Sunday, September 10, 2000

E-mmediate results? attempts to polish delivery service

By Adam Geller
The Associated Press

        NEW YORK — As the clock edges toward 7 p.m. and New Yorkers arrive home, the map of Manhattan spread across John Soberany's computer screen begins to flicker.

        Circles and triangles glow blue, yellow and white, tipping Mr. Soberany to the man on 36th Street waiting for a snack and an Erin Brockovich rental video and the woman a few blocks away expecting toilet paper and a few other items.

        Mr. Soberany is a dispatcher for, the “e-mmediate” gratification pioneer that guarantees customers one-hour free delivery of thousands of convenience items.

        Until a few months ago, New York-based Kozmo was a darling among Internet startups, even though its multimillion-dollar losses were typical of the industry.

        But with investors now pressing Kozmo to prove itself, the company instituted an executive shake-up and more than 300 layoffs, and it has been forced to retool. It has done so with a streamlined warehouse and delivery operations commanded by a former Marine logistics officer and by offering a broader line of products.

        Analysts, though, are skeptical and say Kozmo has a brief window to prove itself.

        “If investors support them for another six months, that's a lot,” says Geri Spieler, an analyst with Gartner Group. “The investment community doesn't have a lot of patience anymore, and they're saying, 'Forget this business about not showing a profit ... Show me the money.'”

        Given that Internet-based quick delivery didn't even exist a few years ago, nobody really knows whether a Kozmic make-over can turn this business into a moneymaker.

        “It's a very interesting business model. It's new and so compelling and, of course, it has generated a great deal of excitement,” says Evie Black Dykema, an analyst for Forrester Research, which predicts that most dot-coms will be out of business before the year is out. “The ultimate question is, can they make the financials work?”

        Investors including Softbank and were convinced when they lavished $250 million in capital on Kozmo after it sprung out of a Manhattan warehouse in early 1998. But after the e-commerce stock bubble burst in April, investor enthusiasm for the likes of Kozmo evaporated.

        In their struggle for survival, dot-com companies cut 4,193 jobs in the month ending August 23 alone, according to outplacement firm Challenger, Gray & Christmas Inc.

        Kozmo operates in 11 cities, but has postponed plans to double that number. It put off until at least next spring an initial public stock offering, and has not yet moved ahead with previously announced plans to deliver for

        Since June, Kozmo has cut about 65 headquarters staff and 275 warehouse and delivery workers in New York and Los Angeles.

        The company has acknowledged total losses of $27.3 million through the end of last year. But, its IPO on hold, the company now won't discuss its finances.

        Kozmo's 20-something founders, Joseph Park and Yong Kang, surrendered day-to-day control to more experienced managers in June. New CEO Gerry Burdo, a former executive at furniture retailer Ethan Allen, says the company has the plan and the time to prove its business can work.

        “We don't have a gun to our head, per se,” he says. “We have a lot of confidence in our model, and we're going to demonstrate that.”

        Mr. Burdo is broadening the business, whose prices are slightly higher than most stores, beyond inexpensive rental videos, chips and soda — offering high-priced electronics, office supplies, and, soon, gifts.

        The quest for viability is evident during a walk through a new prototype warehouse in midtown Manhattan, a Spartan space about three times the size of a convenience store that demonstrates Kozmo's leap “from a warm and fuzzy dot-com to this regimented and efficient organization,” says Don Germano, the company's New York general manager.

        The warehouse is organized around Kozmo's new mission — boosting the average customer's order, cutting packing and delivery costs and increasing volume.

        Mr. Germano leads the way down aisles stocked not only with $3.99 rental videos, but magazines, condoms and $800 digital cameras. He points out cases filled with ice cream, juice, frozen steaks, sushi and clam chowder.

        The new merchandise mix — along with a recently imposed $5 minimum for orders — has boosted the average order from a little more than $10 in the spring to about $17 in some markets, Mr. Burdo says.

        Incoming orders pop up as symbols on Mr. Soberany's computer, allowing him to quickly spot clusters of customers and send out delivery staff with multiple orders. Now, workers who once delivered an average of just under one order an hour have tripled their load and cut costs.

        Every item in the warehouse also is assigned its own number, making it easier for a small corps of workers to locate the items, Mr. Germano says. The warehouse employs about 100 people, down from about 135. Kozmo is also trying to generate daylight-hours business for what has been an evening service.

        Analysts call these steps in the right direction.

        But Ms. Dykema says the company should charge heftier premiums for the convenience it provides. It should also forge more ties with partners including parcel delivery firms and local retailers — something Kozmo has already begun doing with restaurants.

        Ms. Spieler says the company must work harder to capture business during every hour and every season. But even if Kozmo does all that, Ms. Spieler says the equation may not produce a profit.

        “There's a lot of neat stuff that would be great if it didn't have to make a profit,” she says, “but unfortunately that's not how Wall Street and the business community goes around.”


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