Improving E-Retailing Profits With E-mmediate Delivery
To hear Joe Park tell it, the highly publicized profit problems of some dot-com retailers can be solved by going ãthe last mileä for convenience-first web shoppers: delivering merchandise on the same day itâs purchased on the web, even within the hour. That was the message Park, the youthful founder of Kozmo.com, delivered to 600 attendees at E-Tail 2000 who gathered in New York Monday to hear presentations from some of the most prominent players in the Internet retailing industry.
At first blush, such a step-up in service sounds too costly for e-retailers who are struggling to match the margins of store-based retailers and catalogers. But Park, who left Goldman, Sachs & Co. to found Kozmo.com three years ago, convincingly argued that same-day delivery is just what the doctor ordered for e-merchants plagued by high customer acquisition costs, low transaction frequency, and a product offering that does little to distinguish them from mail order firms that control only 15% of the retail market. ãMost retail web sites are nothing more than electronic versions of mail order catalogs,ä says Park. ãThey have the same back end. Their only difference is in the front end. We feel the much greater opportunity for Web merchants is going after the 85% of retail business no one is going after-the business of customers who shop at brick-and-mortar stores.ä
Getting that business, Park insists, requires taking e-retailing to ãthe next level-delivering merchandise to the consumer on the timetable the customer wants.ä For Internet shoppers, he says, that means same-day delivery, providing the same instant gratification the shopper gets at a store without the hassles involved with shopping at stores. ãKozmo.com goes into the brick-and-mortar space more than any of the other e-tailers because we offer a different value proposition than they do-e-mmediate delivery.ä
Fair enough, but what about the cost and margin impact of such a service. This is where Park really began to pique the interest of his audience, arguing that under Kozmoâs Internet retailing model, same-day delivery actually reduces costs and improves margins. By delivering only to markets where Kozmo has local warehouses and e-retailing only a selected number of products inventoried in those warehouses, Park says Kozmo has ãeliminated 60% of an e-retailerâs cost of distribution via UPS and FedEx. Our distribution model is more efficient than their city-to-city distribution model.ä
Furthermore, Park argues that the same-day distribution concept solves the problem of weak transaction volumes that plague many e-retailers. ãCustomers shop at our site more frequently-15 times a year vs. 4 times a year for traditional e-tailers-all because of the power of the last mile e-tailing model,ä says Park.
The concept is compelling enough that Kozmo.com has raised an impressive $250 million to build distribution centers around the country. Starting in New York in March 1998, the web merchant has since expanded to Seattle, San Francisco, Boston, Washington, D.C., and Los Angeles. By the end of the year, Park says, Kozmo centers will be operational in 20 markets. ãWe will have the only national same-day delivery service available not only for our web customers but for customers of other e-tailers as well.ä
Because Kozmo.com services not only its own site but other retail web sites, Kozmo is starting to look more like a challenge to FedEx and UPS than to competing web merchants. Showing a slide that compares Kozmoâs same-day delivery with the three day delivery of the U.S. Postal Service, the two-day delivery of UPS and next day delivery of FedEx, Park boasts, ãWe are really a premier logistics company focusing on same-day delivery.ä
The formula, Park claims, has meant gross margins at Kozmo that exceed 25%. Yet another reason for Kozmoâs success, says Park, is the senior management team he has built. It includes retailers for sure--ten managers from WalMart, five from Ethan Allen, three from Kmart and four from The Gap. More telling perhaps is the list of Kozmo recruits who have nothing to do with retailing. They include 39 from FedEx and 23 from UPS.
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