Evaluating Jet.com’s Business — Part 1
Let’s take a closer look at Jet.com’s business to understand what made it so appealing for Walmart. Fundamentally Jet is an ecommerce company that sells a wide variety of items directly to consumers, very similar to Amazon. Jet has achieved impressive scale in its first two years of operations. While exact numbers are not public, Jet is said to have been adding roughly 400,000 shoppers per month during 2016, putting it on track to hit $1 billion in annual online sales in 2016.
It still remains to be seen whether Jet.com can grow to become fully self-sustaining profitable business. From the beginning Jet.com’s model has very high overhead and fixed costs. This only allows the business to operate profitably at significant scale — with billions in annual gross merchandise volume (GMV). These large initial expenses include the quickly growing team, the acquisition of furniture vendor hayneedle.com, infrastructure, and its distribution centers, along with Jet’s roughly 75,000 owned stock keeping units (individual product types, SKUs). Once at scale, however, the large fixed investments can be leveraged very efficiently. In order to get to a profitable scale as quickly as possible, Jet is investing very heavily in marketing. Despite these high costs, however, the company’s ability to rapidly grow to a run-rate of $1 billion in GMV and a total assortment of 12 million different items is very uncommon. Most startups never make it to such scale.
In order to achieve such growth the company spent $40 million per month. More than half of this spending, $25 million, was devoted to marketing. Roughly calculated, this yields a cost per customer of over $62. Of these customers, 30% return within 90 days, yielding a cost per loyal customer of $207. That’s a significant cost — particularly when considering that Jet initially positioned itself as competing primarily on price. Furthermore, much of its assortment is comprised of low margin items, such as household items and groceries. It therefore comes as no surprise that the company’s original plan to reach profitability through scale in 2020 required several billion dollars of outside investment.
On paper there is little about Jet.com’s business that Walmart could not have done its own. Building a website and some apps for customers is easily possible. Spending a lot of money on customer acquisition would be equally easy. The company could have used its existing infrastructure and fulfillment networks to scale the operations of this new brand much more easily than a company starting from scratch. Walmart certainly has the resources to build something like Jet internally.
However, there’s more to Jet.com than impressive marketing spend. To process all the orders, Jet.com also built a substantial ecommerce platform. The company incorporated several novel approaches to online shopping. It made the process much more transparent and equitable for shoppers and sellers. In the next part of this series we take a closer look at how Jet accomplished this. (click to continue reading!)
