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February 28, 2000

E-Commerce
By BOB TEDESCHIBio

Coming Soon to a Coffee Shop Near You: Parcel Pickup

A recent deal between Starbucks and the urban delivery specialist Kozmo.com -- in which Starbucks will essentially set aside space in its coffee shops for Kozmo -- may be the first example of an established retailer offering its floor space and personnel to an e-commerce company. But it is unlikely to be the last.

Industry executives and analysts predict that such agreements will come rapidly in the next few months, as Internet retailers struggle to address two of their most glaring vulnerabilities -- customer acquisition costs and returns -- while continuing to close the gap between virtual and traditional stores.



Jack Manning/The New York Times
David Williams of Kozmo.com, an urban delivery service, outside a Starbucks in Manhattan. Kozmo customers will be able to return merchandise like rental videos to boxes in Starbucks around the country.
The agreements will take many forms. The convenience-store chain 7-Eleven, for instance, plans to install Internet-ready ATMs, which might eventually let customers order goods from Web retailers and have them delivered to the store.

And in such arrangements, customers might also be able to return Internet goods to the stores. Package handling companies like Mail Boxes Etc. are already starting to handle returns and exchanges on behalf of Internet retailers. Other national chains, like drugstores and gas station convenience marts, might also add such services as a side business.

Indeed, any retailer with a national presence and a strong distribution and warehousing system is a prime candidate to join with e-commerce sites, analysts predict. Customers who enjoy the convenience of the Web might also prefer knowing that if anything goes wrong with a purchase, they can find a real person at a real store to make it better.

"The need for this is huge," said Tim Washer, director of interactive research with NFO Interactive, a market research company. "What it's about is reducing the risk of shopping online. Offering a retail presence will really facilitate that."

Kozmo executives stressed those points in announcing the deal this month. "We'll be able to ride on Starbucks' coattails, and give our customers an incredible sense of confidence," said Joseph Park, chief executive of Kozmo, which offers free one-hour delivery of goods purchased on its Internet site.

Kozmo, which operates only in Boston, New York, Washington, Seattle and San Francisco so far, specializes in delivering videos, books, food and convenience goods.

Under the deal, Kozmo will pay Starbucks $150 million over five years for the right to place return boxes in Starbucks stores. The boxes will initially be used for rental videos, games and DVDs, but will eventually be available for other products, as well, like disposable cameras ready for processing or defective items being returned for a refund. In addition, Starbucks will promote Kozmo and train its sales staff to answer questions about the Internet company. Kozmo, in turn, will deliver Starbucks coffees and teas by the pound -- and eventually perhaps hot beverages, too.

The partnership, which is to include joint marketing, will immediately raise Kozmo's credibility with consumers, predicted Chris Vroom, e-commerce analyst with Credit Suisse First Boston. And it will also give Kozmo an efficient way to reach new customers, he said.

Vroom said Internet retailers typically spent about $100 to acquire each customer -- an exorbitant amount, because the average customer will spend only about $200 at a given site in a lifetime. A $30 million annual outlay to Starbucks will swell Kozmo's customer acquisition costs in the short term, he said, but in the long term it could pay off, given Starbucks' huge clientele.

"Starbucks can put a Kozmo logo on coffee cups that 10 million customers a week will buy," Vroom said. "That's a powerful thing."

Perhaps more powerful is the ability of such partnerships to provide e-commerce customers an easy way to return goods -- not simply rental items, but, more important, goods deemed unsatisfactory by the customers. Internet merchants have been widely criticized for their failures in this regard, particularly as return rates have reached roughly 30 percent -- a rate slightly higher than in the catalog industry.

Retailers with stores online and offline, like Gap and Federated's Macy's, have had an edge at least in part because their customers can return goods to a store whether they were bought online or off. And though e-commerce companies are loath to open up stores for this reason alone, they are clearly in the market for help from companies that can help streamline returns.

"As I speak, there are four or five people from e-commerce companies in this building talking to us about it," said James Amos, chief executive of Mail Boxes Etc., speaking from his office in San Diego.

Amos estimated that 300 other companies had asked Mail Boxes "for access to our 4,000 stores" in the last several months. "We're in discussions with just about everyone that'd come to the top of your mind," he said.

Amos said the deluge began late last year when the company agreed to provide customers of eBay auctions with help in inspecting and returning items bought online. Since then, Mail Boxes has begun installing satellite dishes in franchise stores, in hopes of connecting all of its business partners in a single network.

The satellites will not only provide high-speed Internet access, the company said, but will link the stores' cash registers directly to the corporate office and to the company's e-commerce partners.

That setup, in turn, will allow the company to plug into the back-office systems of Internet retailers -- so that if a customer of an Internet-only merchant wanted to exchange an item at a Mail Boxes store, the replacement item could be sent to a Mail Boxes location. The customer could then simply drop off the old item, pick up the new one and not have to deal with packaging, postage or coordinating delivery times.

Noting that the first e-commerce partnerships will be announced after the satellite system is completed next month, Amos said, "We're basically going to be a bridge between the virtual and the real world."

Naturally, Mail Boxes will have plenty of company in that regard. United Parcel Service, which recently announced plans to expand its network of drop-off centers by testing storefront locations in suburban areas, might use those stores to support e-commerce companies. "We're definitely going to contemplate it," said Mark Rhoney, president of UPS eVentures, the business UPS set up to help e-commerce companies fill orders.

Kenny Kurtzman, chief executive of Ashford.com, an online jewelry and luxury goods retailer, would welcome a partnership with an offline company "if that would help give customers an easier way to return products," he said. "We'd look to partner with someone like FedEx or UPS to do that."

In exploring its own partnerships with e-commerce companies, 7-Eleven has not been approached by online jewelers, "but we have had some bizarre offers," said James Keyes, chief operating officer. "I don't think someone will pick up their living room furniture at our store."

Keyes said that by this summer, 7-Eleven would test ATMs with Internet access. Besides getting cash, customers would be able to cash checks or obtain money orders or get directions from Web sites, for instance.

Initially, the ATMs would not include Internet retailers, he said, but that might change eventually.

"If you wanted a new videogame, you could preview it and order it at the store, then have it delivered to the store on the day of the release," Keyes said. Just such a service is already available in Japan, he said, as the result of an agreement between 7-Eleven and Sony.

The company would also welcome the chance to take returned merchandise for Web retailers, "as long as the goods make sense in our environment," Keyes said.

The E-COMMERCE REPORT is published weekly, on Mondays. Click here for a list of links to other columns in the series.


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Bob Tedeschi at tedeschi@nytimes.com welcomes your comments and suggestions.




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