GENE SHAHEEN, President and CEO, Webvan

from Kellogg School of Business Cyber Symposium, Feb 2000

DEAN JACOBS: I have the honor of introducing an old friend, and that's George Shaheen who will start off today. George and I go back a long, long way, but what's more important than that is that he is an extraordinary person. The fact is, I couldn't be prouder of the fact that he's going to open up today's session. George has overseen and managed, and in effect, intellectually, I think, drove an extraordinary organization called Andersen Consultants to be an enormous, enormous world-wide force in the technology area during this rise of technology. The extraordinary thing, and I'm not going to gush, but the extraordinary thing is he's now doing something - he's in effect moved on to do it again, and as he's starting with a new organization, and left this gigantic juggernaut that's moving along to start again and to do it again.

I had a colleague once that said, "I'm not sure what entrepreneurship is, Can you teach it? How does it come about?" And we both decided that the way to really tell if a person is a real entrepreneur, is not whether they had one success, because that could have been an accident. They could have been there at the right time, at the right place doing the right thing. It's can they replicate? So George is now in the throes of now showing us whether he's going to be a fantastic entrepreneur by whether he replicates and Webvan grows to be a real force in this world, or was he just lucky to run this organization. (laughter) My bet is, he's a great entrepreneur. George Shaheen. (applause)

SHAHEEN: Yeah, maybe we have one of the great flameouts in history going here.

Whenever I meet Dean Jacobs, I - a lot comes to mind. I would say that I get asked a lot, "What's it take to be a great leader?" And I have a very simple view of that. I think that to be a great leader you have to have a vision. You've got to know where you want to go. You have to have courage, to dare to be different to pull it off, and third, you have to execute like crazy to make it all come true. And if you can do that - you have to be more right than wrong as you execute - and if you can do that, you have a pretty good chance of being a pretty effective leader. And I would say, in looking at the Kellogg School over the years and see where it came from and what it is today, and the stature it has, and the role it plays in educating a global student body, this was led by an extraordinary individual, and you personify those three attributes wonderfully, Don, and I would like to acknowledge that to everyone, because this is a special place, that was built with a special vision. And to that, I congratulate you.

I have known Don for a long time. We served on a board together. And one remembrance I have as I was late at night about to take an overnight flight from Sao Paolo to, I think, it was Los Angeles. So I'm, as a road warrior, going through the Sao Paolo airport, and I see this solitary figure, sitting in a chair with a briefcase open, plowing through reading, and I said, "That looks like Dean Jacobs." So I wander over there, and as luck would have it he was waiting for the same overnight flight back to the States, and so we talked. And I said "I know why I'm doing this, Don, I've got to do this because I don't like to starve." I said " I have no idea why you're doing this." But he puts a lot of time and effort into his job, and we have crossed paths many times, and it's been very enjoyable.

I want to talk to you this morning about e-commerce. I want to talk to you about e-commerce as it relates to selling to consumers, and also talk to you about that it doesn't start with business to consumers, but it's also business to business. And I'll tell you a little bit about Webvan, and what we're up to, and what we're all about.

There are many approaches to e-commerce, and what we have learned to do very easily is take friction out of the sales process. We can, through Web stores and Web sites, we can make ordering a product on the Web, disseminate information on the Web, frictionless, and a lot of companies have gotten their start to do exactly that. And in this, if you will, front-end play, it's about acquiring customers, personalizing the experience, and as I say, removing friction from the entire buying process. And that's how commerce on the Web has really gotten launched. And the barriers to entry of that are not particularly high, except as it relates to having an acquired customer base, and having built a brand.

The other approach, or the total approach, also requires addressing the back end. And the back end, oftentimes, is what is forgotten about. The infrastructure on which the, if you will, the commerce business model sits. And what's important in addressing the back end is to build scaleable, efficient, and a cost-effective infrastructure, re-engineering the supply chain, because things are different when you sell in a virtual environment versus a brick-and-mortar environment, and also having to build frequency of contact, and density with the customer.

Now, as Webvan looks at the cycle and at where we sit in the e-commerce arena, if you will, we don't think it's enough to be able to allow you to get into our Web store and order products. That's not enough. We have got to fulfill that order very efficiently and predictably, and we have to get it to you with very little hassle on your part. That takes an awful lot of infrastructure to do that.

Now, let's compare this to the communications industry, and let's think about what Webvan is all about. If you compare it to the communications industry, the global e-commerce community requires a high-density fulfillment pipeline. If you are going to offer a total shopping experience to a customer, you have got to be able to scale it, and you have got to be able to have an efficient process in which to serve the customers.

