Tesco.com is now the world’s largest and by far the most profitable online grocery retailer. In 1996 Tesco.com was alone in developing a ‘store-based’ supply network strategy. This means that it used its existing stores to assemble customer orders which were placed online. Tesco staff would simply be given printouts of customer orders and then walk round the store picking items off the shelves. The groceries would then be delivered by a local fleet of Tesco vans to customers. By contrast, many new e-grocery entrants and some existing supermarkets pursued a

‘warehouse’ supply network strategy of building new, large, totally automated and dedicated regional warehouses.

Because forecasts for online demand were so high, they believed that the economies of scale of dedicated warehouses would be worth the investment. In the late 1990s Tesco came under criticism for being over-cautious and in 1999 it reviewed its strategy. Tesco concluded that its store-based strategy was correct and persevered.

The most famous of the pure e-grocery companies was called WebVan. At the height of the dot-com phenomenon WebVan Group went public with a first-day market capitalization of $7.6 billion. By 2001, having burnt its way through $1.2 billion in capital before filing for bankruptcy, WebVan Group went bust, letting go all of its workers and auctioning off everything from warehouse equipment to software.

● Draw the different supply network strategies for Tesco and companies like WebVan.

● What do you think the economy of scale curves for the Tesco operation and the WebVan operation would look like relative to each other?

● Why do you think WebVan went bust and Tesco was so successful?