"We've looked
at their business model and scratched our heads."
--Powell's
corporate manager Ann Smith
It's nearly midnight. You get an unexpected call from
the airport. It's your ex, who's decided maybe you're
not such a no-hoper after all. Months of involuntary celibacy
may soon end happily. You shove dirty dishes into the
fridge, slide empty pizza boxes under the newspaper pile,
hide the porn, gobble some Altoids--and realize you're
screwed.
Your cupboard is bare. No food, none of those sensitive-type
tunes your ex digs, and worst of all, no precautionary
devices.
In a misguided grab for relevance, you live in the
Pearl; at midnight, nothing's open but high-end gin joints.
But you are resourceful. You fire up your iMac.
Thirty minutes later, a guy in orange bike gear bangs
on your door. Grinning, he hands over a spinach salad,
a large Pizzicato pie, M&Ms, an assortment of Lilith
Fair-type CDs and a box of Trojans.
Regrettably, he has no booze, but thanks to him, the
night has possibilities.
By now, most Portlanders know that "Kozmonauts" have
landed in the Rose City. The orange-clad employees of
Kozmo.com can be seen driving or pedaling furiously at
all hours, delivering a can of root beer, John Grisham's
newest novel or a video copy of the movie American
Beauty.
While much of the dot-com economy is based on confusing
concepts, Kozmo's business plan is pretty simple. If customers
want any of the 25,000 items the company stocks, they
place their order online and wait for delivery.
Kozmo may be a throwback to the day of milkmen and broom
peddlers, but it is in other ways the typical dot-com:
long on promise and short on profits (Kozmo lost nearly
$26 million last year on revenues of $3.5 million). But
in the brief history of the new economy, profits seem
less important than potential. And an unscientific survey
confirms that customers love Kozmo's convenience.
The company targets desk-bound workers and urban yuppies
too busy to schlep to the store.
Jennifer Fujimoto, a 26-year-old graphic designer at
Emerald Interactive, orders regularly from Kozmo rather
than spend half her lunch hour walking to a restaurant.
"Their service is great, and their prices are reasonable,"
Fujimoto says. "If they stick around, I'll definitely
continue to use them."
Fujimoto and other regulars better enjoy quick delivery
while it lasts, as some local retailers figure the Kozmonauts
are heading for a major crash and burn--a prediction informed,
in part, by the private company's decision at the end
of May to postpone going public.
Since May, Manhattan-based Kozmo has been operating locally
from a warehouse on Southeast Martin Luther King Jr. Blvd.,
just north of the Hawthorne Bridge. Ironically, this newest
of new-economy companies works out of an historic building
erected for the Ranchers and Gardeners Association in
1922. The 18,000-square-foot structure has been gutted
and filled with rows and rows of orange shelves and cold
storage that hold everything from Ben and Jerry's Chubby
Hubby and Huggies Diapers to K-Y Jelly and Trojan condoms--and
everything in between.
Here's the deal: Log on to Kozmo's Web site (you can't
order any other way) and you'll see a menu of thousands
of items ranging from Pearl Jam's Binaural CD ($10.99)
to Pizzicato pizzas ($9.99 half-baked). Kozmo's selling
point is that it delivers any item in stock for free with
no minimum within an hour, any time between 7 am and 1
am.
With its videos, junk food, books and magazines, Kozmo
is going head-to-head with a variety of established local
retailers. But the company operates at a significant disadvantage
in a couple of areas. For one, OLCC rules prevent Kozmonauts
from delivering alcoholic beverages, which account for
25 percent of sales--and a healthy profit--at Plaid Pantry.
The company also has high labor costs. Kozmo employs
80 people in Portland, many of them delivery technicians
who pull down $8-$10 per hour and may have to make an
hourlong round trip to deliver a bag of M&Ms. With
no minimum order and a large delivery area, it's easy
to see that Kozmo's $15 average sale doesn't cover costs.
At Plaid Pantry, by contrast, CEO Chris Girard says the
average clerk waits on 44 people and rings up $132 in
sales every hour.
Most competing retailers interviewed by WW don't
seem overly worried, saying that Kozmo may be speedy but
the newcomer's shallow inventory and lack of product expertise
will leave customers feeling needy. "What they're offering
is different from what we're offering," says Powell's
corporate manager Ann Smith. "We understand they've got
about 500 new titles, mostly bestsellers." (Powell's,
by comparison, boasts hundreds of thousands of titles.)
In the area of video rentals and sales, which Kozmo hopes
will be packaged with pizzas, sodas and other high-margin
items, Holly-wood Video, Oregon's homegrown video juggernaut,
isn't losing any sleep. "Hollywood Video does not consider
Kozmo.com competition," says Sean Mahoney, a spokesman
for the Wilsonville-based company. "Their percentage of
the business is insignificant compared to our 1,700-plus
store base and the convenience, copy depth and number
of titles we provide."
Because Kozmo is in the SEC-mandated "quiet period" prior
to its planned initial public offering, officials can't
discuss specific strategy. But from its public filings,
it's clear the company is targeting customers currently
served by convenience stores.
For now, Kozmo's prices are competitive with such stores--and
you don't have to wait in line behind some knucklehead
investing his life savings in lottery tickets. That convenience
worries Plaid Pantry's Girard. "I'm scared to death,"
he says, "because they're going to take a piece of the
market."
Besides Kozmo's obvious attraction for folks who don't
feel like shuffling down to the Plaid Pantry, the company
boasts two major strengths, in Girard's opinion.
First, the bios of the company's top officers read like
a corporate all-star team: Kozmo's 28-year-old founder,
former investment banker Joe Park, hired gray-haired logistics
experts from Federal Express and UPS, veteran bean counters
from top accounting firms and senior executives from companies
such as Coca-Cola, Target and Blockbuster. The head of
the Portland operation, Steve Brune, worked for 7-11 for
more than two decades, most recently overseeing operations
for 847 West Coast stores. "It's really intimidating when
I look at who they've got," Girard says.
Kozmo's second strength is its backers. In addition to
having attracted financing from some of the savviest venture
capitalists on Wall Street and in Silicon Valley, the
company reeled in a $60 million investment from Amazon.com
and has a high-powered marketing alliance with Starbucks.
But in recent months, investors have lost enthusiasm
for delivery-based e-commerce. The share prices of HomeGrocer,
Peapod and Webvan, all of which truck groceries to people's
homes and all of which held wildly successful public offerings
in the past year, have gotten trashed. HomeGrocer, for
instance, which made Portland an early target city, traded
below $4 in May after going public in March at around
$16. Analysts view all three home grocery delivery services
as small, high-cost players in a gigantic, low-margin
business.
Kozmo is suffering from some
of the same doubts. In March the company filed documents
with the Securities and Exchange Commis-sion in preparation
for a $150 million public offering. But after the selloff
in e-commerce stocks, the IPO got delayed. In its SEC
filings, Kozmo disclosed that since it began operations
in March 1998, it had lost a total of $27.3 million.
For his part, Brune, Kozmo's local chief, says the company's
nationwide operations offer purchasing and marketing advantages
that the grocery-delivery companies don't enjoy. He says
that as the company adds DVD players and other electronics
to its product mix and pushes the average ticket toward
$20, its economics will improve dramatically.
Others don't share Brune's optimism. "We've looked at
their business model and scratched our heads," says Powell's
Smith. Girard says that without jacking up prices and
hooking hordes of loyal customers he can't see how Kozmo
can ever cover its overhead. "There are people who will
pay more, but are there enough?" he asks. "Kozmo works
in New York--but this ain't New York."
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Willamette Week | originally
published May 10,
2000