Webvan is all about building the broadband, if you will, backbone to e-commerce, and you can relate that to building the bandwidth requirement in the communications industry. If you don't do that, then you limit the supply of economic bandwidth that's required to make it a valid business proposition.

And there are costs, and there are cost metrics we have to look at. And in our world, it is very important that we have a relevant metric of how much it costs to get by your home every day, or multiple times a day.

And today's e-commerce business cycles are really akin to twisted-copper pair in the communications industry. They're there, they will function, but they can't handle the bandwidth. It doesn't have the infrastructure required to handle the requirements to scale of what the consumer wants. And Webvan's role in all this is to address that infrastructure problem so we can present to the consumer a total shopping experience. So this is a heck of a lot more than just groceries.

What is Web Van? Web Van's mission is to deliver the last mile of e-commerce. We want to be that last mile connection to your home. And we want to do that with products that you want and need. Every product that you want and need. If you can get it into a tote, we want to be able to get it into your home.

Now, why groceries? Why do we start with groceries? I was on a - the DLJ conference a week ago, and Jeff Bezos spoke before I did. He made a comment that Amazon tackled the tough item first, which was selling books on the Internet. Well, I have to tell you, I sat in the back of the room thinking about eggs and milk and ice cream and all this. And so when I got up there I said, I pointed out that I don't think that Amazon did tackle the tough thing first. I think we're tackling the tough thing first, which is groceries.

Groceries is a scaleable, frequent contact with the consumer, a line of business that allows us to build the infrastructure to connect the last mile. In other words, with the grocery business, everybody eats, and everybody eats quite frequently. That gives us scale, as we get market share. Also, because we eat quite frequently, we have an opportunity to have very frequent contact with our customers. Once you have a large group of customers, and you have an opportunity to interact with them very frequently, then you can do a lot with that relationship.

That's that connection of the last mile. And then what we can do, we can bring you your books, your music, your apparel, and other products. So when you look at Webvan, you can't get caught up in the grocery only arena.

And I get asked a lot about our competitors, and immediately they'll start talking to me about the other Internet grocery plays. That's really not our competitors. That's not our competitors. Our competitors' everyone else who has a vision or a model to be able to connect the last mile to your home. That's what Webvan is all about.

Now, as we're in business today, in Oakland, we are in the grocery business, and it's absolutely imperative that we build the world-class national grocery chain in this country. We have to be - we cannot be second best. We have to be better than everyone else if we are going to attract new customers. Because we're faced with the challenge of getting a shopper, who today still remains primarily a woman, who's been trained for decades to shop at a brick-and-mortar grocery company, and we've got to get that shopper to trust us, to understand what our business model is, and to rely on Webvan to feed her family. That's what we're up against. It's a tremendous human behavioral challenge.

So what I'm going to talk about now is the grocery part of this, because this is the business segment on which the Wevban vision will sit as we scale and go forward. So if we could, roll the tape.

(Video with narration)

NARRATOR: Web Van's 330,000 square foot Oakland California distribution center serves a 60-mile radius of the San Francisco Bay area, the nations' fifth-largest metropolitan area.

It begins when customers place an order through our Web site. They can move quickly and easily through their shopping lists, navigating by category or searching specific items. Orders are processed by our Web servers, then routed to the distribution center for fulfillment.

Webvan's Oakland distribution center uses an innovative automated materials handling system to fulfil orders far more quickly and cost-effectively than would be possible in a normal supermarket or warehouse. The Webvan distribution center has 41 carousels, with a storage capacity of more than 107,000 locations. More than four and a half miles of automated conveyer belts move through the facility past a series of put-away and pick pods. Unique bar code license plates on each container are used to move and track all movement flowing through the system. A series of scanners, some fixed position, some hand-held mobile units, read each tote's barcode as it passes through the system.

Our proprietary software system organizes workflow in a way that maximizes productivity. Merchandise received at the center is immediately broken down from its cases, and transferred to trays, which are the containers used to store inventory. Workers scan the products' UPC or barcodes, and enter the number of items placed in each tray, marrying that data to the tray's barcode license plates.

Our distribution center can handle up to 50,000 SKUs. The system knows every location, and exactly how many of each SKU are on hand at any time.

The Webvan system assigns colored totes to each new order. The yellow totes are for dry groceries, the green totes are for chilled products, and the blue totes carry the frozen goods. Each tote is given a license plate which is linked to the specific customer's order, and then tracked throughout the fulfillment process. The system uses software algorithms to automatically route totes to the various put-away and pick pods, which were set up to optimize the loading process. In the grocery business, less than 20% of the items account for more than 80% of volume. We designed the mechanized pods to handle the fastest moving items. The pick path of the totes is set up so that the biggest, heaviest, or most solidly packed items come first, so that the tote can be packed without crushing smaller or more delicate items.

