Kozmo.com Pays Starbucks $150 Million in Marketing Alliance

Kozmo.com, the pioneering online delivery service, Monday inked a joint marketing pact with Starbucks Coffee Co. under which the Internet start-up will pay Starbucks $150 million over the next five years for prominent placement in Starbucks shops.

The deal is an off-line twist on the common online practice in which e-tailers pay guaranteed fees to portal sites like Yahoo Inc. (YHOO) and America Online Inc. (AOL) for preferred placement or “anchor tenancy” in high-traffic shopping areas on those sites.

Under the terms of the deal Kozmo.com will locate “drop boxes” for the return of videos and other items in Starbucks stores throughout the cities where Kozmo.com operates, Kozmo.com will begin delivering Starbucks products like coffee-by-the-pound and accessories, and the two companies will explore the possibility of a service for delivering hot beverages.

“The fit between Kozmo.com and Starbucks is a natural one,” said Joseph Park, chief executive officer and co-founder of Kozmo.com in a statement.

“The Starbucks partnership is further realization of our commitment to quickly expand our service and product in ways that satisfy customers’ needs. It also is a realization of our business-to-consumer and business-to-business Web strategy.”

But the $30 million a year price-tag is certainly a steep one for the Internet start-up. In fact, one of the crucial lessons learned by first generation Internet retailers was the potential pitfalls of high-ticket distribution deals.

Local online music retailer N2K, for example, came under financial pressure as a result of high-priced commitments it had made to pay for placement at portals like AOL.com and Netscape’s site. Those agreements were structured as up front payments as a guaranteed advance against sales. When the sales were insufficient to support the price of the deals and the company’s expansion, N2K was forced to raise more money in the equity markets to cover the guarantees.

Raising money has not been a problem for Kozmo.Com to date. The company raised $53 million in two venture rounds led by Flatiron Partners in the last six months of 1999. And according to reports and sources, Amazon.com and Softbank have led an investment round in Kozmo.com of $100 million, although that round has not been announced.

As expensive as it is — and if the Amazon.com (AMZN)and Softbank figures are correct, the commitment to Starbucks is equal to nearly all the money Kozmo.com has raised to date — the deal does at least partially solve Kozmo.com’s second biggest challenge: getting physical reach for drop boxes throughout its planned network. However, the company’s biggest challenge remains building out a full-scale warehouse and logistics system in dozens of major markets.

Kozmo.com Monday also signed a distribution deal with TicketmasterOnline-CitySearch (TMCS), which will give the online gopher an “under one hour” delivery service position on CitySearch.com pages for Kozmo’s five cities currently serviced. A co-branded site will also be developed.

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