of the U.S. population is over 55), and it is difficult to attract young workers due to the physical nature of the industry.
These factors result in inefficient labor and high training costs. As the quality and potential of this workforce declines, and as automated systems before more cost effective, retailers are looking to robotics for answers.
With Kiva off the market, retailers are seeking alternative solutions for their warehousing needs. Companies like Wal-Mart (NYSE: WMT) are investing in these solutions already.
Earlier this month, Wal-Mart subsidiary and major U.K. grocery store ASDA installed Swisslog’s (SWX: SLOG) AutoStore, an automated warehousing system that rivals the efficiency of Kiva.
The AutoStore installed at ASDA uses 164 robots to store and retrieve 70,000 bins with a 99.8 percent accuracy rate. The AutoStore operates on a simple three-dimensional grid, saving space by eliminating aisles and saving time through quick installation and delivery.
The AutoStore allows for up to 60 percent of additional storage compared to conventional warehousing.
Additionally, the entire system took less than two months to install and was phased into existing operations without interruption. Now that the installation is complete, ASDA picks orders twice as fast as before.
Founded in the 1960s, ASDA is a leading British retailer with approximately 17 percent of U.K. market share. With the successful installation of AutoStore at ASDA’s distribution center, other retailers are likely to take note.
And considering Wal-Mart’s connection to ASDA, it isn’t a stretch to consider this a pilot program for the retail giant.
It’s unlikely Wal-Mart intends to follow suit and acquire Swisslog as Amazon did with Kiva Systems. However, don’t be surprised if more AutoStores start popping up in the United States.
In any case, the AutoStore is (by far) the most efficient warehousing system for groceries on the market. You can expect Swisslog to benefit as a result.
Turning progress to profits,
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