A variety of SKUs requires special environments, like fine wines and premium cigars. The cigars and other tobacco products are kept in a humidor lined with Spanish cedar. Wine is kept on its side, at 57 degrees Fahrenheit, in a dedicated wine cellar.

The tote then proceeds to our automated carousels. The system, using intelligent scanners and routing devices, optimizes the route of the tote. As the tote comes to a pod, the carousels move into position to place the needed items right at the picker's fingertips.

Each carousel has about 8,000 locations, about a third of a good sized grocery store, yet all these items can be efficiently shopped by just one picker. The carousel operator can pick up to 16 orders simultaneously.

A light tree display next to the carousel bins tell the picker which items to pick, and a sort bar display on the conveyor belt shows which items to put into which tote. While the yellow totes are being filled, simultaneously the green and blue totes are also moving along, fulfilling their customer's orders. Produce, meat, fish, poultry, seafood, deli, frozen foods, and prepared foods, are kept in properly refrigerated environments during processing, picking, packing and delivery.

Produce is delivered to us freshly picked each morning. The consumer often receives items that were picked less than 12 hours before. Meat, fish., poultry, seafood and deli SKUs aren't precut and prepackaged. Each item is individually cut and prepared to customer requirements in rooms that are built to USDA specifications.

Prepared foods are an important part of our business too. We have developed recipes especially for later re-heating. The meals are cooked, and then blast-chilled to stop the process, so when the customer reheats the meal later, it is cooked perfectly.

Once the fill-to-order items are packaged and labeled, they are stored in their pod and await their tote.

Like express courier services, Webvan uses a hub-and-spoke system. Completed orders are transported to the dock, separated by delivery route, and loaded on dollies that are wheeled onto specially equipped trucks. Larger trucks go to satellite delivery stations where the orders, already grouped by destination, are loaded onto smaller vans for local delivery.

The Webvan courier brings the order into the customer's home, and checks each item against the order list. The courier is able to immediately credit any returns the customer might have. Customer service and customer satisfaction are the top priority.

The Webvan system isn't just a convenient delivery alternative for the consumer, it's a better way of doing business. The cost from distribution to the customer is far less, and the quality and selection is second to none. Grocery items are fresher, less handled and in better condition than they would be in a supermarket. Webvan can stock 50,000 SKUs, far more than the largest supermarkets. Our innovative proprietary distribution system allows Webvan to offer a revolutionary customer service, along with an attractive financial mode. Web Van delivers value - to customers, and to investors.

(End of video presentation.)

SHAHEEN: That is not your mother's grocery store. It took a total reengineering of the supply chain and a total e-engineering of the business model to put this together and I want some of that to you.

IDC estimates that in the year 2003, that there will be $75 billion spent in e-commerce. I think that's low, personally , I think that it will be greater than that. I think that it will continue to grow exponentially for some period of time. But that is a big, big amount of money coming out of the brick-and-mortar environment and into the Internet environment. It's huge, the market is huge.

If you look at what Webvan is positioned today to build that platform, to build the infrastructure on, the connect-last-mile, it's about groceries, non-prescription drugs, and home-prepared meals. That is a $650-plus billion market in the United States today.

That's the scale we're going after. That's why it is a lucrative opportunity to get a relatively modest market share, but build a very large scaleable, hopefully more efficient company. So we're going after a base of business, that we think can offer us the scale on which to build the last-mile infrastructure.

Now, let's look at the grocery business, because that's actually the business that we're primarily in today. And I think - I commented earlier on the challenge to get the grocery shopper out of the brick-and-mortar establishment and onto the Internet, if you will, to experience and hopefully stay with the shopping experience offered by Webvan.

Well, we looked at that very carefully and determined that there were four major buyer values that had to be addressed if you're going to be successful.

First of all, you had to be able to give the customer choice. Choice. And that's why we built a DC that can handle up to 50,000 SKUs. Not all groceries, mind you, but a lot of choice.

Secondly, you had to provide quality, especially in produce, meats, and prepared meals. Why? Because today one of the first things you hear from a consumer, or someone I talk to about Webvan: "Well, I would like to shop that way, but I like to go to the supermarket because I like to squeeze my own produce."

How many of you feel that way? Now think about it. So does everybody else like to do that. On average, when you take a piece of produce home, did you ever think about how many people have played with it before you took it home? (laughter) A lot. You'd be amazed. Our studies say somewhere between eight and twelve people have pored over that tomato before you took it home.

