Ruinous Disorders

We have seen the best of our times. Machinations, hollowness, treachery and all ruinous disorders follow us disquietly to our graves.

(King Lear I.ii. 112-114)

One of the most majestically hollow business concepts of the Internet bubble finally gave up the ghost yesterday – after having wasted more than a billion dollars of investors’ money.

Like stale bread and rotten fruit, Webvan has been tossed out to feed creditors and piggy bankruptcy lawyers. Its fleet of trucks is being auctioned off. Its customer service lines are dead. Its website is going dark.

Amazon.com still takes orders. TheStreet.com is still giving bad investment advice. But Webvan lies as dead and lifeless as yesterday’s news. The media reported the event without emotion. There was no weeping or wailing, nor even amusement.

But, excuse me if I get a little misty-eyed; I will miss Webvan. Next to Amazon.com, no dot.com company served as such a bright, shining illustration of how blockheaded people can be, and how – even in this Age of Information – the most well-informed, best-educated, and smartest people can act like complete jack-asses.

Among the fools in the Webvan story are some of the biggest names in the information economy. The Financial Times explains:

“Founded in 1996 by Louis Borders of Borders Books, Webvan managed to lure George Shaheen, managing partner of Andersen Consulting, to be its chief executive. Its board was filled with some of the most revered names of the era: Christos Cotsakos of E*Trade, Tim Koogle of Yahoo and Michael Moritz of Sequoia Capital. Its money came from such Silicon Valley powerhouses such as Softbank Capital Partners and Benchmark Capital, and its shares were touted by Wall Street’s best-known investment banks.

“Goldman Sachs said in February 2000 that Webvan could become an Internet franchise to rank alongside AOL and Yahoo. ‘Webvan has re-engineered the back-end fulfillment system to create a scalable solution to the last-mile problem of e-commerce,’ its analysts wrote. Having such names behind it ensured that Webvan was able to come to market – with Goldman as lead underwriter – after only a few months of trading, in which it had managed to sell just $3.2 million worth of goods.

“Nonetheless, its executives assured investors it had a vast opportunity. Groceries represented a far larger market than books, videos or music – areas in which e- commerce made its first forays. The typical US household spends $5,000 a year on groceries and goes food shopping more than twice a week.

“From the start, the company had big ambitions. Rather than starting off in a large city or two, learning from its mistakes and perhaps making a small profit before expanding, it decided to open in 26 markets within three years.

“Each distribution centre would be 18 times the size of a typical supermarket and would cost $35m. Almost five miles of conveyor belts would bring products to the packers at each site and refrigerated vans fitted with sophisticated global satellite positioning systems would allow each warehouse to serve a 50-mile radius.”

Meanwhile, in Paris – a city not known for its commercial avant-gardism – my wife picked up the phone and called the local grocery. Within a couple of hours, a young man appeared at the door, carrying a week’s worth of comestibles. She paid the bill, gave him a tip – unaware that she was undermining nearly every pretension of the Internet Age.

“Wouldn’t you save money by just going to get the groceries at the store,” I asked her.

“Well, not much…and I can’t carry all these heavy bags anyway.”

If local grocery stores – even in Paris – will make home deliveries at only slightly higher cost than shopping in the store, why would anyone think they could make money trying to by-pass the entire food distribution system in order to bring food to your door?

At least, shopping at a local store, you know what you’re likely to get. And if you don’t like what you get, you can always go to a different store. Why would anyone think the Webvan concept would work? And even if it did work, couldn’t it be tested somewhere before being applied everywhere?

But for the boom on Wall Street, Webvan might have been just another bad idea by just another penniless entrepreneur with a grocery store. He might have borrowed a few dollars from his mother-in-law and bought a battered delivery van. Setting up a website in his office, he could have taken orders, had a few teenagers to fill the bags, and deliver them around the neighborhood.

