[sustran] transport & e-commerce

[P. Christopher Zegras]

Interesting piece, with widescale implications.... 
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Subject: @NY - "Online Delivery Services Go to War"
Date: Sat, 12 Feb 2000 13:44:43 -0500
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     Issue 5.24
     February 11, 2000

Giving Customers What they Want:
Online Delivery Services Go to War
        ^
        ^ By Christine Gordon
        ^
        ^ E-commerce is supposed to exist in a friction free environment
where everything's virtual. Virtual storefronts. Virtual inventory. Virtual
cash. But for everything from groceries to cars, the friction-free nature
of electronic commerce runs into grinding real world issues when it comes
to delivering products to customers. For e-commerce players, delivery is
literally where the rubber hits the road, and where all the old problems of
logistics, warehousing, inventory control, and cost containment mean
something.

Suddenly Silicon Alley is ground zero in a battle over who will deliver
your latest e-commerce order to your door. It's a high stakes game in which
each contestant has dreams of building the next UPS or Fed Ex. But today
companies like UrbanFetch.Com and Kozmo.Com look less like high tech
start-ups and more like 19th century messenger services.

At the Greenwich Village offices of UrbanFetch.Com, the front room is
shared by a few dozen jump-suited bike messengers -- and their bikes --
singing along with rap videos on The Box, crammed into a small space like a
size 12 foot in a size 8 shoe.

In the back room, executives huddle atop one another in a miniscule cubical
farm that opens on to a steel-shelved warehouse room. There is literally no
room for a visitor to stand as employees haul crates of DVDs and video game
systems in and out. Behind it all, in a walled off, windowed room sit the
offices of Ross Stevens, co-founder and CEO. But even in Stevens' office
the desk seems an afterthought, surrounded as it is by 12-foot-high storage
lofts, where employees climb like sailors in the rigging of a schooner
looking for the latest order -- a Britney Spears Gift Pack or PalmPilot VII.

"Most of the wrinkles are worked out," Stevens said.

Urbanfetch.com and other delivery players like DeliverNextDay.com and
Kozmo.com, are chanting similar mantras these days, all with catch phrases
that end with the word "expansion." The chief executive officers of each
company plan to rapidly branch out to other cities to broaden their revenue
streams and bump up customer numbers. The online delivery services have
also added some unique services that are designed to hook users. The online
delivery competitors are spending large sums of money to develop programs
to track customer demographics and speed of delivery, but how much profit
can selling a pint of ice cream net a company that's spending inopportune
amounts of capital to erect warehouses that store its goods? Wasn't the
whole idea behind e-commerce predicated on the notion that retailers don't
need to hold inventory and deal with carrying costs?

"We have an 85-percent customer repeat rate," boasted Stevens. "We expect
to be profitable in 18-24 months."

We'll see. The reality is that the space is so hotly competitive that it
was only late last year that Kozmo.Com and Urbanfetch.Com settled a legal
dispute stemming from claims by Kozmo.Com that the Urbanfetch.Com team
lifted the idea for the business after seeing the Kozmo.Com business plan.

Those suits perhaps slowed Urbanfetch.com's fund raising although Stevens
said the company has raised an undisclosed amount of money from several
sources, including Vantage Point Venture Partners.

"We have more than enough capital to operate," said Stevens. "Our
infrastructure is less expensive than a store that needs multiple locations
or is located on Madison Avenue."

Also raising money was Kozmo.Com. Although no official announcement has
come yet, Amazon.com has led an investment round in the company rumored to
be upwards of $100 million.

The vast financing from a strategic partner like Amazon.Com stands to
change the equation for Kozmo.com and perhaps for the
Kozmo.Com/Urbanfetch.com battle. Here's why:

To date, Kozmo.com and Urbanfetch.com have generated money hand-delivering
videos, snacks, consumer electronics, and convenience products to customers
within an hour. Kozmo.com utilizes two warehouses -- one in the Village and
the other on the Upper West Side -- and pays bicycle couriers by the hour
to handle drop-offs and pick-ups. Urbanfetch.com is similarly organized.
Both companies have put together a network of pizza places and coffee shops
that have agreed to allow its customers to drop off their rental videos in
their stores. Kozmo.com and other online delivery services deploy 50 or 60
delivery people every day, each of who might be working at one time on the
busiest days. For the most part, the companies make money from $4 or $4.50
rental fees and from the mark-up on sales of videos, games, and snacks.
Urbanfetch has recently expanded into over the counter medicines and health
and beauty aides.

Neither company would talk in depth about their revenue or cost numbers,
though Urbanfetch.Com execs claimed that last December the company racked
upwards of $1.5 million in revenue with individual orders averaging about
$50. And Stevens said his best couriers make $800 a week.

But the big issue for these competitors is scale. Kozmo.com currently
operates in other cities including Boston, San Francisco, Seattle and
Washington D.C., Los Angeles and plans to expand to Chicago. Urbanfetch.com
 plans to expand domestically and internationally, although details are
under wraps. With each expansion into significantly more spread out
environs than Manhattan deliveries will need to be done by car -- which
will give the companies another wrinkle to smooth out before things start
running gracefully.

And each expansion will require that each company's warehousing, inventory
handling and delivery systems be diligently managed. Each company has its
own particular strategy for handling huge numbers of orders on a daily
basis. Urbanfetch.com's Stevens' hired his own University of Chicago
Graduate school professors to create a pricing model that can be adjusted
according to staffing and weather changes. Kozmo.com and DeliverNextDay.com
have implemented similar algorithmic strategies. So far, each is happy with
the results.

"With 20,000 deliveries a day you can think of it as turning knobs on a
dial," said Stevens. "We almost have 100 percent success in deliveries."

Kozmo.Com too is counting on people to build out its logistics network.
"We've brought in senior executives from Federal Express and AT&T to advise
us on the challenging complexities of the business," said Joseph Park
co-founder and chief executive officer of Kozmo.com. "We believe that the
space of the last mile will be challenging."

That's where the relationship with Amazon.Com could give Kozmo.Com a
distinct advantage -- being able to build around a relatively predictable
order schedule for book, music and video best-sellers. Of course, the
Amazon.com-funded Kozmo.Com will face competition from the like of
barnesandnoble.com, which has begun testing same-day delivery in Manhattan,
using its bookstores as the equivalent of a distributed warehouse operation.

Meanwhile, suburban-based DeliverNextDay.Com has a different proposition --
business to business e-commerce. "Industry experts project that
business-to-business e-commerce will exceed $1.3 trillion by the year
2003," said Michael Breneisen, president of Telebyte, which is the parent
corporate of DeliverNextDay.Com. "However, the cost to integrate a
company's legacy system into e-commerce can range from $300,000 to more
than $1 million."

DeliverNextDay.com offers next day delivery before 10:30 a.m. of technology
products. Of course, the company in part is in the business of selling
products manufactured by Telebyte, so the service is as much direct
retailer as it is hybrid reseller and distributor, which best describes
Urbanfetch and Kozmo. But DeliverNextDay.com will be reselling products
manufactured by other companies. In fact, DevliverNextDay.Com is more of a
middleman play, negotiating favorable terms with shippers based on volume
and passing the savings along as a service to consumers, instead but
building out its own shipping and logistics operation.



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