And as you can see in this system, one or two people at the most handle it, and it never leaves the prescribed chill chain. It stays in that chill chain till it gets into your home. So the freshness and quality of fresh meats and produce is unparalleled. In fact, you can tell a first order when it comes to the DC. You'll see a banana, a peach, an orange, an apple, one pork chop, when someone's trying to see if we're for real for not.

So it's very important that quality is at the highest level, because the shopper will demand that. You can go to a brick-and-mortar store, and you will select a piece of produce, and it may not be good produce in the aggregate, but you in your own mind will pick the best available next tomato. And you'll be satisfied with that, because you will have made that decision. You won't afford us the same opportunity to shop that way for you. You want the best item out of us every time. Very high hurdle.

Thirdly, a buyer value is price. As a consumer, you want everyday low prices, especially in your food shopping. And then fourthly, is convenience.

Now, Web Van's business model addresses, specifically addresses each of these buyer values. Selection, quality, price, and convenience.

My opinion is, the price of admission to the game is the first three: choice, quality, and price. If you don't come in with those three buyer values nailed, the consumer will not buy convenience alone.

I think some of the early entrance to the online grocery business felt that the convenience play would be enough to provide a premium for the service. We don't believe that's true. Convenience has to be the clincher. And that's the buyer value then that prevails.

The Webvan business model was approached as a total reengineering, if you will, of the supply chain, all the way back to the suppliers, and then all the way on through to the customer. And it all starts with our Web store - that's the connection point of our retail establishment, if you will, to the consumer.

And that Web store plays a very important role in connecting to the customer, but also connecting to the DC, to drive the DC, what orders to pick, in what order - what customer orders to pick, in which order, to get them to the receiving dock, because we've made a commitment to you. You have selected a day of delivery, and you have selected a 30-minute window in which you want that food delivered.

It's a very high hurdle of performance, but it also forces a very strong commitment of our company to our customer to meet that 30-minute window. And the way we do that is through a hub-and-spoke operation with transfer stations, transfer trucks, and then local neighborhood vans, which I'll get into in a little bit.

So what we did at Web Van, is we went through the whole supply chain, reengineered it, so we could pick peaches, we could get them aggregated in orders to get to your house when you said you wanted them.

I spoke a little bit about the hub-and-spoke delivery system, once again, think of the infrastructure required to do this. We move orders in the aggregate out to transfer stations and then move them into the smaller vans to go into the neighborhoods and deliver them.

Now looking at San Francisco Bay area, where we have our first DC, we have bridges, we have tunnels, and we have crowded highways. And we have over 90% success in delivering the order within the 30-minute window. We feel that's probably the toughest geographic area we are going to have. And the fact that we can do it in San Francisco, with all those natural barriers, gives us a lot of confidence that we can execute this in other locales without the same challenge.

The business model is interesting, and as you can imagine, the investing community was very interested in this. That DC you saw is the equivalent of about 18 freestanding supermarkets, in terms of volume.

If you look at what an average supermarket does in the $15 to $20 million-per-year range, we will get over $300 million out of each one of our Distribution Centers. The gross margins - the gross margin on the food is about the same, 32%. But we get an eight percent pick-up on the bottom line because - if you look at this it tells the story. We have a higher distribution and general administration expense line by some seven percentage points, and we have to add five percent, our costs, onto that for the delivery network. But if you go down to operating a store, that costs the brick-and-mortar retailers 20 percent of their other operating margins.

Why? They are freestanding and very expensive real estate locations, and that is, in suburban areas, and they have to be outfitted with the equipment and with the decor that is pleasant to a shopper.

And basically, our fulfillment centers, which are much more productive, which are built in light industrial areas, are much more efficient, in terms of real estate utilization, and our delivery system still does not pick up the excess amount of money that a brick-and-mortar retailer has to pay in their real estate.

In running 18 supermarkets, it's about 2,200-plus people for a brick-and-mortar retailer. We can run this DC system with the delivery network with 900 people. So we have about a 2.5-to-1 advantage in labor costs, over the brick-and-mortar retailers.

Now the magic in this, in my opinion, and the excitement of this, is that we all know that the grocery business is a mature industry. We know that the profit margins are razor-thin. But by leveraging technology, and by reengineering the business model and the supply chain, you can go the next step to wring added profitability out of the equation.

And that's what makes the financial picture for Webvan so bright, is that we're going after that eight percent advantage in profit margin. That's the opportunity we have in front of us.

Now, there's a real first-mover advantage in the Internet space. We all know that. Customer attraction, brand-building is very important.

So one of the things I've observed since I've been on board is we've got to build these things faster. We have to roll them out as quickly as we can. And in order to do that, we have to consistently apply technology.

We have 26 of these Distribution Centers on the drawing board, and each one cannot be a variant, technologically. There has to be a consistent platform.

