It's not often that a start-up company is considered a threat to Amazon.com (NASDAQ:AMZN) before it even makes its first sale. But Jet.com, which opened for business earlier this week, is a special story.
Its founder, Marc Lore, already pushed Amazon to the limit once before. In 2005, Lore founded Quidsi, the e-commerce parent of sites like Diapers.com and Soap.com. By 2010, his company had quietly grown to $300 million in annual sales of diapers and other such items: but then Amazon started taking notice.
The e-commerce powerhouse slashed diaper prices by a third, taking down Quidsi's profitability along with it. As a result, Lore was forced to sell to Amazon, fetching $550 million for his company. He then spent two years working in the bowels of his former enemy before parting ways.
Now, he's back with his latest brainchild -- Jet.com. It's a unique e-commerce platform that may be best described as a mash-up between Amazon and Costco Wholesale (NASDAQ:COST), the buy-in-bulk membership club.
What is Jet.com?
As the shipping wars heat up between Amazon and various rivals, Lore's central idea was to appeal to the customer who was willing to sacrifice speed for price. The website charges a $50 annual fee (with a three-month free trial), and then sells its goods at essentially no mark-up, similar to Costco. Jet.com promises to offer the lowest prices on the Internet, saying they will generally be 10%-15% cheaper than anywhere else on the web.
What makes Jet unique and enables the rock-bottom pricing is that users get additional savings based on shipping costs as they add items to their cart. Savings are generated based on which items ship from the same warehouse and on how close of a distance the shopper is to the merchandise. There are also other unique options that can lower the price such as paying with a debit card or waiting for items to be shipped in the same package.
Is it an Amazon killer?
Lore returns to the battle with deep pockets, having already raised hundreds of millions in funding and with a valuation of $600 million even before its launch. The founder is also taking an Amazon-like stance on patience with profits, projecting negative operating income for the first five years.
Initially, Jet doesn't expect to be a major threat to Amazon. The company hopes to hit $20 billion in sales by 2020 with 15 million paying members at that time. Amazon, meanwhile, is set to cross the $100 billion mark in revenue this year and may well have $200 billion in sales by 2020. Plus, there are a number of other reasons for Amazon not to worry.
The online retailer, along with Costco, is among the highest-ranked retailers in customer service. Amazon customers love its service and are therefore less likely to search for an alternate provider. Amazon's Prime loyalty program also continues to grow and has retention rates believed to be as high as 95%. At an annual fee of $99, Prime is more expensive than Jet, but it offers benefits such as free video streaming and the Kindle lending library and has no minimum for free shipping, while Jet has a $35 minimum for free shipping or otherwise charges $5.99 for transportation.
The two services may therefore be complements as much as competitors. Jet may prove to be better for bulk purchases and longer shipping times, while Prime is more suitable for smaller items and quick delivery.
Still, Jet doesn't need to kill Amazon to move its stock price. $20 billion is a significant amount of revenue for the Kindle-maker, and any surprising decline in its growth rate could nail the stock as the company is prized for its sales growth. Amazon has had a similar effect on the much larger Wal-Mart.
But Lore is targeting customers that Amazon hasn't already won over, pointing out that the vast majority of Americans aren't Prime members. With e-commerce projected to grow 15% annually, there should be plenty of room for both companies to compete.
Keep an eye on media reports as a sign of Jet's impact. Since it's a privately held company, we won't know its financial results, but if the buzz keeps up, Amazon could feel the squeeze. As it showed with Diapers.com, however, Amazon has the flexibility to respond directly to any threats to its leadership.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Costco Wholesale. The Motley Fool owns shares of Amazon.com. 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.