March 20, 2000 1:15 PM PST

Amazon feeling need for speed

In a deal that may change how e-commerce companies ship their products, Amazon.com has enlisted online convenience store Kozmo.com to deliver certain orders to customers within an hour of ordering.

The three-year deal announced today calls for Kozmo to deliver some of Amazon's books, music and toys ordered online to customers in cities in which Kozmo operates.

"The Net is about immediate gratification, and this deal helps bring that to fruition," said Matt Stamski, senior analyst with Gomez Advisors.

The deal could put Amazon at the forefront of online retailers in terms of offering customers convenient and speedy delivery of goods. Analysts have long held that the Internet rewards the fast and nimble, and this deal highlights Amazon's recent foray into the distribution business.

Besides its $60 million stake in Kozmo, the company also owns 22 percent of Internet grocer HomeGrocer.

"Amazon is smart to align themselves with companies that can provide goods now," said Goldman Sachs e-commerce analyst Anthony Noto.

Terms of Amazon's deal with Kozmo
• Amazon invests $60 million in Kozmo.com.
• Amazon receives option to buy more shares.
• In exchange for option, Amazon signs non-exclusive agreement to use Kozmo to deliver goods such as music, videos and toys.
Amazon spokesman Bill Curry said the online retailer, which has relied on outside shipping companies to deliver its goods, has been intrigued with same-day delivery. Curry said that right now, the U.S. Postal Service carries about 60 percent of its orders with United Parcel Service making up most of the rest.

Curry would not detail the financial terms of the agreement, which was nonexclusive, or how Kozmo would house Amazon goods. Curry did hint that similar deals with other delivery companies could be in the offing.

"We'll be looking at one-hour shipping from a number of different services in markets around the country," he said.

For Kozmo, which Net retailers use same-day delivery to competesells videos, CDs and convenience goods over the Web, the deal catapults them into the delivery business. No longer can Kozmo be thought of as just a Net convenience store. The company, which declined comment, could conceivably offer delivery services to a host of online companies. Earlier in the year, Kozmo struck a deal to deliver products for Starbucks.

While in theory the move to fulfillment company might seem a logical step, Kozmo has some serious hurdles to face.

The first is the number of competitors that have entered into home delivery. In December, online grocer Webvan struck a deal with Eve.com to deliver some of the Net firm's beauty products. Already, Kozmo is in a head-to-head battle with home delivery rival Urbanfetch.com in New York City.

And shipping giant UPS has increased its Web investment of late. Analysts have pointed to UPS, with its 500 aircraft, 157,000 vehicles and 1,700 facilities, as a potential killer should it ever enter the home delivery market.

Kozmo's other problem is making money. The company, which does not charge for delivery, is believed to be losing money. The company pays for the delivery of orders, no matter how small the purchase. This has raised the concerns of some analysts who speculate that for Kozmo to be profitable, it must sell more than $80 worth of goods for each online order.

But Jupiter Communications analyst Ken Cassar said that Kozmo is in the driver's seat when it comes to home delivery. He said Kozmo was built to deliver in under an hour, giving it an advantage over companies such as Webvan and UPS, which target later delivery windows.

"Kozmo has the operations going already, and Webvan would have to tweak its operations to offer one-hour delivery," Cassar said. "This move by Kozmo makes it a hybrid business-to-business player."

Kozmo currently operates in six cities, including San Francisco, New York and Los Angeles, and has plans to open operations in at least 14 more by the end of the year.

 

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