Weekly Update

Virtualizing brick-and-mortar retailing

Just in time for the holidays, e-commerce operators are ramping up their brick-and-mortar efforts.

As detailed over the weekend by the New York Times, Amazon and eBay, the two giants of e-commerce, are locked in an increasingly fierce battle for control of the streets, as they compete to offer customers in major cities same-day — or even quicker — delivery of orders placed online. Amazon now offers same-day delivery in 11 cities while eBay last month announced plans to expand its eBay Now same-day service to 25 cities in 2014. Both are also facing off against a growing number of startups, including Deliv, Zipments and Postmates.

Amazon is supporting its local same-day delivery by building distribution centers in or near enough to the markets where it offers the service to be able to deliver goods within 24 hours. Ebay Now relies on a network of local couriers dispatched by car, taxi, subway and, in the case of New York City, by bicycle to handle the last mile, evoking memories of Kozmo.com, UrbanFetch and other one-time poster children of the first dot-com era. Ebay also recently acquired London-based delivery courier service Shutl to bolster its on-the-ground efforts.

Kozmo itself, in fact, is even trying belatedly to get off the mat and back in the fight. It’s website is currently promising a relaunch, carrying the message, “Remember us? We’re relaunching soon with the vision to fulfill your online order incredibly fast, and on-demand.”

Yet for all the superficial similarities to those earlier efforts, which after all spectacularly crashed and burned, there are important, and potentially decisive differences in how the new generation of same-day delivery services are approaching the business. 

Coming primarily from a technology background, the founders of Kozmo and the others of that era focused on those parts of the retail business that could easily be automated — order taking and processing — while paying less attention to the basics of the merchant’s trade such as inventory purchasing and pricing. Their relative inexperience in the retail arts, in fact, did more to sink Kozmo.com than any deficiency of its technology.

Though Amazon was an investor in Kozmo, neither it, nor eBay can be said to be inexperienced in the retail arts today. Ebay in particular is now using that knowledge to apply technology to virtualizing the inventory for its same-day service, where it can deliver far more bang for the technology buck than simply automating the order-taking process.

Ebay Now, in fact, has no inventory of its own. It relies on a layer of local operators to perform what amounts to on-demand, personal shopping services. Orders come in and get routed to an available “valet,” who then purchases the items requested from local brick-and-mortar stores and delivers them to the customer. The customer pays the cost of the goods, plus a fee for the delivery service.

The approach allows eBay Now to match its cost of goods sold and cost of sales with its actual revenue in a predictable way, a vast improvement over Kozmo, which relied on warehoused inventory and imposed no minimum order size.

Deliv has taken virtualization even further. Rather than hiring valets, it relies on a network of independent entrepreneurs — students,  part-time workers, out-of-work actors, anyone with spare-time and a means of transportation — to handle the shopping and delivery. It also relies on a network of brick-and-mortar “retail partners” to provide the inventory and recently signed a deal with real-estate giant and mall developer General Growth Properties to extend its base of retail partners to nearly 100,000 locations.

To be fair, much of the technology the new generation of same-day delivery services are leveraging did not exist in Kozmo’s day. Since then, many brick-and-mortar merchants have developed their own order-online for in-store pickup systems, forcing them to develop sophisticated inventory tracking technology to give them visibility into their stock on hand down to the storefront level. Married with GPS — another technology not widely in use in the 1990s — eBay Now, Deliv and similar services can route couriers to the nearest source of the requested goods to improve delivery times.

The real key, though, is recognizing that the critical issues for the same-day delivery business are matching inventory and delivery costs to revenue not more efficient order processing, and then figuring out technology can be used to solve that problem.