Kozmo brings liquor sales to the Big Apple

After delivering beer and wine in Seattle for the past seven months, Kozmo on Monday began offering the service to its New York customers. The online convenience store is considering a broader plan to sell liquor in all nine cities in which it operates, a strategy that may include the purchase of brick-and-mortar liquor stores, a spokesman said.

"Beer and wine offer excellent margins," said Anthony Candella, Kozmo vice president of merchandising. "We hope to be up and running in the majority of our operations by summer."

The 2-year-old company, like most Internet home-delivery companies, is tinkering with its business model to adjust to the lower customer demand and higher costs than anyone in the segment had foreseen. Of the Internet-only delivery companies, not one has shown a profit. Several have fallen victim to the dot-com die-off during the past year, including Kozmo's main rival in New York, Urbanfetch.com.

Even New York-based Kozmo, citing lack of customer demand, closed down operations in San Diego and Houston last month and laid off 120 workers as a result.

Best known for selling convenience goods such as videos, snack food and CDs, Kozmo has recently bulked up its product offerings. In the past month, Kozmo has begun delivering flowers as well as daily editions of The New York Times.

Liquor was a natural addition to the company's offerings and something customers have requested for a long time, Candella said. Friday, before Kozmo advertised the availability of beer on the site, the company said it saw strong sales.

"We sold out of a lot of our alcoholic products," Candella said. "This is going to be a huge business."

A desperate attempt?
Large margins as well as a time-proven demand are the reasons Kozmo is attracted to the liquor business. Typically, Kozmo gets a 40 percent to 45 percent markup on alcoholic beverages. But before it can sell alcohol in any city, Kozmo must first acquire a liquor license. In some cities, liquor licenses are highly sought after and difficult to obtain. In those situations, Candella said, Kozmo will buy liquor stores to obtain the licenses it needs.

But some analysts say adding new products, even liquor, is not the magic pill for online delivery companies.

"The margins are probably good, but this sounds like a desperate attempt to add a compelling reason for people to call," said Paul Ritter, senior analyst with The Yankee Group.

Ritter also questioned the wisdom of taking on the hassles that come with liquor sales. Kozmo must enforce liquor laws just like the corner supermarket must. That means Kozmo is bound by law to prevent sales to minors, an inexact and time-consuming procedure, Ritter said.

"There will undoubtedly be underage people who try to circumnavigate the procedures," Ritter said. "And Kozmo's business model is based on delivering many orders. Time is precious. Now their delivery people must spend it screening for age. That's going to slow down their delivery and have negative impact on their hopes for profitability."

Kozmo said the time commitment to check identification is minimal and that there is no difference between a Kozmo deliverer and a grocery store clerk who must check identification before ringing up an alcoholic beverage purchase. Kozmo said it trains its deliverers about liquor laws, about how to detect fake identification and about how to recognize if someone is intoxicated. Kozmo deliverers have the authority to refuse a sale, Candella said.