Kozmo

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Kozmo (.com)

(For case discussion in 15.823 on April 9, 2001
with Yong Kang, President & Co-Founder, Kozmo.com)

“Think about all the errands you run on a regular basis, to the video store, the bookstore, the convenience store, the office supply store.… We eliminate all those errands. Being part of your lifestyle is what Kozmo is, where you depend on us for all your various basic needs.”

- Joseph Park
Co-Founder, Kozmo.com

The Company
Kozmo.com delivers videos, DVDs, CDs, books, and convenience items (snacks, magazines, toiletries, household products, flowers, beers etc.) to consumers within an hour, with no delivery charge and no order minimum. The service is currently available in nine cities (Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Portland and Washington D.C. -see Exhibit 1 and 2 for web page, dates launched and investors). Kozmo plans to be in more than 35 cities in the U.S. by the end of 2002. In 1999, the number of customers registered on the web site grew at a compounded monthly rate of approximately 30%. But the total number of users has remained steady in 2000.

Joseph Park and Yong Kang left their jobs on Wall Street to found Kozmo in 1997, when Joe first ordered a book from Amazon.com and found that it did not fulfill his desire to have the book on the same day. Joe and Yong had been friends since they were roommates as undergraduates at New York University. With a handful of bike couriers delivering goods ordered online by New Yorkers, Kozmo has grown into an army of "Kozmonauts" that serves major cities. In 1999 Kozmo hired several experienced executives from AT&T, Coca-Cola, FedEx, and UPS to round out its senior management team (see Exhibit 3).

In 1999, Kozmo lost $27 million on $3.5 million in revenues, with delivery costs running at $3.3 million. It revenues for financial year 2000 were $30m with a net loss of $120m with delivery costs of $35 m. Its customer acquisition cost has gone down dramatically from $72 per customer in early 1999 to around $50 in late 2000. Current customer acquisition costs are at $25 per customer. From a model of 100% revenues coming from B2C clients in 2000, Kozmo expects revenue diversification –- 75% from retailers, 25% from its B2B operations and 2% from advertising – in 2001 to help its overall gross margins. Current B2B categories are in the areas of Office Supplies (consumables, software, printer cartridges, digital cameras), Travel as well as logistics pertaining to distributors, manufacturers etc. The company closed a $28 million first round with Flatiron Partners in 1999. It has also raised over $130 million from institutional investors including Chase Capital Partners and Softbank Ventures. In March 2000 Amazon.com invested $60 million in Kozmo.com and became the largest stakeholder in Kozmo with a 31% stake on a fully loaded basis (including warrants). As part of the deal, Amazon.com has struck a nonexclusive, three-year alliance to offer its customers a one-hour delivery option, powered by Kozmo.com. The company had filed to go public in late May 2000 (See Exhibit 3 for selected sections of its S-1 filing with SEC) for an expected valuation of $1.2 - $1.5 billion.

"Convenience stores command a premium for providing quick access to last-minute purchases, so why charge a discount for the ultimate convenience of home delivery?"- Evie Black Dykema, an analyst with Forrester Research. The company withdrew its IPO in August 2000 and has been trimming its workforce (refer to optional reading “Kozmo postpones IPO, lays off 24 employees” in Exhibit 4). Kozmo.com shut down its Houston and San Diego operations in 2001, citing lack of demand. Kozmo has announced three layoff’s trimming around 10% of its workforce and has been able to considerably trim its operating and acquisition costs. Kozmo’s product pricing compares on food items, videos, drugs and other items compares well with convenience stores and discount...
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