- Nicknamed ‘the Amazon Killer’, Jet tries to offer a low-cost alternative.
- With high subsidies, small inventories, high third-party costs, and no transaction fees, income for Jet’s business model is highly unsustainable.
- The current state of the private equity markets will make it harder for Jet to raise more required funds.
- For now, Jet does not threaten Amazon at all.
Tech unicorns have had a rough patch, having their private valuation re-examined and receiving a cold shoulder from Wall Street when going public. Snapchat, Dropbox, Pure Storage (NYSE:PSTG), and SQUARE INC (NYSE:SQ) already felt the sentiment change toward tech unicorns, and as I described in an earlier article, I believe we are just at the beginning of the devaluation process of tech unicorns. In light of the discussions of a valuation bubble in the private equity market, the eCommerce startup Jet.com attracts a lot of attention, as it aims to challenge the eCommerce giant Amazon (NASDAQ:AMZN).
Jet was founded by Mark Lore, an experienced entrepreneur in the eCommerce industry who sold his previous startup Diapers.com to Amazon for $500 million in December 2010. With his eCommerce experience, Mr. Lore, who also acts as Jet’s CEO, started developing a new type of eCommerce experience that combines the membership model of Costco (NASDAQ:COST) and Walmart (NYSE:WMT) Sam’s Club with the Amazon Prime delivery model and adds a unique algorithm that prices each product in real time based on its availability and location in the distribution centers.
Jet’s unique advantage is its low-cost mindset that guides the company on every step of the way. Only three months after the platform was publicly launched, Jet reduced the annual membership fees from $50 to $35 to become more competitive with Amazon Prime, whose annual fee is $99. The company keeps a low inventory level with only specific and popular items; however, in case an item is not available in its distribution centers, Jet quietly purchases that item on another site through affiliate links to minimize the additional cost. Jet runs an extensive affiliate network under the brand Jet Anywhere that enable customers to receive additional discounts on other sites. The prices that appear on Jet’s website include heavy discounts subsidized by the company.
As shown in the chart below, Jet’s low-cost strategy enables the company to be significantly cheaper than Amazon, even though they keep fewer items than the e-commerce giant. On average, according to a survey done by Boomerang Commerce for the Wall Street Journal, the items offered on Jet are 73% cheaper than on Amazon. However, only 31% of the items available on Amazon are also available on Jet.
It’s obvious that Jet offers better deals on many items compared to its rival Amazon, and Jet is already nicknamed ‘the Amazon killer’ by many e-commerce specialists. Jet claims to generate revenues only from annual fees and not from the items, unlike other eCommerce websites like Amazon, Etsy (NASDAQ:ETSY), and eBay (NASDAQ:EBAY) that charge a small fee for every transaction made on the site. Jet might be the Amazon killer in the short-term and during the current Thanksgiving weekend, raised by the wave of hype and buzz; however, could such a thin/low-cost model survive in the long haul? A test done by the Wall Street Journal showed that Jet lost $242.91 on 12 items purchased by the newspaper, suggesting that the current business model might not be sustainable.
Jet raised $545M at a valuation of $1.5B, which is unbelievable for a company that has only existed one year, with a platform that has been up and running for less than six months. It was the last massive funds injection made by the mutual funds giant Fidelity, who only recently reevaluated its Dropbox and Snapchat holdings. I believe that the massive valuation and amount raised have a lot to do with CEO Lore’s reputation in the e-commerce industry. After he created the super successful diapers.com and sold it to Amazon, many believe that he will be able to do this again. When every major retailer has a well-designed and well-operated online presence, together with e-commerce giants, like Amazon, eBay, and Alibaba (NYSE:BABA), it’s hard to see how Jet could pose a real threat to Amazon and e-commerce giants beyond the current hype.
As it is hard to imagine Jet gaining more than a modest double digits market share, I can see a scenario in which one of the retailers or e-commerce giants acquire Jet to expand its offering to a specific audience. In my opinion, this is the only valid business justification Jet has and as much as it wants to challenge Amazon, Jet is years away from that point. In the current losing business model, Jet will require increased amounts of funds to go after Amazon and with the current uncertainty in the private equity markets, it is hard to believe that the company will be able to raise much more funds in the short term.