KOZMO.COM REDUCES STAFF, LOOKS FOR PARTNER

JON SPRINGER

NEW YORK -- Internet delivery service Kozmo.com here has trimmed staff, delayed a public offering and is looking into a partnership with a rival, according to recent company and news reports.

The moves illustrate the difficulty facing money-losing dot-coms in the wake of April's market shakeout, according to analysts.

Kozmo, an on-line service offering one-hour delivery of snack foods, prepared foods, entertainment and convenience items in 11 cities, had filed for an initial public offering with the Securities and Exchange Commission in March, but cited "unfavorable market conditions" in its Aug. 18 request to the SEC to withdraw its registration. The company had hoped to raise as much as $160 million in the offering, according to SEC documents.

Also this month, Kozmo laid off more than 300 employees, including 275 messengers, dispatchers and field staff in New York and Los Angeles, and 30 employees at its headquarters. Reports said the layoffs could be the preparation for a potential business combination with UrbanFetch.com, a similar service also based in New York.

Tim Laseter, vice president of operations for McLean, Va.-based consulting firm Booz-Allen & Hamilton, told SN that a combination between the competing services might be helpful. But he has reservations about either company's ability to make money.

"[A merger] would be good to eliminate a competitor and allow some flexibility in the model, but it doesn't solve the fundamental problems of the business," Laseter said. Chief among the problems for Kozmo and UrbanFetch is that the combination of free delivery and relatively small average orders make delivery a money-losing proposition.

"They've painted themselves into a tight corner," said Laseter, author of a recent Booz-Allen study on home-delivery services. "These instant gratification orders -- $15 worth of ice cream and videos -- are inherently small-dollar purchases. But every delivery costs money."

Both services have recently been attempting to add more high-ticket items, Laseter noted, with UrbanFetch adding air conditioners and cellular phones to its offerings.

The services, which according to reports are eyeing an all-stock deal, tangled in a lawsuit settled out of court last year, reports said. The suit, brought by Kozmo, claimed its rival copied Kozmo's business model.

Since April's dot-com stock collapse, a number of "pure-play" Internet retailers have found strategic and financial partners as a means to cut costs and gain easier access to capital. Rival grocery services Webvan and HomeGrocer.com announced a similar merger plan in June.

Kozmo had sales of $3.5 million in 1999 -- an increase of 2,163.9% -- but lost $26.4 million overall, according to the SEC filing.