One of the fust Internet-based groceries home delivery businesses was Homegrocer.com. In 1998, Mike Donald, president of Concord Sales, one of the largest food brokers in B.C., and two partners thought of starting such a business in Vancouver. However, they had to move it to Seattle in order to get financing from U.S. financiers. Mike thought that because Microsoft and Boeing are located in Seattle, the proportion of households with Internet would be high.
After raising approximately $4 million, and using it to lease a large warehouse, purchase 10 trucks, set up tire web page and software, and advertise, Homegrocer.com had fewer than 1,000 regular customers. Mike estimated that an average regular customer purchased 3 times a month and bought approximately $75 each time (below' $75, Homegrocer.com charged a delivery fee of $10). The gross margin (i.e., sales - cost of goods sold or alternatively' revenue - variable cost) was around 20 percent, and total monthly labour and overhead costs were approximately $300,000. (L03)
a. How many regular customers did Homegrocer.com need in 1998 to break even?
Despite the slow' initial business, Homegrocer.com persevered and even expanded into Port-land, Oregon, [n the frenzy of dot.com era in 1999, private investors, including Amazon, com, invested approximately $100 million in Homegrocer.com. Homegrocer.com used the money' to further expand, trying to compete with Webvan, a California-based competitor. In the beginning of 2000, Homegrocer.com raised over $250 million by issuing shares to the public, and kept on expanding to more cities in tire United States. However, its share prices started to decline due to increasing losses. In tnid-2000, Webvan bought Homegrocer.com for over $1 billion. Webvan itself went bankrupt in 2001.
b. Why would a startup company want to expand so fast? Why did most Internet grocery businesses fail?