And we have to build this infrastructure very quickly, very reliably, and we have a very unique contract with the Bechtel Corporation, I'll talk about early on to help to build these things up very quickly.

We have to develop totally new relationships with wholesalers and suppliers. When you go to a brick-and-mortar distribution center, there's a lot of pallets. We don't deal in pallets, we deal in eaches. So the merchandise when it comes to us, from our suppliers, has to be in a transport form that we can break it down very quickly, get it in those trays, get them on the carousels or the mech pods so we can officially pick it for you. We are not a pallet operation. We're working with suppliers so they can re-engineer their supply chains that come to us.

We have to be very aggressive in marketing. We have to be very creative in marketing, as we attract new customers, and we're doing that with School Pop, which is an Internet Script Service that we've signed an alliance with, and of course, advertising and promotions.

And then as any good retailer, we have to be a known, relevant part of the community. We have to give something back, and we're working very hard to work with our customers to come up with programs, where, to be quite frank, we can feed the poor, and that type of thing, and people can participate with us.

I commented on the Bechtel relationship. This is all about helping us build first-class infrastructure as quickly as possible. We did a deal that was new with Bechtel. We said we'll give you some incentives. You build these things where we want them built on time, on schedule, and you'll earn yourself some stock warrants as part of your value proposition for your reward. And so this is their first step into the Internet space where they are assuming some of the risks of performance going forward with us and putting some of their upside at risk as they do it.

Now this was not easy to do with this crowd. This group has been around a long time, and they have built some major projects around the world, and getting them to see the new world was fun, but I think we've got them understanding how we want to build these things and how we want to compensate them, and they're good at what they do. Around the world, they've tackled some of the largest construction and engineering projects known. And they're working with us on - building out our infrastructures is something we don't have to worry about.

Our expansion strategy today is we'll come out of the ground in Atlanta on the second half of the year. We'll be in Chicago out of the ground in operations, probably late July or in August. We'll be in Seattle in the second half of 2000, and then we have Washington and Dallas on the drawing boards, and there'll be more lease signings announced in the near future, and we hope that by the end of 2000, early 2001, to have, well on our way to have our 26 largest markets, with distribution capability and a Webvan shopping experience enabled.

The target market we're going after is was what I called the soccer moms. This is usually two-income working families. They are urban. They make - they have family income. What they don't have is a lot of time. And they value, they want a first-rate shopping experience that they can do from the convenience of their home as efficiently as possible. If we get one to three percent of this target market our economics work.

I was with a major investor yesterday, and he heard this and he said well if this works why wouldn't you get 85 percent of the market. I said keep talking to me, you're screwing up my courage. But you don't need 85 percent of the market to make this work but if you think about it, if it works, it's relevant and it's sufficient and convenient and you can deliver quality, why can't you get a very large share of the market.

We did a survey in San Francisco and we said how many - we tried to find out how many people were likely to use an online grocer. Six percent said absolutely, that's your early adopters, that's your first traunch of customers. Twenty-three percent said probably that they would, so that's 30 percent of the market right there that probably would use it or definitely would use it. And if you just got half of those who were neutral, which meant that they were probably open to it, you'd be well on your way to 35 percent market share in this space. I believe by 2003/2004 that there will be 35 percent of the market buying groceries off the Internet, but with a model which combines all four of the buyer values.

The real story in that prediction is not what it does to the Webvans of the world and others who would be the ones doing this, it will be what happens to the brick and mortar retailers. It will be a very painful reality for them if my prognostication is true. In fact, they hurt very badly if they use 8 to 10 percent share.

The barriers to entry to this business are huge. First of all, that courier who comes to your house, and gets in your home and gets in your kitchen, is a powerful relationship. I believe there will be one or two companies who will earn the right to have that relationship with you. Webvan intends to be one of them. The capital investment is huge. That DC sitting on the ground is a $35 to $40 million dollar investment along with the courier network.

We feel we have a 21/2 or three year head start already on the development of the technology to do this. The technology that does all the picking, all the order gathering, all the route optimization. Every route we have to re-optimize every day, because we may come to your home one day but not the next. You may have it one 30 minute window one day but not the next - is quite powerful.

We have used some standardized software, but to be quite frank a vast majority of this code is proprietary. Our engineers have designed and brought it to life.

We have exclusive vendor equipment relationships - the carousels and the logic, the light tree logic on the PIX and the conveyors. We have exclusive relationship with those vendors.

We have our unique relationship with Bechtel and we hope we're getting the advantage of being a first mover. First mover advantage is very powerful.

Competitive response is I get asked about this all the time. What will the brick and mortar retailers do? Well, I don't have an answer for that.

