An early Jet investor’s optimism about the Walmart acquisition
-Originally published by Ben Sun, GP of Primary Venture Partners, on Recode
We were thrilled to wake up to Monday’s headlines announcing Walmart’s $3.3 billion purchase of Jet.com — the largest U.S. e-commerce transaction to date, but a small price to pay, given Walmart’s $230 billion market cap and drive to secure a toehold against its main rival, Amazon.
It’s no surprise that Jet.com is an attractive buy for Walmart; led by Marc Lore, co-founder of Quidsi (parent of Diapers.com), the company has made a huge dent in the online retail market in just one year’s time, and it’s a great differentiator for Walmart, which has been playing catch-up to Amazon’s e-commerce domination for years.
As the only New York-based seed fund in Jet’s first round (we invested alongside New Enterprise Associates, Accel, Bain Capital Ventures and MentorTech), Primary Venture Partners has long believed in the company’s strategic vision. With Lore at the helm — he’s a repeat entrepreneur looking to make huge waves in a pool he knows so well — this investment decision was one that we immediately jumped at when we were given the chance two short years ago.
The balance that’s hard to beat
First, a bit about the titan that Jet has been challenging. Amazon has built a successful $240 billion business by leveraging its scale to find the right balance of price, selection and convenience. Finding that right balance enables consumers to buy anything they want, whenever they want, with just the few clicks of a button, and at prices that rival any brick-and-mortar store. It has shaped the way we think, the way we shop and the way we demand, and it’s largely responsible for our dwindling patience when it comes to waiting in lines.
Amazon has come closest to finding that balance with Amazon Prime, which gives users free one- or two-day shipping on most items for just $99 per year (or $10.99 per month, for the commitment-phobic). The offering makes up the majority of Amazon’s gross merchandise volume, and Prime subscribers are increasing by leaps and bounds (the Prime customer base grew from 19 million to 63 million in the last year).
Moreover, subscribers making twice as many purchases and spending more than double, on average, than non-Prime customers. With market share of 42 percent of the ecommerce market, and more than 7 percent of total retail sales occurring online, there’s no one who can beat Amazon at its own game in the foreseeable future.
Prime is a great deal for consumers, to be sure, enabling them to make impulse purchases with nary a thought to back-end shipping costs and logistics. But there’s one inherent weakness to the Prime offering and its encouragement of the single-unit purchase mentality. With Prime, Amazon has made itself an indispensable way of life for consumers who want to log on and quickly purchase any item they need, whenever they need it — be it a few sticks of deodorant or a flat-panel TV — without any consideration for shipping costs. This way of shopping, while attractive from the consumer side, is extremely expensive and logistically complex for the supplier.
Amazon has attempted to streamline fulfillment through programs like Vendor Flex, which it launched in 2013 in an attempt to ship goods faster and cheaper by co-locating an Amazon fulfillment center within a manufacturer’s warehouse. The arrangement has eliminated many overhead and shipping costs, enabling Amazon to sell diapers and other items cheaper than its competitors.
Amazon building a warehouse next to where P&G stores its Pampers allows the company to sell a pack of Pampers at the lowest price. However, if a customer wants to add to that purchase a small bottle of California Baby Lotion (which is not owned by P&G), that item will be shipped from a different warehouse, which means that the additional costs of shipping ultimately fall to the customer. If a supplier could combine the two items into one box, it could pass those shipping savings onto the customer and offer a better price. It was this notion that Marc Lore and the Jet team went after, knowing that they couldn’t compete with Amazon for single-unit orders.
Fighting back with a price-first approach
In his time at Quidsi, Lore had a front-row seat as Amazon snowballed and gained more and more traction. He realized that he could never beat Amazon at its own game, but he observed the structural weakness of the single-unit purchase consumer mentality, and found his angle of attack. He launched Jet as the anti-single-unit marketplace, and its value proposition lies in incentivizing consumers to purchase multiple items at once by discounting prices. So while Amazon tinkers with finding the perfect balance between price, selection and convenience, Jet prioritizes price, in hopes of being the go-to e-commerce platform for those that value price (which are a lot of people).
From his years in ecommerce, Lore understands better than most that designing a site experience and back-end fulfillment infrastructure to support multiple-unit orders is very different than the processes involved in single-unit orders. He built Jet from the ground up with the specific customer experience, marketing, technology, supply chain, fulfillment logistics and infrastructure processes to encourage and support multi-unit purchases. Lore realized that if he got this right, it’s a model that Amazon wouldn’t be able to easily (if ever) replicate with its existing infrastructure that’s so squarely focused on single-unit purchases.
We’ve seen this same price versus multi-unit purchase battle between Costco and Walmart. Seemingly after a similar customer, the discount retailers are vying for market share with two vastly different business models: Walmart via sheer scale and enormous selection of goods (it carries 120,000 SKUs and boasts a $230 market cap), and Costco via a warehouse model that makes most of its revenue on annual membership fees.
Costco’s membership fee offers a big advantage for customers, as it enables Costco to sell its wares at the lowest prices without having to sweat its negligible profit margins. Those low prices, in turn, encourage customers to purchase more items at once — an approach that has resulted in an average Costco order of almost $400. So despite having fewer retail stores than Walmart and only 4,000 SKUs, Costco has been able to claim a meaningful position in the market, with a $75 billion market cap to boot. The moral of the story? With a differentiated merchandising strategy and the right infrastructure in place, a meaningful portion of the consumer population can be trained to value price over selection and convenience.
Jet’s strategy offers Walmart a critical toehold
Jet is chipping away at Amazon’s e-commerce dominance in the same way, and its success just 12 months out of the gate has proven that the battle for the e-commerce kingdom is far from over. The company has already hit a $1 billion run-rate gross merchandise value. It’s no wonder, then, that Jet is such an attractive buy for Walmart, which has been modeling its e-commerce strategy on Amazon’s for years. That mimicry hasn’t gotten the company very far, however, with Amazon far outpacing it in every facet of the digital game. Walmart now realizes that its path to success lies in fighting back in a nontraditional way, and has chosen Jet as its key differentiator.
Jet gives Walmart a smart, alternative model for competing with Amazon. Rather than struggling to find that same balance of price, convenience and selection that Amazon has nearly perfected with Prime, Jet strives to gain loyal customers by valuing price above all. Lore and his founding team of repeat entrepreneurs are playing their own game by their own rules, and in Jet they’ve built an operation that’s already claimed a meaningful share of the ecommerce market. Backed by Walmart’s supplier clout, customer reach, and balance sheet strength, we expect Team Jet to be upping their game radically in the months and years to come.