PetSmart acquired Pet360 for $130 million in cash and up to $30 million more in future performance-based payments.
Now that retailers can cheaply and instantaneously zap pictures and details about their goods anywhere on a 24/7 basis, online consumers are demanding that the corresponding physical goods-the books, groceries and even those khaki Dockers-pick up the pace. In the emerging digital economy, overnight delivery seems … well … positively slow.
Blame their expectations on 28-year-old, former investment banker Joseph Park, whose first Amazon shopping experience ended in frustration. It was the fall of 1996-the year that Amazon booked a little more than $16 million in revenue-Park was jonesing for a copy of John Grisham’s “Rainmaker,” and he wanted it right away. Several clicks later he confronted a series of increasingly expensive shipping options, none designed to deliver the book that day.
“The sooner I wanted it, the more I had to pay,” recalls Park. “I got so frustrated I turned off my computer and ran down to Barnes & Noble and purchased the thing. That’s when the idea came to me. If I could marry online shopping with instant gratification, I’d have something big.” Ten months later, Park resigned his lucrative commission at Goldman Sachs in Los Angeles and flew to New York to start Kozmo.com, a business that serves up new economy convenience items and delivers them to your door within an hour at no extra charge.
According to “Transforming Home Delivery” by Forrester Research, 89% of web buyers get impatient waiting for their deliveries. Of the shoppers who contact customer service, 58% do so to ask when their package will arrive, making it the number one customer service inquiry. Even so, they aren’t willing to pay much for fast delivery. Nearly 80% of online shoppers usually or always choose the cheapest shipping. And like Park, 44% abandon an online shopping cart because shipping costs are too high. Forrester authors frame their analysis with the following conundrum: “Consumers crave a 24-hour, on-demand delivery service that specializes in services, delivers while they are home, and charges $5 per delivery. The real question is: can it be done?”
Counting Kozmo and online grocer Webvan, more than 10 companies are looking for ways to get it done. DeliverEtoday.com, DeliverENow.com, DXNow.com, GetToday.com, PD Quick, Sameday.com, UltraEX, UrbanFetch.com and the recently departed DNet-each with a different business model-are vying for the nearly $40 billion in annual delivery revenue. By comparison, FedEX delivers $15 billion in revenues a year.
In theory, the premise behind affordable, same-day delivery is not entirely far-fetched. Logically, it should cost less to pick and pack inventory idling in local retail stores and distribution centers and haul it to consumers’ homes, than to airlift goods from a central warehouse and fly them across the country. The problem: No one has figured out how to turn this logic into profit. All they’ve delivered so far is millions of dollars of red ink. Kozmo, which raised $250 million, including a $60 million investment from Amazon.com, lost $26.4 million on sales of $3.5 million in 1999. Webvan reported a 1999 loss of $144.6 million on sales of $13.3 million. Webvan’s stock was recently trading near $6.75, down from its 52-week high of $34.
Other contenders have been forced to abort their delivery businesses on the launch pad. Sameday, backed by $25 million in venture capital, abandoned its online retail business, Sameday Mall, a few months after its October 1999 (?) debut, and reformulated its business plan to focus on supplying back-end logistics services to retailers and b2b companies. GetToday folded in May when its venture capitalists pulled out. DNet, which was scheduled to roll out its service this fall, wound down its operation in August after failing to secure additional financing. Others like DeliverEtoday, which raised $1 million in seed money from Bear Ventures LLC, are still struggling to raise the capital to prove out their business model.
While analysts are not ready to write off the category, they’re highly skeptical. In a report critical of online home delivery retailers, “Last Mile to Nowhere,” Booz, Allen & Hamilton Partner Tim Laseter writes: “We believe the last mile may lead to the gallows rather than to the promised land.” He cites four major challenges:
- limited sales density which drives profitability;
- high delivery costs;
- product selection; and
- competition from the U.S. Postal Service and UPS.
But some say the opportunity is too large to ignore. “There’s a huge demand for improved distribution,” says venture capitalist Theresa Gouw Renzetta, whose firm Accel Partners has poured millions into Sameday.com’s logistics service technology. “Someone will solve the last mile problem and find a way to make money,” she says. “The key is finding where the pain is and tackling the most economically advantaged layer first.”
There’s no doubt that Park, a poster child for the same-day delivery movement, faces significant obstacles in delivering his vision-no less than those faced by FedEx founder Fred Smith in the 1970s in convincing the world his overnight delivery service would fly. “Like Smith, we’re focusing on a delivery window that no one else has tackled,” Park explains. “Fortunately we have the benefits of bringing in experts.” Over the last year, Kozmo has hired 40 employees from FedEx and more than 30 from UPS. The difference today is the Internet, which Park says he is counting on to achieve the necessary scale quickly. (Kozmo is in 11 cities and growing at a double-digit rate each month.) But Kozmo may not be able to scale fast enough.