The online retail sector saw more than $500 billion in revenue last year. Between 2008 and 2012, this market also saw an annual growth rate of 19%, and it is expected to reach $1 trillion within the next six years. With such enormous scale and accelerating growth at stake, traditional retailers such as Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) have been increasing their e-commerce exposure in the last five years. With more than $50 billion in online sales in 2012, however, Amazon.com (NASDAQ:AMZN) is the clear market leader.
Considering that it took Amazon.com 20 years to reach its current scale of operations, is it possible to develop a strong competitor in a short time from scratch? It is, according to Chieh Huang, CEO of e-commerce start-up Boxed.The story of Boxed, which as its site says, sells "bulk-sized products at pint-sized prices," shows how 10 people managed to build an Amazon.com competitor in only three months. It also shows what the most important ingredient of building a successful e-commerce start-up is and how important it is for investors to understand that there are no high barriers to entry for a creative start-up.
How Boxed plans to become the online Costco
With roughly $1 million in initial funding, Chieh Huang formed a team of 10 engineers and planners, most of whom had experience in developing online games. Together they developed a mobile-only e-commerce application called Boxed, which was released three months ago.
Aware of the intense competition in the online retail space, the team decided to focus on a particular niche that was unserved. They focused on building an online platform for bulk orders, a segment traditionally dominated by big club retailers such as Sam's Club and Costco, because they could build an economic moat faster by saving time for customers who are either too busy or live too far away from a warehouse club. As Quartz contributor Christopher Mims notes, if Amazon is the online Wal-Mart, Boxed aims to be the online Costco.
To differentiate its product as much as possible from Costco's online site, the Boxed team used its experience making games for Zynga to develop a user-friendly back-end interface that allows anybody to edit the app. They also designed a pleasant front-end user experience, with friendly icons and game characters.
Fighting against Amazon.com and Wal-Mart
To remain competitive against Amazon.com (which has spent more than $14 billion on 50 warehouses since 2010) or Wal-Mart (which is transforming its more than 4,000 U.S. locations into an efficient distribution network), Boxed decided to rent its own warehouses in Las Vegas and New Jersey. These cities were chosen due to their proximity to most cities located on either the east or west coast.
In order to provide free overnight shipping for orders over $75, the company decided to ship wholesale staples out via regular ground mail. By keeping its own warehouses, relying on regular ground mail, and using its own proprietary software to manage supply and demand, the company has been able to provide competitive pricing despite its small scale of operations. Notice that unlike Costco, which may have 5,000 items in its stores, Boxed keeps only 500 units available for users in its own warehouses.
To remain efficient, Boxed decided to carry only a limited range of products. The company now sells roughly 600 items that were chosen due to their popularity and high liquidity, including items such as cereals, diapers, or toilet paper. This allows the company to keep minimal inventory.
By contrast, Amazon.com has more than 200 million items in its catalog and adds nearly 175,000 new items per day. Boxed wisely left the be-everything job to Amazon, choosing a niche that has led to an average order higher than most of its competitors -- Boxed shoppers typically spend more than $100 each time they shop.
Final Foolish takeaway
The retail industry is probably the most competitive space, with Wal-Mart dominating the traditional segment by employing an "every day low prices" strategy, Costco controlling the warehouse segment, and Amazon.com ruling the online space. Boxed demonstrated that it is possible to build out an economic moat from zero, even in such a fierce landscape. To achieve this, the key ingredients involve focusing on a specific -- preferably unserved -- niche, developing for mobile, and keeping a light and efficient logistics system.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Costco Wholesale. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.