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ANALYSIS: Kozmo's $150 Million Distribution Deal Goes Sour

By Christine Gordon

In the near future, don't expect a dot-com like Kozmo to shell out $150 million to place video drop boxes throughout a chain of stores. And don't expect a retailer like Starbucks to trust a dot-com to deliver what it promises.

In February 2000, both companies announced that the Alley-based instant-delivery company would pay $150 million over a five-year period for placement of 500 Kozmo video drop boxes throughout Starbucks's stores.

The deal seemed like a great idea at the time. For its part, Kozmo thought it could increase brand awareness and ostensibly draw the sort of clientele upon which its instant-delivery service depends -- upscale Internet-savvy consumers who are willing to shell out $2.00 for a cup of Java, and, more important, like instant gratification.

So what went wrong?

More than a year after the deal was cut, many traditional companies began to shy away from the troubled dot-com environment.

In fact, Alley pundits say, dot-coms themselves are trying to create distance from the negative hype surrounding the Internet industry these days. Kozmo seems to have acknowledged as much by dropping the "dot-com" from its name last month. The company has also tried to shed its dot-com status by initiating a catalog of Kozmo goods.

"Do you really want Kozmo as a part of your decor when other dot-coms are tanking?" said Michael Drapkin, principal of Drapkin, who operated his own same-day service company, Dispatch Management Services Corp, is familiar with the Kozmo-Starbucks deal.

While Drapkin doesn't underestimate Kozmo's chances for survival, he said the company needs to eliminate administrative overhead and cut bad advertising deals to stay buoyant.

"If they manage to cut expenses down to the bone, they have a fighting chance. Any dot-com that can run organically will be a survivor," he said.

And the decision to drop its deal with Starbucks is certainly a step in the right direction.

A spokesperson for Kozmo said the relationship between the same-day delivery company and the retail coffee chain remained friendly, and that Kozmo sought to renegotiate the deal once it changed its plans to expand into other regions.

The spokesperson said Kozmo incurred no penalties from its cancellation, and denied that its cash-strapped position frightened the coffee giant into abandoning its deal.

Whatever the specifics of the companies closed-door discussion, its outcome is apparent: By the end of the month, Kozmo's drop boxes will be pulled from Starbucks's stores, and the coffee giant will be $150 million poorer.

In recent months, Kozmo has been guiding its business toward promoting higher-priced items. The company also charges a pretty good delivery price, $1.99 for orders under $30.

In March 2000, Starbucks invested $25 million in Kozmo in return for equity in the company. The coffee chain has since declared losses of $59 million related to its investment in the same-day delivery service, as well as other Internet firms.

March 27, 2001

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