December 26, 2000, 9:55 AM

Right Now Is Not Too Soon

(Page 2 of 4)

In July, Kozmo’s board urged Park to step down from the top slot at the company he co-founded with Yong Kang in a Greenwich Village storefront. He was replaced by Chief Financial Officer Gerry Burdo, former finance director at Ethan Allen who was recruited in February. Park is no longer responsible for day-to-day management, but remains chairman of the board. Kozmo says the decision was mutual. Replacing a young, inexperienced founder with a seasoned executive is par in Internet start-ups. The move was, however, interpreted as an attempt to demonstrate to Wall Street that Kozmo is cleaning up its act in preparation for its $150 million IPO. Originally planned for May, the IPO was postponed until September but will likely come next year-if it comes at all.

Fred Smith also was kicked upstairs when FedEx was still losing money and hungry for cash. He also had unbelievers eager to predict his doom. Business Week’s 1974 forecast predicted the company would not continue to grow; Smith proved otherwise. FedEx burned through $84 million, a huge sum in pre-dot-com dollars, before turning its first profit in February 1975, four years after Smith started the company.

The most daunting indictment is that almost no one believes Kozmo’s free delivery model will work-a huge liability now that path-to-profitability has become Wall Street’s new mantra. Many view it as an opportunity to heap on abuse. An executive at a Kozmo’s competitor boasts of ordering a Coke from the service every afternoon to hasten the company’s demise. Others have ordered single boxes of candy multiple times as a way to prove the Kozmo model is not working.

“Kozmo’s system is designed to be abused,” says Forrester analyst Evie Black Dykema, who orders frequent lunches from Kozmo. “They need to charge a premium like a convenience store if they’re going to make their business plan work.”

It works for pizzas

Park seems cognizant of what needs to be done. “We’re a retailer. We buy like any other retailer and we generate 40% profit margins. Our challenge is clearly bringing our costs of selling and delivery in line.” In Kozmo’s case, the largest component is delivery costs which Park describes as the engine under the hood.

Kozmo mitigates some of its delivery costs by it not having expensive retail outlets. But, the service is labor intensive, even though it laid off 300 employees in mid-August as a result of improvements in its automation software. Many of the company’s 3,000 employees work in warehouses packing orders or ride around on bicycles, in cars or vans delivering them. Kozmo delivers goods from its central warehouses where it stocks select items from manufacturers and retailers. It maintains drop boxes at several sites including Starbuck’s, one of Kozmo’s strategic investors.

According to its Securities and Exchange Commission filing, Kozmo’s average order is running at $15, however, its delivery costs average more than $14. But, Park says costs will fall as the company increases its delivery density-the number of drops a driver makes per hour. “FedEx and UPS drivers average 12 deliveries per hour. Our challenge is to get as close to 12 as possible, though we don’t need to be at that number to make money,” says Park, declining to say how many deliveries an hour they now make.

A typical carry-out from Domino’s pizza costs $15, while delivery costs run $2 or $3 representing 15-20% of the pie. Drivers average four to five deliveries per hour. In addition, Kozmo plans to raise its average order size under Burdo’s regime by offering office supplies, wine, beer and gourmet food, and by bundling items.

However, analysts say Kozmo will have a hard time balancing its books. “They’re set up to lose money,” says Rebecca Nidositko, senior retail analyst at the Yankee Group. “They need a huge number of orders of the right products in concentrated markets to make it work. Conversely, if they move into larger items to boost their margins, their bike messengers won’t be able to carry them. They’re counting on too many ifs to become profitable. Free delivery is not going to work.”

But the beleaguered executive is sticking to his story. In the worst case, Park told Vanity Fair, Kozmo will make a good case study for his business school application. Park earned his BS degree in journalism and political science before seeking his fortune on Wall Street. Smith, also a political science major, got a C on his Yale term paper which outlined FedEx’s hub-and-spoke model. His professor doubted that the concept would work.

Delivery infomediaries

While Park focuses on building the “7-Eleven of the new economy,” other Internet start-ups, including now-defunct DNet and GetToday, targeted their efforts on bringing instant gratification benefits to traditional retailers. Both companies have nearly identical business models. Both ran into fatal funding problems and withdrew from the market earlier this year. Nevertheless, their model are illuminating.

Unlike Kozmo or Webvan which own inventory, warehouses and delivery fleets (read: massive capital requirements), these Bay-area start-ups could be described as a delivery infomediaries-they owned none of the above. Instead, the companies planned to broker deliveries between web retailers and local couriers which serve most metropolitan areas. DNet’s CEO Chris Moore describes the service as the “revenge of the brick-and-mortars.”

DNet’s service was designed to work like this. When a consumer selected same-day delivery, the retailer would pass the information electronically to DNet’s servers, which would route the order to one of the company’s courier partners. A driver would pick up the goods at the local merchant’s store and deliver them. By aggregating volume, the company was able to negotiate a standard rate that was less than the cost of an overnight shipment. Their negotiated rates on a four-hour delivery start at $10 delivered within four miles of the merchant’s store and increase with weight and distance. DNet planned to make money by taking a cut of each delivery charge. By piggybacking on existing couriers it would presumably avoid the density problems plaguing Kozmo.

Local couriers-the vast majority of which are small, low-tech, privately held and specialize in time-sensitive legal papers, parts, and donor organs-stood to benefit from the incremental business. Retailers in turn could better leverage local inventories. “It doesn’t make sense for retailers to ship goods across the country from a central warehouse if they are sitting in a store a few miles away from the customer,” Moore says.

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