This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!'s Challenge: Turning the Last Mile Into the Green Mile

If you live in certain (fabulously lucky) metro areas and get an attack of the munchies, you can go to and, within an hour, for a buck and change, receive a bag of Jelly Bellies via bicycle messenger.

As the company prepares to raise about $150 million in an IPO, it had better hope there are very few customers who take it up on that offer.

Kozmo's candy conundrum illustrates the central problem in the so-called last mile of e-commerce: While plenty of people love to get stuff at their homes or offices, it's awfully tough to make money delivering the goods unless you do a lot of sales. And recently, investors have shown little tolerance for the huge initial capital investments, and subsequent losses, that these companies produce.

Considering recent market conditions for similar e-commerce stocks, IPO watchers are skeptical that Kozmo's deal will be greeted with open wallets. Online grocers Webvan (WBVN) and HomeGrocer (HOMG) are both under water after their recent IPOs. And Peapod (PPOD) is searching for the cash it needs to avoid going under.

The Hard Sell

"I don't think is going to be that easy of a sell," says Vinnie Slavin, a sales trader who tracks IPOs for Cantor Fitzgerald. "It's a very big deal to give to a bunch of guys riding around on bicycles. It's a helluva valuation put on bicycle messengers." (He's not just being figurative; some messengers do get options.) Kozmo wasn't immediately available for comment.

Company Profile
Web site
Proposed symbol KZMO
CEO Joseph Park
Estimated amount of offering $150 million
Underwriters Credit Suisse First Boston, Salomon Smith Barney, U.S. Bancorp Piper Jaffray
Revenue $3.5 million (1999)
Net loss $26.3 million (1999)
Average order size $15
Employees (salaried) 445
Cities of operation New York City, Seattle, San Francisco, Boston, Washington, D.C. and Los Angeles
Source: Edgar Online, Jupiter Communications

Even so, almost everyone agrees there's some sort of demand for last-mile e-commerce. "It's inevitable," says Andrew Mann, a fund manager with Eureka Capital, which has a stake in Peapod. "Too many people want it to happen."

The question is whether you can make money doing this. Take Kozmo, for example. According to documents filed with the Securities and Exchange Commission, in 1999 the company had revenue of $3.5 million, split about evenly between merchandise sales and video rentals. Gross profit was $1.5 million, giving it gross margins of 43%. Pretty good, no? No. Kozmo doesn't count delivery in its cost of goods sold. Add those (somewhat important) costs into the mix, and the margin plummets to minus 50%. Whoops.

Kozmo isn't helped by the fact that its average order size is only about $15, says Ken Cassar, analyst with Jupiter Communications. To make this kind of delivery service financially viable, it's key to increase order size or to figure out a more efficient delivery system to make all those little orders worthwhile. Evie Black Dykema, an analyst with Forrester Research, recommended in a recent research brief that Kozmo boost prices, the same way convenience stores charge more than supermarkets.

Bicycle Race

Geography is another question mark. Kozmo plans to expand beyond its existing NYC, Seattle, San Francisco, Boston, Washington, D.C., and Los Angeles markets into 10 more, and analysts say it will be interesting to see how demand -- and costs -- shake out. "Bikes are only feasible in New York City and a few other areas, and when you talk about cars, you're getting into much higher costs," says Darren Chervitz, senior analyst with the Jacob Internet Fund, which hasn't invested in any of the last-mile companies.

A competitor, Urbanfetch, now operates only in New York, though it, too, is planning to expand (and go public, though it hasn't set a timeline). Urbanfetch says its average order is $50, thanks to a focus on higher-end items like Palm Pilots and gift certificates. (In a recent court dispute, now settled, Kozmo accused Urbanfetch of stealing its business model after posing as a potential investor.)

To its credit, Kozmo has the backing of (AMZN), Chase Venture Capital Associates and Softbank. (Another Chase Manhattan (CMB) unit, Chase Capital Partners, and Softbank are investors in (TSCM), publisher of this Web site.) And it has alliances with Starbucks (SBUX) (for video drop boxes) and Ticketmaster Online-CitySearch (TMCS).

Everything Must Go

But even brand-name support can't help a stock in an ailing sector. "It's a brutal market to go out now," says Tom Taulli, an IPO analyst with "You look at Webvan and they've got a hot all-star team, lots of money -- and the stock is at distressed levels right now."

Kozmo's IPO will hardly be the last word on the last-mile companies. This sector continues to attract new ventures: offers meal delivery and is testing a movie-delivery program with Blockbuster (BBI), while, a Bay Area start-up, plans to offer dry cleaning pick-up and delivery (plus environmentally safe cleaning techniques). And the online grocers continue to soldier on.

But under current market conditions, investors are talking about the last-mile companies more like a particularly interesting science experiment rather than a stellar investment opportunity. And "interesting" and a buck fifty will get you a subway token. Or, if you prefer, a box of candy from Kozmo.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs