Online Delivery Service Makes a Run for L.A.

The Internet revolution brought diapers and “Wild Wild West” to Marla Johnson’s doorstep in Van Nuys last week.

They arrived only 20 minutes after she sat down at her home computer to place the order with Kozmo.com, an online delivery service that created a buzz when it started on bicycles in New York City two years ago. The company quietly has begun operations in the San Fernando Valley--the beachhead for a full-scale assault on Los Angeles next month.

Skeptics wonder just how profitable a business can be delivering low-margin items such as rental videos, frozen pizzas and pints of Chunky Monkey ice cream. Kozmo levies no delivery charge.

But the privately held Kozmo is bankrolled by investors who hope it’s the next “dot-com” gold mine. And the fast growth of the 2-year-old company underscores how old ideas such as home delivery can take on a fresh patina in an Internet-driven world.

For Johnson, 37, it hardly matters. She’s a work-at-home mom who got her diapers and video at a price that didn’t come close to covering typical delivery costs. She and other consumers are delighted to take advantage of dot-com economics for as long as it lasts.

Los Angeles is a crucial battlefield for Kozmo.com--and one that will thoroughly test its resourcefulness. In New York and the handful of other cities where it has set up shop, Kozmo targeted dense urban centers where hard-charging bicycle deliverers can slice through downtown traffic jams.

But in Los Angeles, Kozmo faces a market that is as much suburb as it is city. Deliverers will mostly use cars, and the company will need a phalanx of warehouses from the South Bay to Pasadena.

Video and DVD rentals are Kozmo’s mainstay, but the company also delivers books, magazines, sundries and snack foods. Prices are often higher than at stores. For example, the Kozmo purchase price for a “Tarzan” video is $26.99; at Blockbuster, it costs $19.99. But Kozmo delivers it free.

“What we offer is convenience,” said P.J. Harari, general manager of Kozmo’s local operation. “It’s for the frazzled working mom or dad, college students, anyone who does not have time to stand in line in three or four stores to pick up what they need right away.”

Johnson’s order was delivered by uniformed driver Ed Swanson, a Glendale College student who joked that the orange Kozmo cap makes his head look like “a giant pumpkin.”

The previous night he delivered the movie “Run Lola Run” to Jodi, a Sherman Oaks resident who recently had a baby. “Wow, this is great,” she said, opening the door on the rainy night. “I was not going to schlep the baby out in this weather.”

“It used to drive me nuts that, if you could get delivery of food and other things in L.A., there was a $15 minimum,” said Jodi, who declined to give her last name. “In New York, they will deliver a muffin.”

Except for a smattering of bikes and motor scooters in parts of West Los Angeles, Kozmo workers here will have to use their cars to ferry goods--and will have to deal with the unpredictability of L.A. traffic.

Harari said Kozmo has prepared for L.A. by limiting delivery to places that can usually be reached in about 20 minutes. That gives it a cushion in living up to its commitment to make a delivery within an hour of the order.

In the Valley, Kozmo now delivers to Studio City, Tarzana, Van Nuys, Burbank and other communities within about seven miles of its North Hollywood warehouse. The company is establishing additional warehouses in West L.A., Pasadena, Hollywood and the South Bay. Once all are in place, a wide-ranging promotional campaign will begin.

Digital commerce analyst Mike May of Jupiter Communications applauds Kozmo for offering a service likely to connect with consumers.

“If Kozmo can offer the same products at competitive prices with fast delivery, it can be a very compelling service to consumers,” he said.

But the devil is in the details.

“In order to turn a profit, I think they have to evolve from a core of movie rentals and snacks to higher-ticket items with bigger margins,” May said. “That’s the real challenge. To establish a relationship with customers to the point they would be interested in buying things from them they don’t need right away.”

As is the norm with dot-coms, Kozmo did not let the absence of profit curb ambitious expansion plans. The company’s move into Los Angeles and other cities is fueled by $23 million received last year from venture capitalists led by New York-based Flatiron Partners, a prominent Internet investor.

According to a Wall Street Journal report, a deal is in the works to generate an additional $100-million investment for Kozmo from companies led by Amazon.com, which would have a 23% stake in the delivery service. Kozmo officials won’t confirm the report, but have said that an IPO is inevitable.

In informal tests, Times staffers in the Valley ordered several items for delivery to their homes. In all cases, the goods arrived well within the hour. Drivers were friendly and courteous.

The one hitch concerned a pizza pictured online as cooked and ready to eat. It arrived frozen. Kozmo officials have since changed the site to identify the pizza as frozen.

Although Kozmo does sell a few items beyond what you might find at a mini-mall--it stocks three DVD players--Harari said Kozmo will succeed because of its efficient delivery in volume.

“Someone might go online to rent a video from us and then add on a [frozen] pizza . . . aspirin and diapers,” she said.

But May said other Internet-based delivery services that offer groceries may have the edge.

“When you sell groceries, you are in the replenishment business,” he said. “Many people are going to have groceries delivered regularly. This gives a company a chance to build a relationship with a customer, and that can lead to selling them higher-margin items.”

Camarillo-based Pink Dot Inc., which has been delivering groceries, prepared hot foods, spirits, beer and nonprescription drugstore items since 1987, hopes May is right. It has 11 distribution centers in Los Angeles and Orange counties and strives to make deliveries in “about 30 minutes,” the company brochure says.

Pink Dot began as a phone order service, but now also takes orders via the Internet.

One major difference between the two services is that Pink Dot does not offer video rentals or sales. It tried it once and now plans to reenter the business. “The problem was not delivering [rentals], but the returns,” Pink Dot Chief Executive Dan Frederickson said. “There was a lot of incentive for people to be there when we brought them, but not as much at pickup time.”

Kozmo has sought to alleviate that problem by establishing drop-off centers in its operation areas. It recently announced it will pay Starbucks $150 million over five years for the right to put drop-off boxes and promotional materials in its coffee shops in all its delivery areas.

In addition, Kozmo will send drivers to pick up rentals for an additional dollar.

Kozmo and other Internet-based delivery services eventually could prove nettlesome to bricks-and-mortar operations such as Blockbuster.

“Not in the near term,” May said. “. . . But it’s the traditional, video rental business that is right in the middle of the scope of Kozmo’s operation.”

Kozmo was founded in 1998 by former Goldman Sachs banker Joseph Park. Its major rival in New York is UrbanFetch, a company Kozmo sued for allegedly stealing its concept. The matter was settled out of court in December.

The scene at Kozmo’s unmarked North Hollywood warehouse, leased from an aircraft parts manufacturer, was infused with the excitement of young workers last week. They took orders off the Internet, gathered items from custom-made shelves and sent drivers on their way with plenty of time to spare. The pay for delivery workers is generally $7 to $9 an hour.

Delivery people normally use their own vehicles, which must be insured. They are given a small allowance to cover gasoline costs.

Drivers do not know what is in the packages they deliver. Among the Kozmo.com’s offerings are pornographic videos from an extensive adult section--which can be blocked by customers when they register with the site--and condoms.

Although you can place a Kozmo order by phone via its toll-free customer service line, the company discourages it. Company officials said it’s far more efficient for them to get orders on the Internet. In addition, online customers can find out right away whether a desired video or ice cream flavor is in stock.

Back in the Valley, driver Swanson left Jodi’s house--sans tip--and delivered a video to a Studio City apartment dweller who said he has already used the service on two other occasions. He tipped $2.

Swanson said he had a previous job driving exotic dancers to bachelor parties and other events.

“Sometimes I would go into a situation, turn right around and say, ‘We’re out of here,’ if I had a bad feeling about a place.

“This is sure a different experience.”