Why Net delivery service schemes are out of order

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For the past four months, I've been doing my dirty laundry on the Internet.

Every week or so, I punch in an order at MyLackey.com, a local Seattle site. A "laundry lackey" shows up at my door the next day and hauls off my clothes. Two days later, my clean laundry reappears in neat, wrapped bundles. I pay anywhere from $40 to $50, depending on weight, for the privilege of having a lackey do my laundry.

Sure, it's convenient and easy. But after my contractors finish remodeling my house next month--and I get my laundry room back--I most likely will never use MyLackey.com again.

There's been a lot of talk about the Web's ability to make the everyday chores of life more pleasant. Kozmo.com promises videos and junk food in an hour. Urbanfetch satisfies time-starved New Yorkers who need a meal or a Palm device pronto. MyLackey does everything from manicures to bike maintenance to car detailing.

None of these companies will survive.

I'm not faulting the concept. Delivering movies to time-starved families and doing laundry for overworked executives are no-brainer ideas. But making an Internet business out of such things is far more difficult than any of these companies thought it would be.


Take Kozmo. Of all the so-called "convenience" companies on the Internet, it's gotten the most attention. Lately, none of that attention has been positive. Kozmo last week laid off about 275 employees or 10% of its workforce. It also delayed an initial public offering in March, and in July began a search for a new CEO.

Kozmo dumped $3.41 into sales-and-marketing expenses for every dollar of revenue in the fourth quarter, the most recent period it's disclosed in Securities & Exchange Commission filings.

Kozmo's customer count since December 31 has tripled as it's doubled the number of cities where it operates. But Kozmo still serves only 300,000 consumers across 10 major cities. And until Kozmo got smart and instigated a $5 minimum order size in July, you could order something as small as a pint of Ben & Jerry's and have it delivered for free. Scores of bored officeworkers did just that, just because they could.

Urbanfetch, Kozmo's prime rival in New York, hasn't fared much better. (There were media reports last week that Kozmo may acquire the competitor.) Urbanfetch has acquired just 70,000 customers in New York since launching last October and about 10,000 in London, where it launched in June.

Where Kozmo wants to be the Internet equivalent of the convenience store, Urbanfetch has focused on delivering higher-priced merchandise, such as designer fragrances, air conditioners and videogames. It claims sales of electronics account for 35% of its business. (Earlier this month, its price for a Palm IIIc was $399, identical to the price at Amazon.com and Buy.com.)

Selling services via the Internet is even more challenging. Though MyLackey saves money by not having to warehouse products, its business model requires it to strike individual relationships with local businesses--salons, auto detailing companies, laundry services, etc. To make money, MyLackey buys at wholesale and resells to the consumer at full price. For example, it may pay $70 to an auto-detailing shop and charge a consumer $100, pocketing the $30 difference, said CEO Brian McGarvey.

While Mr. McGarvey boasts that gross margins on services are higher than those for convenience products, he faces a host of other challenges. For one, he's got to convince local businesses that it makes sense to partner with him. None of the businesses gets any branding benefit from a deal with MyLackey; when they handle a MyLackey order they slap a MyLackey banner on their car and wear a MyLackey cap. And if any of the company's partners decides to do its own Web-based ordering system in the future, that would eliminate MyLackey's role as the middleman.


Setting up relationships with local businesses is a time-consuming, laborious process, which may explain why MyLackey till now operated in just two markets, Seattle and Portland, Ore. MyLackey is slated to launch in Washington, D.C., on Sept. 1. The Web site's home page said McLackey plans to enter Boston, New York, San Francisco, Silicon Valley and Southern California; Mr. McGarvey wouldn't discuss that.

One problem facing all these companies is the exorbitant cost of delivery. Booz, Allen & Hamilton VP Timothy Laseter estimated in a recent report that Kozmo, which offers free delivery, spends $10 to make a delivery. Its average order now is just $15, Mr. Laseter estimates. No surprise why the company is losing money.

Kozmo Chairman Joseph Park, who co-founded Kozmo and stepped down as CEO in a July management shakeup, wouldn't comment on the Booz Allen report. But Kozmo director Seth Goldstein, a partner in VC firm Flatiron Partners, said the company expects to become profitable in its first markets by yearend.

Another challenge in catering to couch potatoes is anticipating demand. Do people really need to have a digital camera or CD player delivered in an hour? That's what Urbanfetch promises. Urbanfetch--which operates 24 hours a day--needs to estimate how many of its 70,000 customers will want to buy one at some point and then warehouse the goods or have an immediate way to acquire them when an order comes in.

MyLackey has the opposite problem. It needs at least a day to schedule most services, so it can't deliver immediate satisfaction. Need a suit dry cleaned in an hour? No can do.


The novelty factor for ordering stuff online is also high. Sure, it's geeky decadent to have someone deliver the latest Travel & Leisure and a pint of Starbucks ice cream to your door. But it's hardly practical as a business.

Perhaps the biggest sign that this business isn't working comes from the companies themselves. In April, Urbanfetch launched Urbanfetch Express, a courier service that delivers business documents for 120 corporate clients including Young & Rubicam. Old-fashioned bike messengers now account for 25% of Urbanfetch's business, said CEO Ross Stevens. MyLackey's Mr. McGarvey, meanwhile, talks of licensing his order-scheduling technology.

Kozmo has remained focused on its consumer-oriented delivery service. Said Mr. Park: "The fact that we haven't gone into additional revenue streams is a sign that we're confident of where our business is today."

The better question is where the business will be tomorrow.

Contributing Editor Debra Aho Williamson writes the monthly Inside the Web report. Send Internet case study ideas to debbie@milestone2.com or Editor Bradley Johnson at brad@adage.com.

Copyright August 2000, Crain Communications Inc.

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