October 27, 1999 2:10 PM PDT

Net retailers use same-day delivery to compete

Ordering your food from your laptop isn't enough anymore--customers now want same-day delivery.

A small but growing number of start-ups plan to deliver on this demand. New York-based Kozmo.com and UrbanFetch.com--Internet firms that sell CDs, videos, and books--promise to deliver merchandise ordered online within an hour. Zooming around Manhattan on bicycles, mopeds, and minivans, these delivery services could be the harbingers of tomorrow's Internet.

"Will customers one day expect much or all of their online orders to be delivered the same day?" Hambrecht & Quist analyst Genni Combes asked. "The answer is yes."

The need for speed in delivering goods is growing on the Internet. Online companies are spending big money on advertising and marketing--anything that will attract new customers and separate them from the pack. Some companies are finding that the best way to stand out is to offer superior customer services, such as same-day delivery.

Net companies have typically lacked the distribution networks of their brick-and-mortar competitors; and as a consequence, they have been slower delivering goods. While online shoppers are forced to wait at least a day for their goods to be shipped, traditional consumers walk into a physical store, pay, and walk out with their purchase.

"Ordering online and having someone bring merchandise to your door in under an hour is the height of convenience," E*Offerings analyst Andrea Williams said. "I like these business models. I think these [companies] are the next step in e-commerce."

Offering same-day delivery will also entice new customers to e-commerce, Williams said. "There is a large percentage of people who want to buy online but don't because they can't get it right then," she said. "Same-day service will persuade them to try."

But same-day delivery may prove difficult and expensive for online retailers. Both UPS and Federal Express offer same-day delivery services, but at costs far higher than their already-expensive overnight delivery charges. Alternatively, companies can build out their own distribution networks, but that carries an even higher price tag along with a high demand for logistical expertise that such companies may not have.

Companies that are most likely to bridge this gap are online grocers, industry observers say. Webvan and HomeGrocer.com are currently building distribution centers and delivery systems in major metropolitan areas that could allow them to deliver not only groceries but also a wide range of products on the same day they're ordered.

Although HomeGrocer.com primarily delivers groceries the day after they're ordered, company president Terry Drayton said it has begun experimenting with same-day deliveries in the Seattle area. The company plans to stay focused on the grocery market, but he said Amazon.com, which bought a 35-percent stake in HomeGrocer.com, has talked with the company about using its distribution network to deliver Amazon's products.

"The next-day service and the same-day service capability is something [Amazon chief executive] Jeff Bezos, and David Risher [Amazon's senior vice president for product development] have been intrigued with," Drayton said.

But the online grocers have been largely unable to deliver products on a same-day basis, much less other goods. Webvan, for instance, regularly requires customers to wait several days before receiving their groceries, ruling out customers that need milk or bread right away.

And companies are finding that there's a big difference between setting up an online store that can reach customers nationwide or worldwide and building out a national distribution network that can handle same-day deliveries. HomeGrocer.com, for example, is building out its service piece by piece, and now serves three markets including Seattle and Orange County, California. And earlier this summer, Webvan put in a $1 billion order to build distribution centers in more than 20 metro areas nationwide.

Lofty goals
But the new wave of online companies is looking to do these stores one better. Grocery start-ups such as Pink Dot.com, which services 39 communities around the sprawling Los Angeles and Orange County areas, will not only deliver groceries the same day, but also promises to have them there within 30 minutes.

Pink Dot, which began as a phone-order company in 1987, charges a low $2.99 delivery fee, but acknowledges that prices on some items may be slightly higher than physical stores. Pink Dot chief executive officer Dan Fredericson said the company--which also sells prepared foods such as sandwiches, salads, and deserts--is in the business of selling "convenience and quality."

But Kozmo and UrbanFetch do not charge for delivery. In addition, both companies charge the same or lower prices for the convenience items they sell--such as CDs, ice cream, books, and videos--as brick-and-mortar stores.

"Kozmo sells more Ben and Jerry's than anybody in New York, on or off line," company spokesman Michael Prichinello said. "Kozmo charges $3.25 a pint. The average price at any store in New York charges between $4 and $4.50."

Both companies agree that the key to delivering low-priced goods is lower overhead. Book and video chains, for instance, need to pay rent on multiple locations. The stores hold less inventory because they have to worry about displaying goods for customers to see, according to UrbanFetch chief executive officer Ross Stevens. The money that land-based stores put into rent, Kozmo and UrbanFetch throw into their extensive delivery systems.

"Our business model has massive efficiencies," Stevens said. "We do not need to be in prime real estate locations. We can be in warehouses off the beaten track and pay way less than what traditional retailers pay.

Both companies are secretive about their distribution methods. Kozmo, which launched in March 1998 and has branched out to San Francisco, Seattle, and Boston as well as New York, will only say that Kozmo created its own software that computes complex logistical algorithms.

UrbanFetch, which also services the Brooklyn Heights area in New York and plans to service cities throughout the United States, declined to comment on any part of its distribution system except to say that the company employees has more than 100 delivery professionals.

"We spent a lot of time on distribution, and we think it's groundbreaking," Stevens said. "There is no need to tell anybody about it. We don't even let cameras in our warehouses."

For the Internet industry, these fast-delivery companies are in position to rake in money from others that covet their distribution skills. Should these start-ups be successful at gaining customer loyalty, others may well want to partner with them to deliver their goods as well.

"I do think that the online grocers will ultimately become local Fed Ex's," Hambrecht & Quist's Combes said.

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