Is there really enough room for another big e-commerce player?
Consumers have already laid their trust and money on the largest online retailer. Just in the past quarter, Amazon posted sales of $23.19 billion and shares reached a record setting figure ($535.50) surpassing Walmart’s value. The company is pushing options for diversification, such as Amazon Web services, to increase profit margins in order to reinvest in other aspects of the business: logistics, content for Prime users and research and development for in-house devices, like the Fire Smartphone. It will take a full-out project over the next decade to somehow compete with Amazon’s business, which oddly enough doesn’t take too kindly to reporting profits.
“This [second quarter profit] is more of an anomaly because they operate on a mindset that if there’s profit they’re not being creative enough,” said Michael Yoshikami, CEO of Walnut Creek.
But Marc Lore, founder of Jet.com, is committed to an endeavor that will aim to usurp the incumbent in online retailing. By creating a site that offers prices 10-to-15 percent lower than anywhere else, including Amazon, he certainly thinks he can pull away retailers’ most loyal patrons.
The current e-commerce market, as Lore explained, stands at a valuation of $300 billion, and the business represents a mere 10 percent of all retail sales. Perhaps, there is more than enough room for two elephants in the room as analysts forecast projections seeping into the $400 billion mark in the next three years. And, of course, Lore is looking to get in on some of the cash prizes.
Carrying so much buzz and press that names Jet as the new Amazon killer, the company, after all, has the backing of more than a dozen investors, most notably from Alibaba, Google Ventures and Goldman Sachs and has amassed $225 million in capital. There is ever mounting pressure on the startup to deliver on its promise to deliver cost savings directly to the consumer. The outstanding amount of equity raised by Jet.com is noted as the highest total in an e-commerce’s first year. The closest companies are all from the dot-com boom era, which historically does not bode well for Jet, given that most of the companies on the list have shut down.
Jet has a long road ahead in order to overcome the behemoth that is Amazon. The Wall Street Journal unveiled a list of numbers that puts the ambitious company into perspective and might lead you to question its potential success over the coming years. Before delving into the numbers that will worry many in terms of the bottom line, let’s first look at the positives.
Prior to starting Jet.com, Marc Lore was the CEO of Quidsi, which had Diapers.com and Soap.com as subsidiaries. Lore is no stranger to the e-commerce platform, and interestingly enough, it seems he might have an old chip on his shoulder against Amazon, the company that bought Quidsi in 2010 for $540 million. What stokes the competition even more is the previous price war that befell Amazon and Diapers.com. Now, Lore wants to return the favor with aggressive price discounts on an even bigger stage.
“Marc knows the business so well he can pull it off,” Bessemer Ventures partner Jeremy Levine told The Wall Street Journal.
In addition to Lore’s experience, the beta testing that rolled out this past April, with 150,000 customers, showed approving results. Repeat rates stood out, recording more than 50 percent. As part of the company’s official launch, they’re providing a free three month trial to test out the website’s bargains on more than 4 million products, and that figure is expected to ascend to 10 million soon. The marketing campaign will be expansive, including multiple channel outreaches such as outdoor and television advertising.
Now, onto the concerns. Its only source of profit comes from an annual membership of $50; Amazon Prime charges its members an annual fee of $99.99, so Jet’s marketing team faces an enormously cumbersome task of generating not only a lot of awareness about the brand, but it also needs to convince consumers that Jet.com is the go-to place for online shopping. The startup anticipates spending roughly $100 on customer acquisition, and if Lore is looking forward to 15 million customers by 2020, then they will spend about $1.5 billion in marketing in the first five years. Moreover, while the company takes time to build its inventory up to 10 million products, it will make use of a “concierge” service in order to deliver requested items to customers. This external merchandise-buying initiative will cost Jet $300 million over the next five years as well. In sum, Jet.com will be operating in huge losses in the next half decade.
“Jet is for people who care about saving money, but don’t want to have to work for it,” Lore says in an interview with Business Insider. “There is no coupon clipping or wasting time. It’s about shopping smarter to save. We’ve built this technology that does all the heavy lifting in the background. You just shop as you ordinarily would, and you just see the prices start to get better.”
With so much excitement surrounding the “costco of the Internet,” we’ll see if price conscious shoppers will turn to a new home.
Image: Via Jet.com
