JETTISONED

Jet.com has been trying to beat Amazon at entirely the wrong game

Jet.com CEO Marc Lore wanted five years.

Five years for his online retailing startup to reach 15 million customers and $20 billion in revenue—what Lore defined as “scale.” Five years for Jet to establish itself as a legitimate competitor to Amazon.

“There’s an opportunity here to create a multi-hundred-billion-dollar business,” Lore told CNBC when the company launched in July 2015. “There is plenty of upside once you get to $20 billion.”

As of today, it looks like Jet’s years spent scaling its business may barely surpass one. The company is reportedly in talks to sell to Walmart for as much as $3 billion, a deal that would be latest in a series of shakeups for e-commerce startups.

Were Walmart to acquire Jet, it would mark a quick and disappointing end for a startup that shot to a $1 billion valuation and attracted a great deal of hype for going after an online juggernaut. But that outcome should hardly be surprising. Jet has spent the past year trying to beat Amazon at the game of low pricing, which is a game Amazon no longer even bothers to play.

To deliver its customers the lowest prices, Jet essentially helps its merchants bid in real time for those users’ business. (Unlike Amazon, which has built out a network of warehouses, the vast majority of Jet’s merchandise is sold by retailers who handle shipping and logistics themselves.) For example, a seller might drop the price of an item by $5 if the customer agrees to waive their right to a return. Jet takes a commission of 8% to 16% from merchants on most sales.

To consumers, Jet markets this as “smart cart” technology and uses it to recommend items that can be added to any given order to get the lowest total price based on factors such as shipping and packaging costs, proximity between merchants, and special deals a seller might be offering. The system can feel a little counterintuitive, but Jet believes that once customers get the hang of it, the savings they reap will make them loyal converts and bigger spenders.

Whether this is actually the case is another matter. Slice Intelligence, a research firm that tracks e-commerce companies, found that only 30% of Jet’s sales came from repeat shoppers as of February. Jet’s average customer also purchased only 1.5 times, lower than the comparable rates for Target.com (2.2) and Walmart.com (2.1).

“It is too early to conclude that Jet has a retention problem,” Slice analysts recently wrote, “but going forward, both of these metrics will be key indicators of Jet’s ability to sustain growth.”

Amazon also once competed primarily on price, but that long since ceased to be its main method of attracting and retaining customers. The Amazon of today does that with Prime, its stunningly successful $99-a-year membership program. In the US, an estimated 63 million people subscribe to Amazon Prime, equal to half of all US Amazon customers.

Amazon might lure these members in with perks that have nothing to do with online shopping—streaming music, streaming video, free photo storage. But regardless of why they join, the people who subscribe to Prime become Amazon’s most valuable customers. They spend twice what other Amazon shoppers do each year, and renew their memberships at incredibly high rates. Amazon has banked on customers valuing frictionless purchases over unbeatably low prices—and the popularity of Prime indicates that the bet is paying off.

Jet has grown quickly since last summer, with July sales up 170% from August 2015, according to Slice Intelligence. For May, Jet said it did $85 million in monthly sales, bringing its annual run-rate to $1 billion. On a recent visit to Jet’s headquarters in New Jersey, a sign in the company’s lobby flashed key metrics: $93 for the average order, $288,742 spent on Jet.com that morning. Employees crammed around communal desks and into conference rooms with superhero-inspired names like “Avengers’ Mansion.” There was a lot of purple.

Jet has hit psychological milestones and looks the part of a flashy startup, but its business has yet to truly impress. With $1 billion in annual gross merchandise sales, Jet represents less than 1% of the total market for e-commerce in the US, according to Euromonitor. Amazon, by far the market leader, has 31%. Walmart has 3%.

Given another four years, perhaps Jet would gain more stature as an e-commerce mainstay, and capture a more significant share of an undoubtedly vast market. But in competing with Amazon, its approach has been misguided. Jet placed all its bets on low prices. Amazon moved on from that years ago.

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