By ROLFE WINKLER at The Wall Street Journal
Online marketplace Jet.com Inc. has almost no revenue, years of likely losses in its future and a strategy that includes underpricing mighty Amazon.com Inc. on millions of items. Jet also has perhaps the highest valuation ever among e-commerce startups before their official launch.
That is no contradiction in Silicon Valley, where investors keep pouring money into audacious business experiments filled with big-splash potential. Jet is the buzziest e-commerce arrival of the current boom, with $225 million in capital raised in the past year and a timer on its website counting down the seconds to Tuesday’s opening of Jet to the public.
More than just about any other current startup, Jet seems reminiscent of the dot-com boom era, when e-commerce companies assumed giant losses before breaking into the black.
Anticipation runs so high that Jet’s founder and chief executive, Marc Lore, is in talks with investors about raising hundreds of millions of dollars in additional capital by year end, according to people briefed on the discussions. The infusion could increase the online retailer’s value to $3 billion from $600 million.
“People want to put money to work,” says Mr. Lore, 44 years old. “I get a call and people say: ‘Hey, can we talk?’ Yeah, I’ll listen.”
Yet ambition is already colliding with reality at Jet, which promises members-only “club price savings on pretty much everything you buy” for a fee of $49.99 a year.
The Hoboken, N.J., company is absorbing steep losses on many orders filled as part of a trial run that began in March, largely because Jet hasn’t signed up enough partner merchants or opened enough warehouses to directly sell much of the merchandise shown on its website.
When a Jet customer buys items that aren’t in its inventory or available from partner merchants, a Jet employee buys the items from another website and has them shipped directly to the customer. That is expensive for Jet because the company often pays high shipping costs plus any difference between its advertised price and the amount charged by the outside website.
1. PRODUCT: Adidas 'Supernova' Long Sleeve Tee
PRICE CUSTOMER PAID: $41.82
FULFILLING RETAILER: Nordstrom
JET'S COST: $63.94
For example, The Wall Street Journal recently bought 22 items from Jet. Twelve were shipped to the Journal by retailers such as Wal-Mart Stores Inc., J.C. Penney Co. and Nordstrom Inc., according to sales receipts.
Jet’s prices for the same 12 items added up to $275.55, an average discount of about 11% from the prices Jet paid for those items on other retailers’ websites. Jet’s total cost, which also includes estimated shipping and taxes, was $518.46.
As a result, Jet had an overall loss of $242.91 on the 12 items. Mr. Lore says the loss is unusually large, partly because the items’ cost was low relative to shipping charges.
Some retailers say they were unaware that Jet is pitching their products, often by discounting them below the retailer’s own price. “If they’re unhappy with it, we’ll just get [the product] somewhere else,” Mr. Lore says.
Adam Fischer, vice president of Internet sales at Wüsthof-Trident of America Inc., says he was unhappy to learn that Jet discounted some of its products because that can cheapen customer perceptions of Wüsthof’s high-end cutlery and undercut authorized dealers. Wüsthof is a unit of Wüsthof Dreizackwerk KG.
Mr. Lore responds that Jet will remove any brand’s products from its website if asked—and abide by the brand’s minimum selling prices.
Why is Jet willing to alienate brands and take a financial hit on purchases made using outside websites? The answer says a lot about the formula for trying to strike it rich in the frenzied world of technology startups.
Investors are flush with cash and want to plow it into fledgling businesses with big, brash ideas that seem promising and could be wildly profitable if the company survives long enough to go public or be acquired.
Jet is trying to pull off one of the most improbable scenarios of all: lure millions of customers away from Amazon, which had raised less than $10 million in funding before it went public in 1997. Amazon, of Seattle, now is worth about $225 billion.
Mr. Lore says Jet needs to spend aggressively to reach massive scale, at which point the company will start to turn a profit. That includes as much as $300 million over five years for the outside merchandise-buying program, which Jet calls a “concierge” service, to help attract new members while Jet adds inventory and forges more partnerships with retailers who want to sell products on its site.
As of Sunday, Jet had 4.5 million products, says Mr. Lore, who expects the number to hit 10 million by the end of this week. At its launch, Jet will fulfill about one-third of customer orders itself, with another third handled by partner merchants and the rest by Jet’s concierge service. Jet had about 100,000 trial members as of Sunday, Mr. Lore says.
The company has already spent $40 million to hire more than 300 people, subsidize the concierge service, set up warehouses in New Jersey, Kansas and Nevada, and on other startup costs, says Mr. Lore.
An ad blitz starting with billboards this week and a television campaign in September is expected to cost $100 million during the next year. The company will have no membership fees coming in for at least six months as it offers free trials to start.
Jet is a “huge swing-for-the-fences play, and the concierge service is just the tip of the iceberg” in terms of what Mr. Lore will spend, says Jeff Crowe, a managing partner at Wells Fargo & Co.’s Norwest Venture Partners.
Norwest is an investor in Jet along with Coatue Management LLC, Goldman Sachs Group Inc., Google Inc.’s Google Ventures and Chinese Internet giant Alibaba Group Holding Ltd.
Mr. Lore says Jet’s business model only works once the company sells $20 billion worth of products a year, a threshold he expects to hit by 2020. Only Amazon, eBay Inc. and Apple Inc. have higher online “gross merchandise volume” in the U.S., according to Wells Fargo analyst Matt Nemer.
By 2020, Jet expects to have 15 million paying customers, which would generate about $750 million based on the current $49.99-a-year membership cost. Membership fees will be Jet’s sole source of profits, since it says it will relentlessly undercut rivals on product prices and offer free shipping on orders of more than $35 and free returns. Overhead expenses alone are expected to climb to about $150 million a year.
