Falling Dot-Com Star

Kozmo.com Inc., the online convenience store that promises delivery of products to urban consumers within an hour, had been a dot-com darling since its founding in 1997 [Business, March 6, 2000]. Private investments from venture capital firms and Amazon.com Inc. were reported at $268 million. Meanwhile, New York-based Jupiter Research projected that the home-delivery market would reach $3.5 billion in 2000. A major deal with Seattle-based Starbucks Corp. put a Kozmo brand presence in many of the popular coffee shops, and the online store expanded operations from its New York headquarters to 10 other cities.

Then last spring, reality hit the stock market and troubles piled up for Kozmo, including the following:

• A high-profile CIO left two months after arriving.

• The CEO turned over daily operations to the chief financial officer.

• Hundreds of employees received pink slips.

• Sales in 1999 of $3.5 million didn't cover $26 million in losses.

• Plans for further expansion were put on hold.

• Analysts challenged its business model.

Delivering an initial public offering (IPO) - which was delayed, then canceled - proved a greater strain than bicycling through midtown Manhattan with a box of doughnuts. As Chris Siragusa, Kozmo's group vice president of technology, puts it, the rules suddenly changed. "Unfortunately, you have to play by [the market's] rules," he says.

Were initial investors and onlookers foolish or simply caught by bad timing?

"I wouldn't be betting on [Kozmo]," says Tim Laseter, vice president in the operations practice at consultancy Booz Allen & Hamilton Inc. in McLean, Va. "There are some big economic challenges in the business concept of same-day delivery." Deliveries are expensive to perform, so orders must be large enough - with high enough margins - to cover the costs and ultimately provide profit, he adds.

Misunderstood?

Kozmo can't leverage technology to the same extent as companies such as Amazon.com and Walmart.com, the online unit of Wal-Mart Stores Inc., says Greg Kyle, president and CEO of Pegasus Research International LLC in New York. That's because as its business grows online, it must hire more people to deliver goods in the real world. "The more customers they acquire, the more deliveries they make, [and] the higher their costs go," he says.

Skip Trevathan, Kozmo's chief operating officer and former managing director of North American logistics at Memphis-based FedEx Corp., says many observers don't understand Kozmo's business mechanics. Most delivery scheduling and routing systems - even those used by FedEx and UPS - assume a 12- to 24-hour window between order placement and actual delivery. In contrast, Kozmo has just five to seven minutes to pinpoint the delivery round (a bicycle trip with Kozmo products) that will carry an order. The tight requirements also offer opportunities for logistics systems that can balance delivery loads, expected vehicle traffic and weather conditions, he says.

"There is a point that technology will reach its optimum efficiency gains," says Trevathan. "We are [a] long, long way away from even approaching . . . that." Since going live last year with systems developed in-house, orders per delivery have climbed from a little more than one to about 2.2, he adds. In fact, 275 delivery and warehouse workers were laid off because the company was able to reduce staff and consolidate warehouses in Los Angeles and New York while deliveries continued to increase.

"What we did was nothing more than what mature businesses would call rightsizing," says Trevathan. Yet scrutiny continues. Delivery efficiencies don't explain later layoffs of several dozen employees from company headquarters. Kozmo was involved in talks to acquire a former rival, New York-based Urbanfetch.com Inc., but dropped the plans after months of on-again/off-again negotiations. A lawsuit alleging discrimination in its delivery services in Washington was dismissed.

In today's market, investors, banks and analysts have little patience for e-businesses. "There was a euphoria and feeding frenzy [in the market] that went on for about two and a half or three years. All of a sudden, it was like waking up from a bad drunk," says Trevathan. He insists that investors, management and employees are still committed and that Kozmo will be profitable in two to four of its most established markets sometime this year.

Profitability in sight?

The final arbiter of success is likely how quickly Kozmo can become profitable and whether management can conserve cash well enough to last until then. Kyle says he sees little chance of an IPO anytime soon. "To really be a sustainable public company, they should be able to demonstrate several hundred million dollars in sales for a long-term, successful model," he says. "It's doubtful whether you have that opportunity here in the U.S."

Bob Greene, a managing partner at New York-based Flatiron Partners, one of Kozmo's investors, says he disagrees. "It's in its early days and, I suspect, will come up with a model that works in lots of different kinds of markets just in the U.S. itself," he says. For example, the company might cover some suburbs with once- or twice-daily deliveries to extend its reach. He also points out that this month, Kozmo is adding a $2 delivery charge for each order below the $25 to $30 range. The fee is expected to raise $20 million to $25 million and will remain in effect until the company becomes profitable.

Trevathan says he remains confident. "I didn't move from Memphis, Tenn., to Manhattan thinking I would be done in six months," he says.

Sherman is a freelance writer in Marshfield, Mass. Contact him at esherman@reporters.net.

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