I think the first thing they'll do will take a kill them in the cradle attitude where they will try to pick out of their freestanding stores and either deliver that to you or have you come by their store to pick up your groceries.

The problem with that is it's not scalable and it's not economic because they provide that service, they're adding an additional layer of cost already on a high-cost operation. So that isn't their answer. Their answer is to make the investment to get into the business this way. In order to do that they have to be willing to cannibalize their stores. They have to be willing to put that real estate at risk. It's a very difficult decision to make, to leave what got you there and put it at risk for a whole new business model.

There are other e-commerce companies who are looking at the space we're in quite interestingly. Amazon, Priceline, Fingerhut. There are a myriad of companies out there who have various components of what I've talked to you about, what Webvan is trying to integrate and pull off as the single company. They will have responses to what we're doing.

We know today that Amazon is building fulfillment centers. We know that Fingerhut is investing in fulfillment technology. And we expect that in this space because it's so big, because the opportunity is so huge, competition will be attractive.

And of course then there's the online grocery companies themselves. But we don't know of any other online grocery company that is approaching the business model like we are, who have re-engineered it to the extent we have. But the competition will be coming. This market's just too big. So with that, I would like to answer any questions you have and see where we go from here. But these are exciting times and we haven't seen anything yet. I think the Internet shopping experience you have today is as bad as it's going to get. It's only going to get better.

AUDIENCE: Given the brand recognition of an Amazon or a Wal-Mart or some of your potential competitors, do you think that you're going to need to partner with someone who has a massive brand recognition, a Yahoo or an AOL or something like that to get that distribution, that Ticketmaster, something like that?

SHAHEEN: I think opportunities to do that will be there. I think we will consider those very carefully because what you're doing when you align with another brand is you're making a choice. You're declaring and you don't do that lightly. But I think we're going to see in this Internet space and we're already seeing it where brands, the co-branding phenomena where both sides get an uplift from each other, I would expect us to definitely be in that space.

AUDIENCE: If you woke up tomorrow and you were the Chairman/CEO of the United States Postal Service and they were somehow privatized, what would you do as a sort of a response to this threat (inaudible) -

SHAHEEN: Well the Postal Service does have a fleet of trucks and they do get by every home in America every day, but they have a specific route structure and they have a workforce which is not incented or built around customer service. Big change you'd have to address.

So they have some advantage and they have a mechanism to get by every home but they don't have the model right. It's just not getting by a home it's getting to that home and in the door when you want me there. And then you have to have a workforce that's incented.

Our couriers, the men and women who come into your home and get paid an attractive salary with benefits and they have stock options. They want this company to work.

AUDIENCE: George. Do you have any thoughts about global expansion and secondly, are you going to acquire companies who are doing what you're doing today?

SHAHEEN: I personally am not a real believer in acquisitions. I think the management time and attention that it takes is heavy, and if you study history, acquisitions have a much larger track record of failing than succeeding so I'm not a real fan of acquisitions. I wouldn't say never, but I would look at it very carefully.

In terms of internationally, yeah, this model should work internationally but Europe is not the United States, Asia is not the United States, but the basic need is there. We want to be global. No question. We want to take this global. I have been contacted by a number of, what I'd say, very reputable companies and investors outside the United States to partner and go global. However I think right now we got to get this model implemented and working in the States and then go from there. So that will be down the road a bit for us but that certainly is in our aspirations.

AUDIENCE: Yes. You've described how Webvan is changing retail and delivery, can you describe -

SHAHEEN: I'm sorry -

AUDIENCE: You described how Web Van is going to change retail and delivery, can you describe how it will impact the manufacturing and production side on the upstream?

SHAHEEN: Yeah. We have immediate information about who buys what. Also when you order a bottle of ketchup from Webvan we, at that time, we allocate an available bottle of ketchup to you, or we know when additional ketchup is coming in and whether it's going to get there in time to fulfill your order, so we have a very dynamic inventory allocation process.

By working with our suppliers we can pass that information upstream and it helps them plan their production and their shipments to us. It also gives them very online customer choice, what customers want, and thirdly, it allows them to then work with their packaging divisions to get the merchandise to us in packages and in forms that make our processing of it more efficient.

P&G has just been wonderful. They have put multiple people, have worked with us for months on this whole supply chain. They're taking it very seriously. They look at this whole Internet grocery selling channel as totally different, and they have really rolled up their sleeves for example, as has Nestles, as has Pillsbury, as has General Mills, to come in and say what's different, how we're going to do it.

The reason they like us is this: to buy over the Internet that's a brand buy. It's a brand buy. You're going to buy what you know. You're not going to buy generic, because you can't see it and touch it and feel it.

