Amazon, Walmart rival Jet.com launches new e-commerce model

HOBOKEN, N.J. – Marc Lore's ambition is as spectacular as his view of the sparkling Manhattan skyline.

From new headquarters on the Frank Sinatra side of the Hudson River, the former Quidsi founder's latest venture – Jet.com – plans to take on online shopping's biggest players, from Amazon to Walmart.

Jet's consumer proposition is as simple as its algorithms are complex: Spend $50 a year for a membership and you get the Web's lowest prices on 10 million-plus goods.

Fueled by $225 million in funding ("Though it will take much more to get us on the e-commerce flywheel," says Lore) and encouraged by months of beta testing with 150,000 customers ("We saw repeat rates of more than 50%," he adds), Jet rolls out nationally Tuesday with a three-month free trial.

With the proper runway, Jet could take off. E-commerce sales totaled $300 billion last year and will surge to $414 billion by 2018, according to Forrester Research. Currently, e-commerce represents less than 10% of retail sales, and some analysts predict a jump to 30% by 2030.

With average savings of 10-15% on most items, Jet's niche is the cost-conscious, from millennials on a budget to boomers hunting coupon-less savings.

"It's simply about undercutting everyone," says New Jersey native Lore, whose calm demeanor belies his boundless energy. "We make money only on the memberships, so we can cut profit margins to zero. But the real secret sauce is our technology. It's more a real-time trading site than an e-commerce site."

Here's how Jet works. As you add items to your basket, a discount tally starts accruing. The more you add, the bigger the discount, aided by specific choices such as opting out of a product return (a cost that Lore says is built into most shipped goods) and non-credit card payments (debit cards and linked checking accounts cut your final bill).

ALL ABOUT A KETCHUP BOTTLE

Lore's real-time trading reference speaks to the system's ability to adjust your discount based in part on where suppliers are. The closer the supplier, the lower the price. It gets Lore thinking about a bottle of ketchup.

"The a-ha moment for me was thinking about the profitability of a single SKU," he says excitedly. "On one Heinz ketchup bottle we could either lose 20% if it had to ship cross-country, or make 20% if it was near. So we thought, let's give retailers the ability to compete for that ketchup depending on where the order comes from."

When USA TODAY shopped for a handful of identical products on Jet and Amazon, the former order totaled roughly 30% less. Jet did not have certain products we tried to order (such as Bose QuietComfort 25 headphones), and Amazon required us to join Prime for some items (such as a certain size Corn Flakes box).

Lore has been mulling Jet ever since he sold household-product site Quidsi to Amazon in 2010 for $545 million. Although financially secure, the entrepreneur says Jet was a reaction to his need to apply lessons learned.

"I realized it's not really about customer service, because that's hard to define, is it answering the phone faster, being nicer?" he says. "If you want to be an e-commerce success, it has to be about maximizing along scale. It's critical to win on price."

Lore insists he isn't encouraging a duel with his former boss, Jeff Bezos, whose site's razor thin margins are offset by its massive $90 billion annual revenue. In fact, Lore points on that in many ways Jet is the anti-Amazon.

"The Amazon Prime model (where $100 a year gets you free fast shipping) encourages you to add inefficiency to the system," he says, sitting in a small common office because he prefers to spend most of his day wandering around talking to his 300 employees one on one. "At Jet, the idea is the bigger your basket, the more cost you pull out of the system and the more you save."

Gartner analyst David Mitchell Smith says that Jet's hybrid formula – part Costco membership approach, part Amazon online shopping mall – may well appeal to a market segment that has yet to be exploited.

But he adds that "the critical issues will be watching how Amazon and others respond, and to make sure Jet can scale up volume as quickly as possible," he says. "It may not be enough just to optimize (the process) around technology."

CAPITAL CRITICAL TO EARLY DAYS

In its initial stages, Jet is likely to have to use its capital raises – led by the likes of Bain Capital and Accel Partners, leading to a pre-launch $500 million valuation – to artificially keep prices low until its sales ramp up, says Matt Nemer, retail and e-commerce analyst for Wells Fargo Securities.

"You need scale to compete with Amazon, so cash burn in the early days will be to create false scale and cover for low initial membership numbers," says Nemer, whose notes on Jet also include ordering similar items from Amazon and Jet and finding the latter yielded a 36% discount.

Nemer says he likes Jet Anywhere, a feature that allows customers to save on products from 700 sites such as J. Crew and Gap. Also in Jet's corner, he says, is the fact that Amazon has trained many shoppers to buy mainly on impulse. He points to the critical social media commentary that accompanied Amazon "Prime Day" sale last week.

Lore acknowledges the trip ahead will bring challenges, but he's eager for Jet's flight to begin.

"One of our goals is $20 billion in product sales in five years, but another is to be a great company where people feel connected to the mission," says Lore, noting that everyone at Jet makes the same salary within each of 10 department bands. "It's all about learning what it takes to make people happy, from your employees to your customers. That's what we're trying to get right."

Follow USA TODAY tech reporter Marco della Cava on Twitter: @marcodellacava