Inside A Jet.com Inc. Fulfillment Center On Cyber Monday
A Jet.com fulfillment center Photograph by Bloomberg via Getty Images

A Year In, Jet.com Is Still Trying to Take On Amazon

Jul 22, 2016

A year ago yesterday, Jet.com, the e-commerce upstart gunning for Amazon, opened for business. It premiered with a huge amount of hype after getting hundreds of millions in funding and a nearly $600 million valuation before selling a single purse, microwave, or bottle of laundry detergent.

But the past year has been filled with challenges. The company has been forced to shift strategies, weathered reports that it was bleeding cash with no clear path to profitability, and scuffled with high profile brands.

But despite the sometimes rocky start, founder Marc Lore doesn't seem to have lost any optimism about there being room for an e-commerce marketplace in a world dominated by Amazon.

"This has never been a winner take all market," Lore said in an interview with Fortune. "There will be a really large No. 2, 3, and 4, and we can be one of those."

As proof, he said Jet's sales have tripled in the past six months. In December, it sold $33 million in merchandise compared with $90 million in May.

"We're on a $1.1 billion run rate," he said, using a popular but fuzzy Silicon Valley business metric that extrapolates future revenue based on results in the latest month. "Our growth rate is off the charts."

Jet originally launched its membership-based e-commerce site in July 2015 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 could buy diapers, cleaning supplies, and sporting goods, promising prices 10% to 15% below elsewhere online.

But in October, Jet dropped its $50 membership fee, which at the time was of its only ways to make a profit. Because of the discounted prices of around 10% on items, Jet doesn't make a profit on its sales. But the company said that customers were still happy with 4% or 5% discounts, allowing the company to make some money from selling items like toilet paper and diapers.

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There were some other red flags around Jet's debut that hinted at trouble to come. The Wall Street Journal tested Jet prior to its public launch by buying 22 items, 12 of which were shipped by retailers directly rather than Jet handling the shipping. The prices for those 12 items totaled $275.55. But Jet lost an estimated $242.91 in the sale, according to the Journal.

Besides the lower prices, Jet’s other key differentiator from Amazon is betting on 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 shipping the items individually. Conversely, Jet encourages customers through lower prices to buy multiple items that are in a warehouse nearby. Discounts are also offered if the customer forgoes the possibility returning of products they decide against keeping.

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This strategy has remained consistent over the past year, and Lore and the company's chief customer officer, Liza Landsman, said Thursday that this has been successful so far. In fact, Landsman said the company will start offering more of these incentives to lower prices for customers including possibly sharing emails with manufacturers or opting for a longer shipment window.

Groceries has also been another area where Jet has been testing the waters. In April, it quietly started testing an expansion into groceries sales in 875 zip codes in New York City, New Jersey, Washington D.C., Connecticut, and Pennsylvania. Milk, fruits, vegetables, cereal, and canned goods are just some of the items available.

The reasoning for expanding into groceries, a low margin business, is that they tend to draw repeat customers, said Landsman. And these customers may ending up buying other non-grocery items.

Lore said that the company has also focused on offering specialty categories of food such as gluten-free, Kosher food, and Indian and Chinese foods. People are willing to spend more on these harder to find items, and that means higher margins for Jet, he said. Grocery deliveries have been expanded to 1,500 zip codes, with more being added. Jet will also start using returnable shipping containers with groceries, meaning customers can return the containers the food was shipped and delivered in to cut costs.

Lastly, expect to see Jet follow in Amazon's footsteps, creating private-label brands of diapers and more to sell to customers. Amazon has started to sell its own coffee, baby food and clothing that open the door to higher profit margins than reselling products produced by others.

"It's absolutely something we have in the works," said Lore, calling the opportunity "low hanging fruit." Some of the areas where Jet will be developing their own products include health and beauty, baby, and groceries.

Although Lore paints a bright future for Jet, there's still the question of how quickly the startup is burning its cash, and when it will become profitable. He still projects profitability in 2020 - a full three and a half years from now—and says that he is unlikely to raise another round of funding until later this year. In November, the startup raised $618 million in new funding on top of nearly $300 million raised previously. "We've got deep pocketed investors and we have enough demand from existing investors to fill the next round," he said.

Lore hasn't been shy about his belief that creating an e-commerce company that can compete at the scale of Amazon requires a lot of money. "It's a misconception that if a company is burning cash, it's not going to make it. We will become profitable in the future, but it will take time." he said.

Sucharita Mulpuru, analyst at Forrester Research, agrees that it will take a lot of capital and experimentation to come close to Amazon's scale. "It's going to take a lot of time for Jet," she said. "They are so far behind Amazon, they are not even in the same playing field."

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