Not even running yet and Jet.com may command a market value of $3 billion.
From Jet.com

Diapers.com founder Marc Lore is betting that he can build a new e-commerce in the Amazon-era.

By Leena Rao
July 21, 2015

After $200 million in funding, and reaching a nine digit valuation, Jet.com, the Amazon e-commerce challenger from Diapers.com founder Marc Lore, has finally opened for business.

Jet is hoping to take on brick and mortar warehouse clubs like Sam’s Club and Costco while also competing against Amazon’s bulk products business. For a $50 annual membership, Jet members can buy diapers, cleaning supplies, sporting goods and more, promising prices 10% to 15% below the lowest prices online. Jet is premiering with 10 million products across all categories.

At Fortune’s Brainstorm Tech conference last week, Lore said — unconvincingly — that Jet isn’t gunning for his former employer Amazon, which bought Diapers.com’s parent, Quidsi, five years ago for $550 million. Part of what makes Jet different from Amazon and others is its dynamic pricing–meaning the price of items changes depending on what shoppers buy.

For example, if shoppers buy multiple items that are in different warehouses, shoppers end up paying more because merchants have to spend more on packaging and sending the items individually. Conversely, Jet will encourage customers through lower prices to buy multiple items that are in a warehouse nearby.

 

For example, someone buying a baseball bat and a glove may get a suggestion to also get some baseballs. Jet’s algorithms will price the balls that are in a warehouse closer to the shopper more cheaply than balls in other warehouses.

In an interview, Lore explained that Jet is really about making the economics of online retailing fully transparent. The fixed price model is inefficient for both merchants and consumers, he argued.

“Shopping is more simple,” Lore says. “We’re doing all the heavy lifting behind the scenes.”

While Jet does sell its own merchandise, it tries not to compete with the retailers who partner with it to sell the vast majority of items available through the site. Of 10 million products listed on the site, only 25,000 are from Jet’s own warehouses.

Eventually Jet plans to add more every day essentials like shampoos, shaving essentials to its internal inventory, but it’s not going to venture beyond that, Lore promises. “Our primary goal is not to compete with merchant partners,” he said.

The Wall Street Journal recently tested Jet, buying 22 items, 12 of which were shipped by retailers (not Jet’s own merchandise). The prices for those 12 items totaled $275.55. But in a sign of the questionable economics, the Wall Street Journal estimated that Jet lost $242.91 in the sale. Unfortunately, that kind of loss doesn’t build much confidence in Jet becoming profitable any time soon, if ever.

Furthermore, Jet is competing against a formidable list of competitors. Costco and Sam’s Club have already built large businesses. Costco, for example, had $120.64 billion in sales in 2014, up from $105 billion in 2013. Meanwhile, Amazon dominates online retailing. Trying to beat its prices, as Jet.com is hoping, is an exercise in self-flagellation because Amazon, despite its huge volume, generally loses money.

 

Adding to that, Jet’s massive amount of funding (and high valuation with yet generating revenue) has generated skepticism. And there are rumors that Jet is raising more cash at a $3 billion valuation, which would place it in the elite unicorn club of startups valued at $1 billion or more.

Jet is also going to be embarking on a massive marketing push over the next few months. The company plans to spend $100 million of its war chest on marketing in the coming year, including TV commercials to air in September.

Lore isn’t apologetic about raising and spending so much money. “In order to create an online merchant at scale, it requires a significant amount of initial capital. And I know much capital it will take to create Jet.”

He adds that people are only going to shop more online through their phones and Web, presenting a massive opportunity for more online retailers. eMarketer estimates that e-commerce spending will reach $2.5 trillion by 2018.

Despite the questions around the business, Lore’s confident that Jet is going to thrive and return a profit to his investors.

“We know what it costs to build a warehouse, a team; and the amount of capital needed to get to where we want to go will be a fraction of the value of equity we will create when we get there,” he said. “It’s not like 20 years ago,” a reference to when similar money-losing startups talked big and spent big, but ultimately flopped. He’s hoping that this time it’s different.

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