Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
Everyone wondered how Kozmo could make money. The answer: It couldn’t.
Founder Joseph Park once said that if Kozmo failed, he’d have a great case study for his application to business school. He has his case study.
Kozmo.com, which excited the Internet world with its bold offer of same-day, free delivery and ambitious expansion plans, last month closed shop. The company blamed the demise on changing market conditions that forced it to pursue profitability sooner than expected.
“Given more time and more hospitable market conditions, Kozmo would have rounded the corner and would have continued to grow, “ Gerry Burdo, president and CEO, said in a prepared statement. “However, some decisions made early in the company’s development combined with current market conditions prevented Kozmo from overcoming the challenges associated with conquering the last mile.”
Among the early decisions that caught up with Kozmo was the idea of free delivery¯no matter the size of the purchase. “You can’t make a lot of money delivery Jujubes to college kids,” says Rob Rubin, an analyst with Forrester Research. Last July, Kozmo instituted a minimum order of $5 for free delivery. In December, it began charging $1.99 for deliveries under $30. “They really needed to go after more affluent consumers who were buying more expensive convenience items,” Rubin says.
Kozmo was making strides in that direction, for instance, offering uncooked meals prepared by gourmet chefs for $40. “But the core customers that they had been cultivating for three years only like to buy low-cost items, like candy,” Rubin says.
Another problem that came back to haunt Kozmo, say analysts, were the ambitious expansion plans. “To succeed, a delivery model has to start small and build to scale,” says Kevin Noonan, vice president of Internet and media research at The Yankee Group. “You can’t build to scale to begin with.”
A further problem that analysts point out was that the founders had no concept of the logistics of such an operation. “It had to have been a huge logistics nightmare, especially if you have no experience in logistics,” Noonan says. At the end, Kozmo employed 1,100, mostly in delivery and warehousing. “Employee turnover was probably a problem as well,” he says.
Kozmo had received $250 million in funding, plus additional financing in January. But one investor who had committed to the January financing pulled out, Noonan says, and that may have caused the others to follow. “That created a domino effect,” he says.
Kozmo had been struggling for some time to make its business model work. Besides charging for certain deliveries and expanding its product line, it pulled out of cities where profitability was not possible in the near term, it grew its average ticket from $10 in July to $25 last month, and it improved gross margins from 12% to 48% in the same period. It was profitable in Boston, New York, and San Francisco.
To succeed, a delivery service needs to target a more affluent consumer, set a minimum order size for delivery, establish procedures that will allow the service to fill delivery routes and deliver other kinds of goods that require rapid delivery, such as items from medical labs or machine parts, Rubin says.
Whether demand exists outside of Kozmo’s profitable cities and how long it will take for that demand to grow to profitable proportions are the great unknowns. “It’s going to take improvements in the Internet shopping experience to create demand,” says Roger McDonell, CEO of Package Quest and former CEO of DeliverEToday, a last-mile delivery service that shut down after the holidays. “When it’s faster to shop online, volume will build. Then this delivery model could work.” McDonell is now marketing package-tracking software to online retailers.
At the end, Kozmo was conducting business in nine cities-Atlanta, Boston, Chicago, Los Angeles, New York, Portland, Ore., San Francisco, Seattle, and Washington, D.C. It will liquidate inventory and pay creditors. “The board felt it was important to preserve our remaining resources while keeping the employees’ best interests in mind, including being able to pay them a severance,” Burdo said.