New York Times Technology
The New York Times
Job Market
Real Estate
All Classifieds
  Quick News
NYT Front Page
New York Region
Special: Taxes
  Editorials / Op-Ed
Readers' Opinions
Job Market
Real Estate
Week in Review
College Times
Learning Network
New York Today
NYT Store
Help Center
Media Kit
NYT Mobile
Our Advertisers
  Home Delivery
Customer Service
Your Profile
Review Profile
E-Mail Options
Log Out
Text Version
Sign Up for Newsletters  |  Log Out
Go to Advanced Search
E-Mail This Article Printer-Friendly Format
Most E-Mailed Articles

April 13, 2001

Behind Kozmo's Demise: Thin Profit Margins


Related Articles

Kozmo to End Operations (April 12, 2001)

Kozmo Loses $6 Million in Expected New Financing (April 3, 2001) to Lay Off More Workers and Focus on Offline Sales (Feb. 24, 2001) to Cut 4% of Workforce (Feb. 23, 2001)

Readers' Opinions

Join a Discussion on the Dot-Com Backlash

Other Resources
Get Stock Quotes    Look Up Symbols
Separate symbols with a space.
Portfolio |  Stock Markets |  Mutual Funds |  Bonds |  Currencies |  Bank Rates |  Industries

Sometimes, profits are not enough.

That is what Kozmo, the pioneering online delivery company that was supposed to be New York's first big hit during the dot-com boom, learned this week when its investors pulled the plug. The company announced late Wednesday that it would have to shut down its operations in nine cities and lay off its remaining 1,100 employees because investors would not ante up the money to complete a merger that would have kept the company in business.

Kozmo, which was started by a young entrepreneur in his East Village apartment three years ago and grew into a company of more than 3,300 employees, earned profits in its largest markets in December. It was the first time that Kozmo, which delivered goods ordered on the Internet to consumers in less than an hour, had ever earned profits.

It remains unclear whether the overall company earned operating profits that month. But executives said that if a planned merger with a delivery outfit in the Los Angeles area, PDQuick, had gone through, the new company would have become more profitable by cutting back to the six most successful markets.

Investors have said that for dot- coms, the pursuit of profits is the holy grail. But just a profit would not have been enough in this case.

In many ways, Kozmo's executives did find a way to make online delivery work, albeit too late. After the Nasdaq's sharp fall in April 2000 dried up the public markets, Kozmo reduced costs through layoffs and increased revenues by adding items that had margins higher than the delivery of videotapes and 16-ounce Cokes. It added a delivery charge and began selling products like DVD players, which had a higher profit margin. Kozmo also branched out to offline sales, for which it mailed consumers a catalog.

In New York, for example, the company made an operating profit of $200,000 in December on revenues of $2 million, in contrast to last June, when it had an operating loss of $2.5 million on revenues of $800,000.

But the ultimate problem came down to basic economics.

Backers of Kozmo invested almost $280 million in the company because they were convinced that it would revolutionize the way people shopped and would earn them large returns on their investments. But their experience with Kozmo showed them that although the online delivery business has potential for profits, it is not likely to ever generate the high profits that they anticipated.

That realization made putting more money into Kozmo out of the question, said Michael Drapkin, the founder and principal of the Drapkin Technology Corporation, an e-commerce consulting firm and the author of "Three Clicks Away: Advice from the Trenches of E-Commerce" (John Wiley & Sons: 2001). "The whole thing about same-day delivery is that they run ultraefficient operations on paper-thin margins," he said. "Even if you could corner the entire market, you could never get enough to be able to get a return on an investment of $280 million."

Dot-coms once did not have to worry about this because they could wait for a suitor to buy them or an initial public offering under which they could sell their stock. But since the Nasdaq's sharp decline a year ago, both of those options disappeared.

"I don't think you can go from being an idea to wanting to be a global company in three years," Alice O'Rourke, a former venture capitalist who is now executive director of the New York New Media Association, said of Kozmo. "You can't make a company grow too fast, just like you can't make a human grow too fast."

Within New York's Internet industry, there was deep disappointment over Kozmo's failure, given the fact that Flatiron Partners, Softbank and other backers announced in January that they would put $25 million more into the company.

Kozmo officials say that their recent financial success and the growth of their customer base to 400,000 from 150,000 in the last year show that online delivery can work. They contend Kozmo's problems were the result of spending too much money during the dot-com boom. Instead, they say, the company could have focused on fewer cities and carved out a smaller niche more appropriate for the service's inherently small profit margins.

Home | Back to Technology | Search | Help Back to Top

E-Mail This Article Printer-Friendly Format
Most E-Mailed Articles

Moving Offices?

Post a Job on

Search Classifieds

Browse the NYT Store

  Explore Shopping at

Click Here to Receive 50% Off Home Delivery of The New York Times Newspaper.

Copyright 2001 The New York Times Company | Privacy Information