Perhaps the innovation would prove to be a dead-end mutation – like a three-legged cow or a sentimental tax collector. But, if the service proved popular enough, and profitable enough, he could have bought another grocery store in a different part of town and tried to duplicate it. Maybe it would be ‘scalable,’ and maybe it wouldn’t.

Once the concept had been proven out, he might have gone to venture capitalists in attempt to roll it out statewide…or even nationwide.

But in the late ’90s, theory triumphed over experience… and there was enough capital sloshing around to waterlog almost any good idea. Dot.coms thought they needed to move fast to get out ahead of the competition.

Besides, money was being pumped at them as though through a fire hose – they had to do something with it. And, in the lush, green fields of the dot.com era, even three-legged cows could survive.

“Genetic mutations that would never have been replicated in a normal intensely competitive population are afforded that opportunity in an isolated, well-nourished group,” explains Michael Rothschild in his book, “Bionomics.”

Why would investors want to buy stock in an untested grocery delivery company founded by a guy who wouldn’t know a rutabaga from a cassava melon…and who had probably never delivered even a newspaper, let alone a sack of groceries?

Yet, on its first day of trading, Webvan sped immediately into the fast lane and became worth $8.7 billion – an amount equal to nearly 1% of the U.S. GDP.

What? An $8.7 billion business would have to earn, say, at least $500 million per year in order to give investors a decent return on their money. Can you really earn that much delivering groceries?

Margins on groceries are tight. Families know what groceries cost and watch their expenses. Experienced chains – such as Krogers – are lucky to have margins of 2% to 5% of sales. To break into the business, Webvan figured it had to undercut the established grocers – which left it with almost no margins…and preposterously high capital costs.

As time passed, more and more three-legged cows competed for the rich pastureland of American capitalism. But soon, the fields became treacherous. Investors stopped worrying about the return on their capital and became anxious about the return of their capital.

“Once population expansion caused crowding to resume,” Rothschild continues, “natural selection begins gradually to shape the offshoot population into a new species tailored to the nuances of its niche. Except for these intermittent pulses of evolution, a species will remain largely unchanged for millions of years.”

And so, the grocers are still with us. A few have added websites to take orders on-line. In Paris, you can go on-line to one of the city’s major department stores and get anything you want.

But you won’t see any Webvans on the streets. Neither in Paris, France nor in Paris, Texas. Webvan is no more.

Sniff. Sniff.

Bill Bonner
Baltimore, Maryland
July 10, 2001

Americans are now getting nothing from their money market funds and CD’s – after inflation. And they’ve been losing money in the stock market for the last two years.

In January, USA Today published a list of 50 stocks chosen by 10 top analysts. The list is down 22% on average, with 43 of the stocks in the red.

“For the first time in the 20-year history of the popular 401(k) retirement savings plan,” reports the NY TIMES, “the average account lost money last year, even after thousands of dollars of new contributions. And despite some strengthening of stock prices in the last couple of months, recent estimates show, the declines persisted in the first half of this year.”

The average account shrank to $41,919 in 2000 from $46,740 in 1999, according to a report from Cerulli Associates, a benefits consulting firm.

Rather than give up the hope of easy money, Americans seem to have turned to real estate. “Home sales profits fuel real estate bubble,” says a headline in Detroit’s Free Press. Last year, the median gain on a sale was $28,700 nationwide and $40,000 in California. In total, nearly $200 billion of home sale profits – or 2% of the entire nation’s GDP – entered the economy.

This year, mortgage applications are running 54% ahead of last year, and 44% of them are refinancings.

It is possible for a few people to get richer – buying and selling real estate carefully. But is it possible for an entire nation? What happens when all house prices rise?

“At all times, but especially in the last few years,” commented Fredric Bastiat, a 19th century French economist, “people have dreamt of universalizing wealth by universalizing credit… This solution, alas, has at its foundation merely an optical illusion, in so far as an illusion can serve as a foundation for anything. These people begin by confusing hard money with products; then they confuse paper money with hard money; and it is from these two confusions that they profess to derive a fact.”

