Delivering Red Ink

Baldwin Louie — Mon, 31 Jul 2000 18:00:00 -0400

"The simple ideas are always the best ideas," Joseph Park declared three years ago, shortly after launching Kozmo.com (dossier).

And what could be simpler than a business that offers everything from videos and games to ice cream and cigarettes at the click of a mouse and then delivers them straight to your door by bicycle messenger in under an hour?

But simplicity doesn't necessarily lead to profits.

Park's words came back to haunt him last week after the board of directors urged both Park and cofounder Yong Kang to step down from the top spots at the 3,000-employee company they founded in a Greenwich Village storefront. The two are now figureheads - Park is the chairman of the board and Kang is vice chairman - removed from the day-to-day management of the company. A Kozmo spokesman says the decision was mutual. Kozmo's chief technology officer and chief marketing officer were also forced out of their positions last week. Kozmo CFO Gerry Burdo has stepped into Park's CEO slot temporarily while the board searches for a permanent replacement.

Replacing a young and inexperienced founder with a more seasoned executive is a natural step in the evolution of a startup. But it isn't hard to read Park's ouster as a desperate move, a last-ditch attempt to demonstrate to Wall Street that Kozmo is cleaning house in preparation for its IPO, which was planned for May, then postponed until September and will now most likely come late in the fourth quarter. That's if it comes at all.

One problem is that Park's notion of a business based on instant gratification so far has failed to deliver profits. What was once a standard disclaimer in any Internet startup's S-1 filing has now become an insurmountable liability for e-commerce operations like Kozmo. "We will continue to incur operating and net losses and to have negative cash flow for the foreseeable future," Kozmo's filing reads. "We expect that the rate at which we will incur those losses and have negative cash flow will increase significantly from current levels." That kind of admission leaves Wall Street cold.

Will removing Park from his position save Kozmo? Not likely. According to its filings to the Securities and Exchange Commission in March, Kozmo spends about $1.50 for every $1 it generates from sales. That figure doesn't include the $21 million it spends on inventory, marketing and administrative costs. All told, Kozmo has lost a staggering $26.4 million on revenues of $3.5 million.

"We are on a fast and disciplined track to profitability in all of our markets, without slowing the exponential growth we've experienced on the top line," said Kozmo's Burdo in a statement last week. But despite these vague promises of profit, no one at the company has been able to explain how Kozmo will stop losing money on every sale.

The startup's ambitions have led to its undoing. In hindsight, the worst move Kozmo made was to file so early to go public. Swept up by investor frenzy over dot-coms, Kozmo planned to rake in an estimated $150 million from the public. But the filing and its subsequent SEC-mandated quiet period opened the company to intense financial scrutiny. Making matters worse, the quiet period has prevented it from updating what sources inside the company say is outdated information.

Those sources say Kozmo's numbers have improved significantly since the March filing. That, and plans to impose an order minimum, are putting Kozmo on course to achieve its first profitable quarter within the first half of 2002.

"We have a pretty clear path and key metrics in terms of average order per delivery per hour and gross margins," says Seth Goldstein, a partner at Flatiron and a Kozmo board member. "We've made some other changes."

The quiet period prevents the company from discussing plans in detail.

Kozmo's travails aren't unique. Last-mile delivery services - like Urbanfetch.com, Sameday.com and PD Quick - are all trying to find a way to turn a profit, although there are few details on their numbers since all are still private. While analysts are not ready to write off this category altogether, they're highly skeptical. In a scathing report that surveys same-day home-delivery services titled, "Last Mile to Nowhere," Booz, Allen & Hamilton (dossier) partner Tim Laseter writes: "We think the last mile will lead to the gallows rather than to the promised land." He sites four reasons: "limited online sales potential; high cost of delivery; a selection-variety trade-off; and existing, entrenched competition."

Based on publicly available information, Laseter's report argues that even if Kozmo scales wider and larger, the company will never break even.

Urbanfetch, which recently imposed a $10 minimum purchase to guarantee free delivery, is similarly finding it hard to reach profitability. While the company's $50 average order is far higher than Kozmo's, the company is forced to split the New York market with Kozmo. Industry sources say Urbanfetch's bankers are putting the company up for sale. Urbanfetch executives were unreachable at press time.

While far larger, Webvan is hardly immune to the category's woes. For the second quarter, Webvan reported a net loss of $74.4 million, or 23 cents a share, on sales of $28.3 million. This is compared with a loss in the same period a year ago of $234 million on sales of $383,000. Webvan is currently trading around $6.75, down from its 52-week high of $34. The quarter's numbers, it should be noted, do not reflect Webvan's proposed purchase of HomeGrocer.com (HOMG) for an estimated $1 billion in stock.

Sameday, which was originally called Shipper.com, has struggled to find a niche, since it competes with traditional delivery services like UPS and Federal Express. More recently, it launched Sameday Mall, an online retailer with same-day delivery, but it abandoned that business a few months after its October launch. Earlier this year, Sameday retuned its operations to serve as a business-to-business fulfillment service for other retailers.

Online grocery delivery company PD Quick, which recently changed its name from Pink Dot, is planning to spend its recent $20 million investment on expanding beyond its home base of Los Angeles into 30 additional cities. But getting into new markets like Washington and New York means taking on Webvan and Kozmo.

The truth is, any one city has only so much room for a last-mile delivery service.

Instant Gratification

A number of services are competing to own the "last mile." They include:

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* planned expansion. Source: Booz, Allen & Hamilton

Benjamin Hammer contributed to this report.

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Delivering Red Ink