Jet: Start-up targets Amazon and Walmart … say, what?

After months of testing and and network-building, the e-commerce start-up Jet.com opened its digital storefront last week, marking the official kickoff of the company’s ambitious effort to battle Amazon and Walmart for price-conscious customers.

According to the Washington Post, Jet is taking a new approach to pricing. Its algorithm doesn’t simply look at the price of each individual item in your online shopping cart.

It looks at all the items you want to buy, as well as your Zip code, to determine which retailer or warehouse can ship that unique combination of items to you the cheapest.

Shoppers can only buy things on Jet if they’ve signed up for a $49-per-year membership.

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Let’s dig a little deeper and assess the odds …

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Jet is very well funded … it has already raised over $200 million in seed capital.

The investors are betting on the track record of the founder – a the guy who developed Diapers.com and sold it to Amazon for over $500 million – and the prospects of the “innovative model”.

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Jet has already built a network of over 1,000 affiliates – retailers and distributors who keep products in inventory.

Jet is geared to selling market baskets of goods, not just “eaches” – trade talk for single items.

As a customer “builds” an order, Jet digitally shops its affiliates and recalculates the price of the entire market basket.

So, one affiliate may have the best price on the first item, but a relatively high price on the second item.

In the old days, this was called “rum & whiskey” pricing … bundling high-priced rum with low priced whiskey

A second affiliate may be slightly high on the first item, but very low priced on the second item.

The first affiliate would win the first round; the second affiliate would win the second.

You get the picture.

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Part of getting to the best price is a focus on “landed costs” … think, product price plus shipping and handling.

Jet’s model tries to leverage distribution economics.

An underlying assumption is that bundling multiple products reduces shipping costs (versus sending several individual packages).

Makes sense, since one truck is driving the final mile with one package instead of several trucks with several packages.

In addition to shopping retail affiliates, Jet concurrently shops shipping options …  arbitraging shippers’ rate schedules as orders grow bigger.

Jet can link points of origination and destination since they know where the affiliates are located and the customers’ zip codes.

In general, it’s cheaper to ship shorter distances than longer ones

Technical note: Shorter beats longer doesn’t always hold true.  Sometimes, access to economical shipping routes offsets distance – think, shipper’s relative proximity to an airport or trucking hub.

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Here’s the final part of the equation …  one that I haven’t seem reported anyplace else:

Sales tax arbitrage … taking advantage of “opportunities” – aka, loopholes —  in states’ sales tax laws.

In a prior post, I outlined where & why Amazon collects sales taxes.

See: Where does Amazon collect sales tax? Why?

Remember that Jet is laser focused on landed costs: product plus shipping … plus, I assume, sales tax.

About half of the states collect sales tax on online sales if the supplier has a physical presence in the state where the delivery is being made.

In those states, Jet might be able to tap a supplier that doesn’t have a presence in the delivery state.

Bingo … a 5% or 6% cost advantage that Amazon and Walmart can’t match.

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OK, let’s pull it all together …

First, there’s building a customer base.

Amazon and Walmart already have built enormous customer bases …. they’ve got “customer scale” already on the book.

Jet says it’ll spend $100 million marketing its service.

Might work … but it’ll be an expensive uphill climb.

Second, cost of goods sold.

Hard to believe that Jet’s affiliates will be able to buy products cheaper than Amazon and Walmart.

Those guys already have a huge purchasing volume advantage that they use aggressively with suppliers.

Early on, Jet’s network will be at a big disadvantage … it may eventually narrow the gap, but will never beat Amazon and Walmart’s buying power.

Third, shipping & handling.

Given their volume and broad product lines, both Walmart have well developed processes for efficiently bundling orders.

And, they’ve got the volume-based buying power to extract favorable shipping rates from all carriers.

Doubt that Jet will develop an advantage there.

Finally, the sales tax angle.

I do think that Jet has an advantage there in state that are collecting sales taxes from physically present online retailers.

But, I bet that advantage will be transient.

I expect more states to start collecting sales taxes on online sales … and I expect states to go beyond the physically-present rule and start collecting on all online orders.

If so, Jet’s tax arbitrage advantage goes away.

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Bottom line: I’m betting the under on this one.

Clever concept, but Amazon is formidable … and I learned log ago, don’t mess with Walmart.

Stay tuned to this one …

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#HomaFiles

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