We've told them we don't want to be generic. We want to be brands as they love that. We've also said don't come in the Webvan and repeat the mistakes you made in the brick and mortar business. What is that? Slotting fees. We don't want slotting fees. OK. Get that out of here. No diverting. We don't want to get in that diverting business, and take those bad habits and leave them behind. All they do is add costs, administrative costs and control costs. We don't want them. Just sell us the products our customers want at your best price and we'll work with you. We won't go generic. We'll stay with brands, and we'll work with you to market your product.

They like that. It's simpler. It's more straightforward and because of what they see this market going to explode. It allows them to make some investments to change. So those relationships are very powerful. I don't know who has control of this

AUDIENCE: You have been the managing partner of Andersen Consulting for 10 years, maybe some of the students here are still hesitating between careers in consulting or in the high tech. What would you advise them to do.

SHAHEEN: Between consulting and high tech?

AUDIENCE: Yes.

SHAHEEN: Well, listen. I spent 30 some years in the consulting business and I wouldn't have changed that for the world. Let me tell you why I went into consulting.

In 1967, when I came out of college, I didn't know what I wanted to do. And I had no basis to make that decision, so when consulting came along, I just executed a hedge, and I figured I knew enough about the firm I was joining that if it worked out, I thought partners, seemed to me, living pretty well, so I said to myself, I'd be one of those. And if it doesn't, I'll be able to pick my next career a lot smarter than I'm picking my career coming out of college. So I just executed a hedge. And I never really had to execute the other side. I chose to execute the other side.

So I'm quite a fan of consulting. I think it gives you in-depth experience. It gives you variety, and you really grow quickly in a short period of time. So I speak very highly and relate very admirably to my career in consulting.

In terms of high tech, that's a whole different arena. Let's face it, the allure of high tech is small company, not a lot of regimentation. Quick responsibilities, and riches. Pre-IPO.

What you don't realize is statistically, if you looked at it totally statistically, it's not as lucrative as you think. There's a lot of failures out there. So you have to know what you're getting into.

So what I would tell you, it's very difficult for me to say consulting or high tech. I think it depends upon what you want to do, how you assess the risk-reward, and how you want to develop.

I would tell you that as a young professional, going into the workforce, you have five to seven years to build a marketable set of skills that you will then sell to the marketplace for the rest of your life. Build those skills. Build those skills early in your career, and you'll be able too market them the rest of your career very efficiently. So that would be my advice, and wherever you think you can build those skills the deepest and the quickest, that's where I would go.

AUDIENCE: With e-commerce growing exponentially, do you think a lot of deliveries will grow, and your target audience is the soccer moms, it's likely to have a career. I wonder if you've seen companies doing interesting things to build ways to accept deliveries, either in the garage or storage room or something that pops up out of the ground and is (inaudible) coated. Who's taking care of that part of the industry.

SHAHEEN: OK. We deliver seven in the morning until 10 at night, so we have people in San Francisco who will take an order in the morning before they go to work, they're done with it, they put it away, they go to work. We also deliver up to 10 o'clock at night, and those are very heavily in demand business times for us.

We do not believe that the lock-box on your premises is a scalable, economically viable model. Why? Those devices are expensive, and to the extent that those devices have to sit inside your premise somewhere unattended is a deterrent for people to use them, and you cannot use them in urban areas. There's not places to put these devices.

So there are some Internet grocery companies on the East Coast that have a lock-box type situation that that piece of asset comes to your property and it sits. The box is expensive. It has to be refrigerated.

And we have trouble leaving perishables, liquor and tobacco unattended. We will not do that. if you have liquor, tobacco or perishables, we will not leave the product unattended.

And so I understand the concept. We don't think it's economical, nor do we think it's scalable.

AUDIENCE: Speaking of the Northeast, how do you think that (inaudible) scale. I thought that (inaudible) efficiently (inaudible).

SHAHEEN: Stay tuned. We'll have some more leases we'll be announcing shortly.

AUDIENCE: As I understand -

SHAHEEN: I agree with you. I like the density, and especially New York. New York likes service so we look at that as a lucrative market forthcoming.

AUDIENCE: As I understand it, Peapod and HomeGrocer are just a few of your competitors out there and, in particular, Peapod, the way I understand it, seems to have a geographical footprint on the United States, and they've also changed some of their distribution going more towards warehouses. What value does Webvan have over Peapod so that it will be the market leader in a couple of years from now.

SHAHEEN: Scalability. Peapod was in San Francisco seven plus years ahead of us. We went by them in volume immediately because their model isn't scalable. They could only do four or 500 orders a day and we did that right out of the box, so they have to come up with a fulfillment and delivery capability to scale and it remains to be seen if they can build something like that but, so far, we haven't seen it. Also I believe their commitment is two-hour window. We think that's - we don't think that would be competitive.

