For the few brave souls still trying to raise money for e-commerce startups, selling the next revolution in e-tailing is like hawking ice cream in a blizzard.
The thing is, the ice cream might be tasty, and winter doesn't last forever. While venture capitalists scramble to find shelter from the dot-com downturn -- even if it means passing up good ideas --entrepreneurs such as Michael Cohen are trying to learn from the mistakes made by the first-generation e-commerce companies.
A year ago, Cohen and three partners launched Mycornerdeli.com (MCD). At that time, they admired such high-profile home delivery companies like Kozmo and Webvan (WBVN) for the services they offered. But they questioned the viability of business models that required building distribution systems from scratch. For Manhattan, the idea seemed particularly loony.
"Double parking alone would cost them more than they would make in sales," MCD co-founder and president Mickey Klein said.
But how could they offer customers quick home delivery without building warehouses and buying trucks? As it turned out, their answer was right around the corner.
Manhattan has 2,400 independent delis and convenience stores. These mom-and-pop markets dominate the city's multi-billion-dollar grocery market. With high margins and a dense customer base, most already offered home delivery -- some around the clock -- on foot.
But what they didn't have was an online storefront.
Cohen and his partners figured that if they could pool these stores' resources, their company could offer 24-hour home delivery in 30 minutes or less, without having to buy a single truck. The delis, meanwhile, would get orders that they otherwise wouldn't pull in. MCD would get a few percentage points off the top. And New Yorkers could get their corned beef on rye faster than they could bellow "where the hell is that Kozmo guy?"
The plan requires far less capital than competitors and promises a shorter gestation period before profitability. Could this be the kind of leaner, meaner business plan that pundits say the market is looking for after the bloated bombs of 2000?
Maybe, but selling investors on business-to-consumer e-commerce of any kind is very tough these days, and a grocery delivery angle only makes things worse.
Webvan lost $120 million in the third quarter alone, and its stock hovers at 50 cents a share, as does the stock of its rival Peapod. Kozmo is still afloat, but a recent cash injection seemed more like an emergency transfusion than a miracle drug. Urbanfetch went under in October.
Mike Scanlin, whose research group at Garage.com looks at about 1,000 business plans every week, wasn't surprised to hear that Mycornerdeli is having trouble landing venture capital.
"This company is going to have to grow organically (use its own profits) or via strategic investors," Scanlin said. "VCs won't touch it. There are no technology barriers, so anyone else could do the same thing. Eighteen months ago, this was a fundable idea. In today's market, it's not."
Scanlin said venture capitalists are currently looking for companies with patented technology and a potential market capitalization of $1 billion. "They're only hitting for the fences."
Nevertheless, he thought MCD still had a chance "for the right angel investor, maybe."
Klein concedes they have struggled to overcome the perception that they are a "me too" company comparable to their ill-fated rivals. But, he argues, their model is based on critique of other online grocers, not imitation.
Tim Clark, an e-commerce analyst for Jupiter Communications, agrees.
"Mycornerdeli is in a completely different category than Homegrocer or Webvan," he said. "Those companies needed a huge amount of investment to set up a distribution system and change consumer patterns."
Although it may avoid some pitfalls of its competition, analysts agree that the notion of bundling independent merchants poses its own difficulties. The highest hurdle is convincing store owners -- typically a fickle, independent and risk-averse bunch -- to sign on.
The merchants that MCD deals with are primarily Korean-American immigrants. Many of them speak limited English.
But 50 stores have signed on so far, about half of which are equipped to process deliveries. The orders are placed and paid for online, and then automatically relayed to the stores via fax. All the merchant has to do is tear off the order and send out the goods.
This is the business to consumer, "B2C", side of the business, already up and running on a small scale. When they started out, Cohen and Klein thought this would be the foundation of their revenue stream. But as they began to establish a network of stores, their business model began to evolve.
"Mycornerdeli emerged as a B2C model. But once we had this network, we realized that we had the power to leverage these stores to get benefits from manufacturers," Klein said.
