The idea sounded logical: Create an express delivery system for online orders and deliver within an hour. The idea is not new. Domino’s Pizza built its fortune on this idea, and today many companies deliver pizzas, door-to-door, in less than an hour in thousands of cities worldwide.
Kozmo.com’s business model was based on this idea. But instead of pizzas, Kozmo.com envisioned the delivery of food items, rented videos, electronic games, and convenience products. Also, the model targeted only large cities, especially New York and Boston, where people use public transportation that may not be in operation at certain times. Items were delivered by “Kozmonauts”—employees with vans, bikes, or scooters. Orders were placed on the Internet, but telephone and fax orders also were accepted. The products were delivered from Kozmo.com’s distribution centers.
The first logistics problem faced by Kozmo.com was the return of the rented videos. It was uneconomical to send the Kozmonauts to collect them. So Kozmo.com built drop boxes (like the FedEx boxes), initially in New York. Many of these boxes were vandalized. In an attempt to solve the problem, Kozmo.com partnered with Starbucks and moved the boxes to Starbucks cafés, some of which are open 24 hours a day. In exchange, Starbucks became an investor in Kozmo.com. Kozmo.com started to deliver coffee products to Starbucks’ customers, and Starbucks printed Kozmo.com’s logo on its coffee cups.
With a venture capital investment of more than $250 million, the company expanded rapidly to 10 cities. During the initial period, delivery was free, and no minimum dollar amount of order was required. This strategy attracted many customers but resulted in heavy losses, especially on small-value items. The company’s growth was rapid: By the end of 2000, it had 1,100 employees, and it launched an IPO.
Soon after, more problems started to surface. As with other B2C dot-coms, the more Kozmo.com sold, the larger the losses grew. In response, Kozmo.com closed operations in San Diego and Houston, imposed minimum charges, and added more expensive items (such as rented DVD players) to its offerings. This helped to generate profits in New York and San Francisco. However, with hundreds of dot-coms going out of business in late 2000 and early 2001, a major financial backer withdrew its support. Kozmo.com eventually ran out of cash and as a result had to close its doors on April 11, 2001.
Q: Draw the supply chains for food and rented items at Kozmo.com. What logistics problems did these supply chains present?