Think about all the errands you run on a regular basis, to the video store, the bookstore, the convenience store, the office supply store…. We eliminate all those errands. Being part of your lifestyle is what Kozmo is, where you depend on us for all your various basic needs.
—Joseph Park
Co-founder, Kozmo.com
Kozmo.com was a VC-driven online company that promised a free one-hour delivery of ‘videos, games, dvds, music, mags, books, food, basics and more’ and Starbucks coffee in several major cities in the United States. The company was founded by investment bankers Joseph Park and Yong Kang in March 1998 in New York City. It so happened that the company was out of business within a three-year period, that is, by April 2001.
Kozmo.com delivered videos, DVDs, CDs, books and convenience items (snacks, magazines, toiletries, household products, flowers and beer) to consumers within an hour, with no delivery charge and no order minimum. The service was available in nine cities (Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Portland and Washington DC). It had a plan to expand into more than 35 cities in the United States by the end of 2002. In 1999, the number of customers registered on the Web site grew at a compounded monthly rate of approximately 30 per cent. However, the total number of users remained steady in 2000.
Park and Kang left their jobs on Wall Street to form Kozmo in 1997, when Park first ordered a book from Amazon.com and found that it did not fulfil his desire to have the book on the same day. Park and Yong had been close college friends since they were roommates as undergraduates at New York University.
Park served as an analyst in the corporate finance division of Goldman, Sachs & Co., where he was involved in public equity, hybrid and investment-grade debt offerings, mergers and acquisitions, and financial advisory work. From June 1994 to June 1996, Park served as an analyst in the investment research department at Goldman, Sachs & Co., covering the consumer durable goods and packaging industries.
Kang was an assistant vice president at Societe Generale in the media and communications group, specializing in senior bank financing, high-yield debt and private equity transactions for companies in the broadcasting, cable and entertainment industries. From July 1994 to July 1996, Kang was a senior analyst in the mergers and acquisitions group of the Toronto-Dominion Bank, specializing in acquisition advisory, private equity and high-yield debt transactions for cable, cellular/PCS, paging and broadcasting companies.
With a handful of bike couriers delivering goods ordered online by New Yorkers, Kozmo had grown into an army of ‘Kozmonauts’ that served major cities. In 1999, Kozmo hired several experienced executives from AT&T, Coca-Cola, FedEx and UPS to round out its senior management team.
The directors, executive officers and senior management of Kozmo.com and their positions were as given next:
Model Business
The business model of Kozmo ensured to deliver small goods free of charge within an hour by bicycle, car, truck or public transportation. 1 The model was criticized by some business analysts, who pointed out that one-hour point-to-point delivery of small objects is extremely expensive and were sceptical that Kozmo could make a profit as long as it refused to charge delivery fees. 2 The company countered, in part, that in their target markets, savings due to not needing to rent space for retail stores would exceed the costs of delivery.
Kozmo.com focused on selling frequently purchased high-margin items with well-known brand names. Additionally, it had initiated a business-to-business service to enable select retailers to provide their customers with an expedited delivery option on a fee-for-service basis through Kozmo’s distribution networks.
Kozmo served each of its markets from one or more distribution centres (DCs). DCs were approximately 10,000 square feet in size and were located primarily in low-rent areas with access to key thoroughfares. The size of DCs provided the capacity to expand product offerings in existing markets. Kozmo.com’s solution combined the convenience, time savings, large selection of high-quality product information, personalization of catalogue and Internet shopping with the immediate gratification of in-store shopping, quality customer service, efficient logistics process and low-cost distribution model.
Kozmo.com ’s growth strategy had two main objectives: to be the leading online provider of entertainment, food and convenience products with free delivery in less than one hour, and to further enhance the usage of distribution infrastructure by providing select retailers an expedited delivery option.
In 1999, Kozmo lost $27 million on $3.5 million in revenues, with delivery costs running at $3.3 million. Its revenues for the financial year 2000 were $30 million with a net loss of $120 million with delivery costs of $35 million. Its customer acquisition cost had gone down dramatically from $72 per customer in early 1999 to around $50 in late 2000, which subsequently turned out to be at $25 per customer. From a model of 100 per cent revenues coming from B2C clients in 2000, Kozmo expected revenue diversification—75 per cent from retailers, 25 per cent from its B2B operations and 2 per cent from advertising—in 2001 to help its overall gross margins. The B2B categories were in the areas of office supplies (consumables, software, printer cartridges and digital cameras), travel as well as logistics pertaining to distributors and manufacturers. The company closed a $28 million first round with Flatiron Partners in 1999. It had also raised more than $130 million from institutional investors, including Chase Capital Partners and Softbank Ventures. In March 2000, Amazon.com invested $60 million in Kozmo.com and became the largest stakeholder in Kozmo with a 31 per cent stake on a fully loaded basis (including warrants). As part of the deal, Amazon. com had struck a non-exclusive, three-year alliance to offer its customers a one-hour delivery option, powered by Kozmo.com . The company had filed to go public in late May 2000 for an expected valuation of $1.2 billion to $1.5 billion.