The fact they have derived lately is that they are getting richer. Are people really richer when their houses are more expensive and they have bigger mortgages to pay?

“You can end up with more debt, longer repayment periods and be unable to even dig yourself out,” says Gerri Detweiler, author of “The Ultimate Credit Handbook.”

But let’s turn to Eric before we get depressed:

*****

– Stocks bounced lackadaisically on Monday. The NASDAQ gained a little more than 1% to 2,027 and the Dow less than 1/2% to 10,299. Comcast’s $58 billion unsolicited bid for AT&T’s cable unit sparked some excitement early in the day – perhaps because it was the first news to come out of the telecom sector in quite a while that was not unequivocally horrible.

– But after the close of trading, it was back to bad- news-business as usual. Fiber-optic component giant Corning announced plans to cut 1,000 jobs, close three plants and take a $5.1 billion charge. Corning also took the rather extreme measure of eliminating its common stock dividend. Presumably, business is not booming in the once-hot telecommunications sector.

– With last Friday’s disappointing jobs report, the unemployment trend has taken center stage on Wall Street. And the performance is looking decidedly more tragic than comedic.

– “Help-wanted ads drop to recession levels,” ISI observed. “Most labor market indicators such as help- wanted ads, unemployment claims, layoff announcements, and employment have weakened significantly.” ISI calculates that the nation has lost more than one million jobs in just five months – the biggest decline since 1980.

– The hard-hit manufacturing sector has shed jobs for 12 months in a row. And the once-stalwart service sector added a negligible 9000 jobs in the second quarter – the smallest quarterly increase since 1970. Back then, manufacturing industries so dominated our economy that few service jobs existed apart from those that required wearing a miniskirt for PSA.

– The layoff trend shows no sign of slowing down. ISI points out that job layoffs announced in June totaled nearly nine times the number announced in June of 2000. The Wall Street Journal just released its semi-annual forecasting survey of economists. It will probably surprise very few readers to learn that the economists’ forecasts are rarely correct. In fact, Bianco Research, L.L.C., calculates that “they have correctly predicted the direction of interest rates only 28% of the time since 1982.”

– So what, you may be wondering, does this woefully inaccurate crowd now expect? 10-year interest rates will be lower by year-end, they predict. Maybe it’s a good time to think about locking in that new 30-year mortgage.

– As no one believes that Wall Street was created in seven days, almost no one will argue that economic Darwinism holds sway in the stock market. The evidence is plain enough. Over the last 15 months, hundreds of the NASDAQ’s least fit issues failed to survive. In the month of June alone, 82 companies were delisted.

– The latest casualty is Webvan, the once high-flying online grocer and Internet icon. Webvan, which raised a staggering $1 billion to build a grocery delivery company, announced yesterday that it will cease operations, file for bankruptcy and allow the Nasdaq to delist its shares. The stock that once traded as high as $34 per share is now worthless. [More below… Bill]

*****

Back to Bill in Baltimore:

*** “We take care of garden,” said the young woman in a deep voice. Returning to the U.S. after 2 years in Europe, we found our yard and garden in pretty good shape. The people responsible were standing right in front of me.

*** The woman spoke with a heavy eastern-European accent. She and her partner looked as though they might have defected from the Russian women’s wrestling team. They had stocky bodies mounted on short legs…and long, muscled arms. One had an impish grin. The other seemed to suffer from a form of melancholia. She never smiled.

*** Gardening is not a genteel pastime nor even a casual employment for these girls. It is more like a life or death struggle. They don’t merely pull up weeds; they tear them out and then thrash them as if to teach them a lesson.

*** “Where did you find these girls,” I asked John, who looks after the place when we’re gone.

*** “It was amazing,” he replied. “I ran an ad in the help wanted section. I didn’t expect to get much of a response. I mean, it’s a full-employment economy. And who wants to work out in the hot sun for $10 an hour? But I must have gotten 50 phone calls. There are a lot of people out there who need a little extra money.”