Mr. Lore says the concierge service is a “stopgap” that will dwindle as Jet signs up more partner merchants. More than 2,000 have told Jet they want to sell on its website, and hundreds are already doing so. Eventually, the concierge service will be used only for obscure items.
Jet also wants to stock products from partner merchants in its warehouses along with everyday items such as toothpaste, which typically make no money but will help draw people to Jet’s website, where they are likely to buy other merchandise.
Those moves would help the company reduce shipping costs by increasing the average number of items per shipment, according to Jet.
Shipments directly from Jet arrive in purple boxes stenciled with its happy-face logo, similar to the smile on Amazon boxes. Partner merchants use their own packaging on orders they fill through Jet. Jet also will offer “bonus savings” to members who buy items shipped from the same location and agree not to return items.
Mr. Lore says he isn’t fond of comparisons to flameouts such as online retailer Buy.com Inc. and grocery-delivery company Webvan Group Inc., which raised hundreds of millions of dollars apiece in venture capital, went public and then fell apart.
‘The big question’
In a 90-minute interview, Mr. Lore said 15 times that Jet needs only to “bridge the gap” to attain profitability.
“The big question is: Will people buy the membership?” he adds. Jet’s business model is “100% proven viable at scale. You just have to get to scale.”
Investors say Jet is a different kind of long shot, partly because of the prior success of Mr. Lore, whose Staten Island, N.Y., roots come through whenever he says “toilet paper.” (It sounds like “TAW-let paper.”) In 2005, he started Diapers.com parent Quidsi Inc., selling it to Amazon for $545 million five years later.
He exudes confidence about Jet’s future even though Amazon is a master at underpricing rivals and offers its own $99 Amazon Prime membership program, with exclusive deals and unlimited two-day shipping. Amazon has nearly 278 million customer accounts, including an estimated 40 million Prime members.
An Amazon spokesman declines to comment on Jet.
Mr. Lore says Amazon won’t be the only winner as the e-commerce market continues to grow quickly. “We’re going after that segment of the market that really cares about price and is willing pay a fee to save,” he says.
“Marc knows the business so well he can pull it off,” says Jeremy Levine, a partner at Bessemer Venture Partners, which passed on investing in Jet, as the venture-capital firm does with other e-commerce startups in North America that sell anything Amazon can carry, too. “You’re making a blind bet on consumers liking the value proposition, so you need to hope the financing markets stay favorable,” Mr. Levine adds.
As Jet gears up for Tuesday’s launch, the concierge program has helped the startup create the illusion of bountiful virtual shelves, with millions of products in categories from clothing to electronics to furniture.
Many of the products aren’t yet available directly from Jet or its partner merchants. To fill such orders, a Jet employee buys products on rival websites.
It isn’t easy for Jet’s members to tell up front that the company has a concierge program, which isn’t described on Jet’s website. Only members’ order-history pages include a small notation that a specific purchase was fulfilled elsewhere.
A description “should be on the website,” says Mr. Lore, Jet’s chief executive. “We’re not trying to hide the fact that we’re going to go out of our way for the consumer to find these products.”
Jet let the Journal sign up for its free prelaunch trial run so that a reporter could better understand how the retailer works.
A Jet employee placed some of the Journal’s orders with JCPenney.com, Walmart.com, Nordstrom.com and Walgreens Boots Alliance Inc.’s Drugstore.com, using email addresses that didn’t match the Journal’s email.
Each concierge order also was made with a different credit-card number, making it hard for retailers to tell Jet was the buyer. Jet’s product descriptions and images sometimes were identical to the retailers’ own listings.
The four retailers say Jet isn’t a partner but decline to comment further. Mr. Lore says Jet has stopped filling concierge orders through Nordstrom after that retailer complained. Many retailers are happy to get such orders from Jet, he adds. He says product photos on Jet’s website come from partner merchants, image libraries, Jet’s own photos and other sources.
Marc Henderson, founder of fragrance retailer Scenting.com, says he had no idea that Jet was placing orders on his website until a Journal reporter told him about seeing a recent one. Mr. Henderson says he was having a “weird feeling” about sales quadrupling in the past month for 6.7-ounce bottles of Calvin Klein’s Obsession for Men cologne.
While he is pleased about getting a sales boost from Jet, the e-commerce startup provided email addresses that don’t appear to match the customer’s actual contact information, Mr. Henderson says. That will make it harder for Scenting.com to follow up with those buyers in hopes of getting future sales.
Jet says it plans to give members the option of sharing their email address with merchants that sell products on its website.
L’Oréal SA’s Kiehl’s unit says it isn’t a Jet partner even though the startup’s site recently included 154 Kiehl’s products. Those listings disappeared a few days after the Journal contacted Kiehl’s.
Mr. Lore says he isn’t aware of the specifics of Kiehl’s situation.
EBay has toiled for years trying to convince brands to sell goods through its website. Retailers prefer to get orders through their own sites. They capture email addresses, simplifying future marketing efforts, as well as credit-card numbers and shipping addresses that speed future purchases.
“Wal-Mart loses money on many online sales,” says a person close to the retailer. “The model only works if those losses are investments in customer loyalty. To the extent those sales are to competitors who turn that investment around to steal or even just intermediate the customer relationship, that’s a frustrating outcome for Wal-Mart.”
Richard Last, former director of J.C. Penney’s website, says he wouldn’t sign up to sell items on Jet for the same reason that he spurned Amazon. “The customer is just too valuable. I want them to come to me,” says Mr. Last, now senior director of the digital retailing program at the University of North Texas.