Joshua Greenbaum, a business to business, "B2B," analyst for Enterprise Applications Consulting, said the team had stumbled onto an emerging trend. Independent businesses such as gas station food marts, restaurants and gift shops are beginning to explore how they can use the Internet to band together and improve their purchasing power from manufacturers and distributors.
"Mycornerdeli definitely has an interesting model," Greenbaum said. "The real benefit is tying the stores together and allowing them to be part of the promotions that now only benefit big chains."
In other words, the key is B2B.
MCD has cut deals for their member stores with half a dozen suppliers so far, including Parmalat Milk and Haagen Dazs.
Negotiating these kinds of deals with manufactures, distributors, and the merchants gave these former lawyers and bankers a valuable education on how things work in Manhattan.
"Three days a week, Frito-Lay sends a guy into the store to count corn chips," MCD co-founder Harris Cohen (no relation to Michael) said, incredulous. "Merchants pay for deliveries in cash. It's an archaic world of muscles and trucks."
If this old economy system could be streamlined, they reasoned, the money would flow. But this would require far more than a standard business to business website.
MCD co-founder Harris Cohen is developing the technology to make an automated supply chain for their stores a reality. If his plan works, as a bag of Fritos makes its way from manufacturer, to corner store, to the consumer, wireless scanners will inform a central database of its progress in real time.
Big chains such as Wal-Mart use these kinds of systems to track products from suppliers to stores. Such systems save the labor of counting stock, prevent sales losses due to shortages, help manufacturers track the success of special promotions and cut accounting costs.
Integrated scanning and communications systems such as these typically cost between $25,000 and $100,000 per store, not something a corner deli could afford.
But, Cohen claims he can get the job done for "dramatically" less than $1,000 per store.
Through an agreement with Motorola, he has been working to develop software that will use the company's new J2ME phones to create a wireless network of scanners and printers that connects to a central database.
Given they get the capital they need and the phones roll out at the end of the quarter as promised, he says he can have the network up in six months.
Once that happens, he sees revenue streaming from four different sources:
- Consumers will be able to browse an accurate inventory on virtual aisles of nearby stores and get their goods fast. Sales will rise, and MCD will take a cut of every transaction.
- Retailers will have to be reimbursed for transactions paid for online. But instead of paying them in cash, MCD can pay in product provided by suppliers with whom they have negotiated special promotions. They'll get a cut of the discount, move more product and get to keep the cash collected online.
- Manufacturers will pay to access the database so they can find out which of their products are moving and where, which allows them to better target their promotions. This kind of data isn't currently available for Manhattan at any price.
- Distributors will also want to purchase information. The database will be able to provide a printout of exactly how much product is needed where. The same data could be used to automate transactions, saving drivers time and preventing "slippage."
At the center of this system, Cohen says, will be Mycornerdeli and its database.
Some corporations that know a thing or two about profits are chasing the same rainbow. At the end of January, Chevron, Oracle, Phillip Morris and McLane (the largest distributor in the United States, owned by Wal-Mart) will launch an online marketplace targeted to independent convenience store owners.
This new company, called Retailers Market Exchange, hopes to make Chevron's successful online marketplace -- already used by 3,100 of the company's gas stations and food marts -- available to stations that are not affiliated with Chevron. The site is designed to be a B2B marketplace where independent retailers will have access to information, services, special promotions and products.
Kelly Heiderich-Lee, director of marketing for RMX, said that New York City's Byzantine grocery distribution system is typical nationwide.
"It's not uncommon for 100 different delivery trucks to pull up to a single convenience store every week," she said. "Streamlining the process has value for each piece of the supply chain."
RMX has 80 employees and consultants working to get the project off the ground. With the base of Chevron stores, when it launches it will become the world's largest online B2B marketplace for convenience stores.
Nevertheless, the company's short-term plans are less ambitious than Mycornerdeli's. Although RMX envisions someday using an interconnected system of scanners to track inventory, there are several stages of development the company would have to go through first, Heiderich-Lee said. First they intend to work on aggregating the market and getting retailers accustomed to using the site.
What they do have that Mycornerdeli does not have, however, is big-time funding.