Starbucks Tiptoes into E-Commerce with Kozmo Alliance

Mammoth coffee retailer Starbucks (Nasdaq: SBUX) has launched a conservative foray into e-commerce by announcing a five-year e-commerce agreement with Internet home delivery service Kozmo.com.

Kozmo will pay $150 million (US$) for in-store promotion across Starbucks' 2,100 retail locations. Among other initiatives, the company will place drop boxes for video returns in Starbucks stores and deliver Starbucks' roasted coffee by the pound.

The companies expect that the agreement will lead to other online ventures, including hot beverage delivery and the development of new products and services.

The New York-based Kozmo said that the agreement is crucial to its planned expansion to 21 U.S. cities by the end of the year. The company currently offers one-hour delivery of videos, books, magazines, meals, snacks and beverages in the New York, San Francisco, Boston, Seattle and Washington D.C. markets.

Delivering the Goods

So far, Kozmo is defying the early prevailing wisdom that the delivery of online goods -- especially perishables -- was a service that would fall decidedly flat. The company launched in March 1998, delivering videos in the Greenwich Village section of Manhattan.

Since then, Kozmo has caught the eye of several companies with deep pockets. The company secured $28 million in venture capital funding last October and reportedly received $60 million from Amazon.com and an additional $30 million from Japanese Internet investor Softbank last month.

The company also signed an agreement with Ticketmaster Online/City Search last month to be its exclusive "under one hour" delivery service on its extensive network of city sites across the country. With work piling up, Kozmo hired eight top executives last week, some of which sharpened their teeth at Federal Express, UPS and other delivery services.

Something Brewing

Starbucks has been lambasted for its shaky Internet strategy of late. The company scrapped plans for a portal last year and has opted for what company CEO Howard Schultz calls a "conservative approach."

The company has expanded its Internet holdings in recent months, investing $20 million in online furniture retailer Living.com, and $10 million in Cooking.com.

This latest deal will deliver a steady stream of revenue to the coffee giant and could perk up other online ventures.