‘Convenience stores command a premium for providing quick access to last-minute purchases, so why charge a discount for the ultimate convenience of home delivery?’ asked Evie Black Dykema, an analyst with Forrester Research. The company withdrew its IPO in August 2000 and trimmed its workforce. Kozmo.com shut down its Houston and San Diego operations in 2001, citing lack of demand. Kozmo has announced three layoff’s trimming around 10 per cent of its workforce and considerably trimmed its operating and acquisition costs. The company’s product pricing on food items, videos, drugs and other items compared well with convenience stores and discount pharmaceuticals, that is, CVS, Rite-Aid and Blockbuster. In December 2000, Kozmo introduced a $2 delivery charge on all orders after 3 P.M . and imposed a minimum order of size of $5 as of summer 2000. With Gerardo Burdo replacing Joseph Park as the CEO in 2000, Kozmo had shifted its focus from building a strong brand to maximizing operational efficiency to help attract and retain B2B and B2C customers at a lower cost.
Competition
Although no company currently does exactly what Kozmo did, there were several current and potential competitors in the race to own the so-called ‘last mile’—the final distribution leg linking e-commerce to the customer’s doorstep. Some of the prominent among them are Urbanfetch; Webvan (Nasdaq: WBVN); Sameday.com (formerly Shipper.com ); PDQuick.com (formerly Pink Dot.com ); and Homedelivery.com
Partnerships
In order to increase distribution, build its brand and expand into the B2B market, Kozmo.com had aggressively pursued two types of partnerships marketing/co-branding and financial: Some of the key partnerships include Financial— Amazon.com (March 2000), DreamWorks International Distribution L.L.C., Twentieth-Century Fox Home Entertainment and Universal Studios Home Video (September 2000); Marketing—Starbucks, Ticketmaster Online-CitySearch, Balducci Pasta (August 2000) and Zagat Survey (October 2000).
AMZN) (Nasdaq: Amazon.com
On 20 March 2000, Kozmo.com announced a three-year deal to deliver some of Amazon’s books, music and toys ordered online to customers in the cities that it serves. Amazon customers will have a Kozmo-branded same-day delivery option for many of its most popular items. The sameday service will be priced at an average of $10 per order, comparable with next-day delivery by FedEx or UPS. Kozmo would keep the entire delivery fee, whereas Amazon would earn the entire revenue from the order. As part of this deal, Amazon invested $60 million in Kozmo and received the option to buy more shares.
This deal catapulted Kozmo into the B2B market space. Kozmo had said it expected to do more deals of this kind. It forecasted that as much as 20 per cent of its revenues would be from its B2B business.
Studios Universal (www.universalstudios.com)
On 21 September 2000, Kozmo.com , announced an agreement with Universal Studios Home Video to purchase DVD and VHS films directly from Universal. Kozmo and Universal Studios Home Video would also work jointly to promote Universal home video releases to Kozmo’s 300,000 customers.
SBUX) (Nasdaq: Company Coffee Starbucks
In February 2000, Kozmo announced an agreement with Starbucks, under which Kozmo will pay Starbucks $150 million over five years to place video drop-off boxes in Starbucks stores within Kozmo’s coverage area. Starbucks will also place Kozmo’s logo on its cups and napkins and train its service staff to handle questions about and promote Kozmo. This deal marked the first time that Starbucks allowed another brand to be promoted inside its stores. With 2,500 stores throughout the United States, Starbucks would have helped Kozmo expand its service into new cities.
TMCS) (Nasdaq: Online-citysearch Ticketmaster
Under this deal announced in January 2000, Kozmo would be the sole under-one-hour delivery service for the CitySearch network of city guides. In return, Ticketmaster Online-CitySearch would become the exclusive provider of local arts and entertainment content on a co-branded site, where users can order from Kozmo. CitySearch currently offers guides to 47 US and international cities.
Investors
Some of the prominent investors who reposed confidence by taking stake in the company were Amazon.com , Chase Venture Capital Associates, Columbia TriStar, DreamWorks SKG, Flatiron Partners, Liberty Media, Oak Investment Partners, Softbank Capital Partners, Starbucks Coffee, Twentieth-Century Fox, Universal Studios and Warner Bros.
Kozmo.com ’s aura helped it raise more than $250 million, but the company was unable to generate enough revenue to cover costs. In 1999, it had $3.5 million in revenue, compared with $26.4 million in net losses. Basic problems with its business model included offering a costly home-delivery service for free, even on very small orders on which it was impossible to earn a profit. Last-ditch efforts to boost orders and stop the delivery losses by charging $1.99 for orders less than $30 helped, but could not deliver the company.
Mounting losses led to Park’s ouster in 2000. The new leadership could not turns things around or pull off the long-delayed IPO. In April 2001, the company ran out of money, shut down operations and laid off its employees.
We built out a delivery system that worked,’ recalls former Chief Operating Officer Skip Trevathan, who came to the job with experience as managing director of logistics for delivery goliath FedEx. ‘We were profitable in four of our cities. But we had seven more that we couldn’t make profitable, and then the funding dried up.’3
1. What had basically gone wrong with the business model of Kozmo.com ?
2. Kozmo had very many satisfied and loyal customers; however, it could not take advantage of that in terms of generating profits. What are the key issues and strategies that could have helped Kozmo become profitable?
3. Extract the company’s working results between 1998 and 2000. Analyse these results to identify key mistakes that the company had made in launching the business.
4. What precautions do you think the company should have necessarily taken before launching and during launching of the business to ensure its success?