AUDIENCE: George, regarding current brands like Nestle and Proctor and Gamble who you're working closely with in regards to brand recognition, what kind of barriers to entry are those companies presenting in regards to customers changing brands, barriers to entry of new products in the future, and how is Webvan addressing that?

SHAHEEN: Yeah, I - I think the reason they are working with us so intently is because they - I think the Internet shopping experience is going to allow secondary brands an opportunity to jump towards the head of the pack at the expense of some of these others, and I believe the large brand companies don't want that to happen.

This is a window of opportunity for someone who doesn't have, maybe the market share in a particular locale or in a particular product segment, category segment, and I think the big, major brand holders realize that and they don't to let that happen, and so I think there's a lot of jockeying going on to protect market share and also to gain market share because this is a window of opportunity.

It's very interesting. How we present an item on the Web page can dictate how much of it it sells, because Advil comes before Tylenol - Tylenol is the larger national seller, but we sell more Advil because it comes first on the alphabetic list, so I mean this - this changes, this changes things and, if your Tylenol, you want to work with us so that doesn't perpetuate itself.

AUDIENCE: I know that you and a lot of other companies are obviously targeting urban areas for the distribution advantages. Do you see any time in the future people living in less densely populated areas getting any of the advantages that the Web is providing?

SHAHEEN: People living in less? -

AUDIENCE: In rural areas.

SHAHEEN: I think to make this thing work in very low density areas, you have to get a block of people and you have to get then to commit to a particular day and time segment and make a route out of it. If they're willing to do that, you can do it. It's very difficult to do that within a 30 minute window proposition that you're choosing. It just isn't economical, but we have some plans to do that. We want to go into some neighborhoods and sign them up as a block and give them an economic break, because it's economical for us, so we'll be rolling some of that out.

AUDIENCE: George, you've obviously applied a lot of technology on the back end, specifically through the fulfillment process, but on the customer side, your customer base is still constrained a bit by those people that have PC's to do the order. Are you looking at any alternative technology as far as order process goes on the customer side to make that more accessible?

SHAHEEN: Yeah, we're very interested in talking to other companies who are catalysts for getting the population more connected. Take People PC, if you've seen their ads. We have a lot of interest in those types - we're working with companies to get a Webvan button on the intranet at that company. Why? Because it makes their employees more productive if they don't have to worry about going out and shopping and they can shop on their lunch hour at their place of work, so we are doing those types of things, and we've had very good reception.

The next part of the question is what kind of new appliances would you have architected to serve this? We are looking at things like very affordable portable scanners that can scan what you - if you're going to throw a can of soup away, you scan the UPC code, you throw it in the garbage can, we log it in on a device that you can download, hopefully in a wireless environment, very efficiently.

So we're looking at all of that because we think this is all about saving time. Your generation, on this side of the room (laughter) - your generation is not going to go to the grocery store. You don't want to do it and you're not going to do it. You'd rather ride your bike, you'd rather take your hike, you'd rather play golf, or whatever. You read. You're not going to go to the grocery store.

This side of the room, we're still working on you. You're what's keeping me awake at night because I've got to get you to change your behavior. OK? But since you're the future and there's a lot of you coming, there's no way that it's going to lose, in my opinion, if you can execute this.

AUDIENCE: I was interested to see that you listed community involvement as one of your top five action sets to acquire customers. I wanted to see if you could expand on why you consider that critical, and are there specific strategies that Webvan has to achieve that?

SHAHEEN: As a retailer, your customers have to know you, see you, and admire you and, if you can become part of their community, whether it's by being part of a script program which benefits the schools, or whether it's through a donations program where you can help feed the less fortunate, people like that. People like that. They want to do business with that kind of institution, so we think it's good business as well as it's helpful.

Well, we decided in San Francisco, around the holidays, one of our board members, Christos Christakas (sp?) of e*Trade, said, "Silicon Valley has made a lot of money out here. Why don't we figure out how to give some back?"

Because of this technology, we were able to put on the Web page overnight a button that our customers could click on and a certain amount of money that would be charged to them and we would deliver that amount of food to the Second Harvest Food Bank."

And that was done so efficiently. It didn't take a lot of people and - and the response to that was absolutely amazing, both in terms of corporate gifts and individuals, and it was so easy to do, and so I think that speaks to the power of technology and the efficiency of what we've built and - and we do, generally, want to be a good community citizen so, with that, I think that was our last one. Thank you. (applause)

MODERATOR: George, thanks for a very insightful talk, and good luck at Webvan and the insights there. Please accept our thanks and we appreciate you being here. (applause)

END

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