By Jim Frederick
October 1, 2000

It’s early Monday morning and I’m at work. About the time I finish my first cup of coffee, I realize that I have once again forgotten to bring a CD from home. And today’s the breaking point: The same four disks I’ve had in heavy rotation for months just aren’t going to cut it anymore. Rather than walk to the music store across the street, I head instead to my newest e-commerce obsession, Urbanfetch.com. Within a few minutes, I’ve found what I’m looking for (the soundtrack to The Virgin Suicides) as well as an impulse purchase, the new Harry Potter book. The total is a seemingly reasonable $37.18. The same order at Amazon.com would have cost $34.03 for standard shipping, $43.53 for overnight.

But this ain’t no overnight delivery. Forty-five minutes after I submit my order, a courier arrives at my office. “Urbanfetch,” he says, out of breath, as he hands me my loot. Friendly and polite, he refuses a tip and is off like a shot. Since I’ve done this tens of times, I know what’s next. “Look,” I say to an incredulous co-worker, “they threw in a bag of chocolate chip cookies for free.”

There’s little doubt that Internet retailing has been a bonanza for consumers in the form of lower prices and increased convenience. And nowhere does the customer wield more power than at Urbanfetch and its virtual twin in the nascent immediate-delivery Net shopping business, Kozmo.com. These two sites—which deliver movies, snacks and electronics as well as books and music, all for free within an hour—are New Economy wonders, Shangri-las where the customer is king. I have begun to think of their couriers as a band of knights errant, sworn to serve the fickle whims of overconsuming Americans.

And while Kozmo and Urbanfetch are unique, many a website is dabbling in same-day delivery. Consumers in more than a dozen cities can go online in the morning to buy groceries for that night’s dinner or avoid a stop at the video store after work by ordering a movie rental on their office computer. This is a Web phenomenon you have to try. The deals are terrific, the costs are low and the convenience is extraordinary.

Ah, but here’s the sad part: These services are so wonderful that they may not last long. Indeed, this business model may harbor the seeds of its own destruction.

Orange vs. Green

Back in 1996, the story goes, a recent New York University grad and Goldman Sachs analyst named Joe Park ordered a John Grisham book from Amazon. But he was annoyed he would have to wait a day to get it. Wouldn’t it be great if a store like Amazon could deliver virtually anything you wanted as soon as you ordered it? Park and a partner quit their jobs, built a website, rented a storefront in New York City’s East Village and started delivering videos and ice cream to lazy night owls.

Four years later, Kozmo has raised $250 million in venture capital (including $60 million from Amazon), expanded to 10 more cities (see the map, opposite), broadened its product line (to include everything from 99¢ Junior Mints to $999.99 Nikon Coolpix 900 digital cameras) and filed a proposal with the Securities and Exchange Commission in March to go public.

Since every Coke must have a Pepsi, Urbanfetch opened for business in New York last October, setting off a rivalry that borders on blood feud. The rift started in March 1999, when Kozmo met about fund raising with Ross Stevens, who ran an investment firm named Integrity Capital Management. Less than a month later, ICM had dissolved and Stevens and his partners founded Urbanfetch. This, um, coincidence spawned a lawsuit that was ultimately settled out of court. It gets even weirder. At press time, the two enemies were rumored to be in merger talks.

The Messenger Corps I Love So Much May Be the Achilles’ Heel.

Though Kozmo and Urbanfetch have virtually identical missions, there are differences. By far the biggest is geographic coverage. Kozmo plans to be in 16 cities by year-end. Urbanfetch is only in New York City and London. After that, the magnitude of distinctions diminishes. Kozmo‘s couriers accept tips, Urbanfetch’s don’t. Kozmo delivers until 1 a.m. (12 a.m. in Boston), Urbanfetch operates 24 hours a day. Kozmo‘s couleurs de guerre are orange and kelly green. Urbanfetch’s: forest green and beige.

The Longest Mile

Urbanfetch and Kozmo have chosen to go after the most buzz-filled niche in all of online retailing–the so-called last mile. Getting a stereo from wherever it’s made to a warehouse near the customer is relatively easy and low cost. Getting that same stereo to the customer’s front door is the hard part. How expensive can it be to bring a couple of movies and a pint of Ben & Jerry’s to your house within an hour? Based on Kozmo‘s March S-1 filing, the answer is: really expensive. In 1999, Kozmo generated $3.5 million in the sale of goods that cost it $2 million. Not bad. Unfortunately, the company spent another $26.5 million in marketing and sales, payroll, delivery, distribution centers and other general expenses to sell that $3.5 million worth of stuff.

Kozmo is a start-up, of course, so many expenditures are necessary investments to grow a company. And the holy grail of Internet business is “economies of scale”–once your business gets big, the theory goes, you can add lots more revenue without significantly adding to costs. That’s when profits start to pour in. But in the case of Kozmo and Urbanfetch, many expenses will grow right along with revenues. Indeed, their Achilles’ heels may well be the messenger corps that I love so much.

Live By the Messenger…

Messengers, God bless them, do not scale. Hiring humans to carry packages is expensive, and there’s not a lot of room to make them more efficient. (Bikes go only so fast; messenger bags are small; software to plot routes may help but, really, how much?) Nope, more orders simply means more couriers, and more couriers mean more expenses. Even though Kozmo recently laid off 299 people in New York and Los Angeles, it continues to ramp up in other cities, steadily adding to its 2,350 employees nationwide.

Expenses are far from the companies’ only hurdle. To survive, both need a number of things to happen. First, their average order sizes must go up. Urbanfetch claims its orders average $43. (Urbanfetch, which hasn’t filed to go public, releases only those numbers it’s proud of.) Kozmo‘s S-1 says its average order is $13, a number that’s certainly climbed since March. Even if it has approached Urbanfetch’s average, however, that’s still not high enough. Both companies have instituted minimums and added higher-ticket items like electronics, but how many consumers will buy a $1,000 camera on impulse?

Second, the sites need to maintain an impeccable reputation for on-time delivery. But relying on thousands of low-paid, unskilled workers makes flawless execution tough. From my experiences with Kozmo, as well as those of friends, late deliveries and order snafus seem to be on the rise.

Finally, both companies need more people in more tightly packed areas to place more orders. A study by Booz Allen & Hamilton entitled, ominously enough, “The Last Mile to Nowhere” calculated that most U.S. cities just aren’t dense enough. While New York is capable of generating $14 million in online sales per square mile per year, the authors conclude, “most major cities offer approximately $1 million per square mile in sales each year.” By sticking to New York City and London, Urbanfetch (if it stays independent) may have dealt itself an edge.

Will Kozmo and Urbanfetch survive? Perhaps, although the consumer benefit that I find so dazzlingly appealing–from the Internet to your door in under an hour, as Kozmo‘s slogan goes–creates a host of business challenges that, frankly, seem insurmountable. Luckily, for now we can remain blissfully unconcerned as we experience one of the best manifestations of Internet shopping yet devised. Get it while it lasts.

 

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