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Archived from http://www.computerworld.com/managementtopics/ebusiness/story/0,10801,59545,00.html

Kozmo delivers no more

Story by Mathew Schwartz

APRIL 12, 2001 ( COMPUTERWORLD ) - Late last night, online delivery trailblazer Kozmo Inc. shut down its Web site, ceased delivery operations and said it would liquidate all assets.
Kozmo had been in merger negotiations with PDQuick, a Los Angeles-based grocery delivery service, said a source who requested anonymity. But yesterday, funding promised to PDQuick failed to materialize and any merger was called off. Last month, an investor who had promised Kozmo $6 million also backed out.

"The decision was ultimately made with the employees in mind, to try and show some compassion to them and offer some severance, and where we can, some outplacement services, and to focus on liquidating assets at this point," said Kozmo spokeswoman Stephanie Cohen-Glass.

Kozmo was one of the leading delivery companies on the Internet. It let customers order movies, books, music or food online, then have it delivered within the hour. The company was probably best known for its "Kozmonaut" couriers, bicycle messengers with orange helmets and the green Kozmo logo.

Formed in 1997 by twentysomething New Yorkers Joseph Park and Yong Kang, Kozmo.com serviced nine major urban areas, including New York, Boston and San Francisco.

In a statement, Gerry Burdo, Kozmo's president and CEO, said, "Given more time and more hospitable market conditions, Kozmo would have succeeded in rounding the corner and would have continued to grow. ... Some decisions made early in the company's development combined with current market conditions prevented Kozmo from overcoming the challenges" it faced, he said.

While Burdo didn't elaborate on which early decisions helped scuttle the company, analysts have said one ill-fated decision was to sell only over the Web. However, the company was moving quickly to rectify that problem. Just last week, Kozmo mailed 400,000 catalogs to consumers as part of a new catalog-based, toll-free phone delivery service for consumers who didn't want to shop online.

Kozmo executives were also trying to position their delivery infrastructure and technology as a pipeline for other retailers, they said. Kozmo recently dropped the .com from its name as well.

Another challenge was positioning. The company initially seemed to cater mainly to the late-night cravings of twentysomething urban dwellers, a demographic with somewhat underwhelming revenue potential. Recently, the company began targeting older, more affluent customers, as evidenced by a partnership and promotions with Starbucks.

But as experts have pointed out (see story), Kozmo's potential fatal flaw was that it had only an online sales channel, and these latest changes might have been too little, too late -- to say nothing of the high delivery costs the company incurred with each order. Only last year, the company instituted a $10 minimum on all delivery orders, as well as delivery charges.

As Kozmo failed to expand nationally, it began falling apart. For instance, last year Kozmo agreed to pay Starbucks $150 million over five years to house drop-off boxes for rental videos, which was to have been the cornerstone of a national Kozmo infrastructure. When that vision faltered, the company ended its partnership with Starbucks later in 2000 after paying just $15 million for drop-box and promotional costs.

Kozmo had received funding from Amazon.com, Softbank Capital Partners, Chase Venture Capital, Oak Investment Partners, Flatiron Partners, Liberty Digital and J. & W. Seligman. Starbucks was also an early investor.

But after scratching an initial public offering last year, Kozmo has been steadily laying off employees. Its workforce dropped from 2,200 to 1,300 recently. In January, the company ceased operations in Houston and San Diego, citing lack of demand. By March, Don Germano, Kozmo's regional vice president and New York general manager, resigned for a position with K-Mart. Kozmo also laid off a substantial number of workers at its New York and Portland, Ore., distribution centers.

On March 19, the company announced that Tom McIntyre, the former executive vice president and chief financial officer of BMG Entertainment, would be its new senior vice president and CFO.

The company did seem to be edging toward staying alive. According to Kozmo, its membership grew last year from 150,000 to 400,000, the average order was $25, up from $10 in July, and gross margins in the same period were up from 12% to 48%. The company claimed profitability in Boston, New York and San Francisco.