What Led to Kozmo's Final Delivery

The market's reversal of sentiment on unprofitable dot-coms caught this promising but overextended one by surprise, and it never recovered

So close but yet so far. When Kozmo registered for a $150 million initial public offering in March, 2000, spirits at the New York-based home-delivery service for snack food and videos were sky-high. Its investment bankers were top-tier, the team at Credit Suisse First Boston led by star banker Frank Quattrone. Its venture lineup had star power too, notably Amazon.com and Softbank Capital Partners. With the cash from its IPO, Kozmo planned to expand into 30 cities across the country. At a party on the penthouse floor of a Manhattan office building just after Kozmo filed for its offering, then-chief executive Joseph Park hopped up on a table and told his troops their future was limitless.

Alas, the saga of Kozmo had no happy ending. On Apr. 11 with its hopes of a stock offering a distant dream, Kozmo called it quits and laid off its 1,100 employees (see BW Online, 4/16/01, "Kozmo, We Hardly Knew Ye"). The company's path from stardom to the dot-com dustbin is symbolic of the end of the Internet boom. Fledgling companies that once could look forward to multibillion-dollar valuations in the stock market can no longer find investors willing to put up a dime for their stock. Twenty-something entrepreneurs who once headed the leading companies of the New Economy now find themselves headed for the unemployment lines.

Indeed, Kozmo is just one of dozens of dot-coms that are shutting their doors as their one-time backers realize that the public investors won't be putting millions into new money-losing companies anytime soon.


  At Kozmo, the past year has been one of strategic mistakes piled on top of outside disasters. Just after it filed its IPO documents with the Securities & Exchange Commission, the Nasdaq started its long slide that now has the tech-heavy index 62% off its peak last year. Worse, Kozmo wasn't built to be a profitable company, and it didn't change its business quickly enough once the tech meltdown started. Until last summer, Kozmo followed the old Net model of trying to boost revenues as quickly as possible with little concern in the short term for profits. When the company tried to change its approach to wring profits out of its business, it was simply too little too late.

Kozmo couldn't make its business profitable before its sources of cash evaporated. The company received $30 million from its venture investors in January, but it needed more money to continue operating beyond this spring. The venture backers wouldn't put up the cash. A last-ditch effort to acquire PDQuick, a Los Angeles company with 11 stores and an online operation, would have given Kozmo more resources, but the deal fell through on Apr. 10. Kozmo pulled the plug the next day to conserve enough cash for severance packages for its execs.

"Given more time and more hospitable market conditions, Kozmo would have succeeded in rounding the corner and would have continued to grow," said Gerry Burdo, the company's CEO, in a statement issued Apr. 11. "However, some decisions made early in the company's development, combined with current market conditions, prevented Kozmo from overcoming the challenges with conquering the last mile."


  The fact is, the company had overly ambitious plans for expansion and didn't cut them down quickly enough once capital dried up. Park, now 28, and Yong Kang, now 27, dreamed up the idea for Kozmo in a Greenwich Village basement in 1997 when they wanted goodies from a convenience store delivered to their door. They started the service in 1998 in New York City, quickly expanded to 11 cities with their venture capital money, and planned to a massive expansion after their IPO.

But after the stock offering stalled, the company was slow to cut back. It wasn't until January of this year that it shut down in its least successful markets, San Diego and Houston. That left the company with service in nine cities: Atlanta, Boston, Chicago, Los Angeles, New York, Portland, San Francisco, and Washington.

Youth, once the calling card of the Net economy, didn't serve the company well. Park and Kang were relatively inexperienced. That wasn't a problem with the Net mania of 1999 and early 2000 when enthusiasm seemed the only requisite ingredient for success. But after the IPO was put on hold, Kozmo's venture backers wanted a more experienced leader who could make the company's cash last. In July, 2000, they turned to 35-year-old Burdo, the company's chief financial officer and a former financial executive at furniture maker Ethan Allen. Kozmo's founders and board members say the passing of the baton was a mutual decision.


  But the pesky little problem of making money remained. Originally, Kozmo would deliver something as cheap as a pack of gum for the same price that you buy it at the neighborhood convenience store -- and not charge any delivery fee. To turn a profit, the company had to boost the size of its orders or start charging for delivery.

"Kozmo is more convenient than the nearest 7-11," says Forrester analyst Evie Dykema. "To survive, they needed to shift to a more upscale customer base and pass the cost of the convenience they provide onto customers willing to foot the bill."

It took a while for Kozmo to figure that out. It wasn't until Burdo became CEO last summer that it started to target a higher-end market and require a minimum order size. The company added gourmet meals, fresh flowers, and pricey consumer electronics to its list of offerings. Burdo also set a $5 minimum order limit and imposed a delivery fee for orders under $30. It was starting to work: By this year, average orders had risen to $25, up from $10. That helped gross margins improve to 48%, from the 12% figure the company claimed a year ago.


  This, perhaps, is the surprising finale to the Kozmo story. The company's demise doesn't prove that the home-delivery business is a hopeless failure. Rather, Kozmo's experience over the past few months suggests that a viable business is hiding underneath the wreckage that is Kozmo. Demand for instant gratification is clear: Kozmo's membership swelled to 400,000, up from 150,000 a year earlier, even with Burdo's new financial requirements.

What's more, the business can be profitable. Three Kozmo markets -- San Francisco, Boston, and New York -- made money in December, 2000, according to a company spokesperson. And the deal with PDQuick would have given Kozmo a brick-and-mortar presence to improve its economies of scale, make returns easier, and help establish the company's brand name.

"There is a market for this if a company can figure out how to stick to their knitting and not be all e-things to all e-people," says Alan Alper, an analyst at market researcher Gomez. Some company may figure that out, but it won't be Kozmo.

By Jeanette Brown in New York

Edited by Beth Belton

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