C Citigroup Inc

Jet.com Inc. is already abandoning the main business model behind its new discount-shopping site, a surprising turnabout for what many viewed as the most promising challenge to Amazon.com Inc. in years.

The Hoboken, N.J., startup said Wednesday it will do away with the required $50 annual membership fee less than three months after launching the site. Jet had insisted the fee would stand as its sole source of profits, giving back commissions it collects on the sale of merchandise to customers in the form of lower prices.

The move casts doubt on the viability of one of this year's most-hyped startups, and suggests Jet had trouble signing up customers through free trials. Even before it opened the site to the public in July, Jet had raised $225 million in capital from investors including Goldman Sachs Group Inc. and Google Inc.'s Google Ventures.

Without the membership fees, it isn't clear how Jet will sustain lower prices than Amazon's—its key pitch to customers—while also funding a massive advertising campaign. Jet projected it wouldn't reach profitability until 2020.

Jet's founder, Marc Lore, who also created Diapers.com and later sold that company to Amazon, liked to say his new site would be akin to an online Costco.

"We're saying we're not going to make a profit, we'll make a profit from membership," said Mr. Lore in an interview in July for a page-one story in The Wall Street Journal. "So we take commissions we get from merchants and it comes off the price. [Amazon must] keep the commissions as a profit. That's the difference."

Mr. Lore declined to comment for this story. In a blog post announcing the removal of the membership fee, Mr. Lore said Jet would offer a year of free shipping for early members, with no minimum order size, adding to its expenses.

Investors were drawn to Mr. Lore's unusual business model. He promised prices up to 15% lower than Amazon's by plowing the commissions back into prices, as well as rewarding customers for combining orders so that vendors could cut shipping prices.

Unlike Amazon, Jet is a pure marketplace holding very little inventory and relying instead on brands, manufacturers and resellers who maintain their own warehouses and fulfillment networks.

Jet handed out free memberships, offering trial periods of between three months and one year, meaning very few if any users had to pay the $50 fee. It plastered the coupon codes on buses, subway posters and taxi cabs in a projected $100 million marketing push during the first 12 months from the July launch, adding to pressure on the company to find a way to make money quickly.

If Mr. Lore had carried through with his original plan, he would have faced an uphill battle because Jet would need to constantly add new customers to grow revenue with the membership fees. Every Jet customer would be just as valuable to the bottom line because the company wouldn't profit from bigger spenders.

That stands in contrast to Amazon and its $99-per-year Prime membership, because the Seattle company profits from the commissions it collects for sales on its site. Amazon can cut prices through negotiating with suppliers and reducing the cost of its shipping and delivery network. Revenue for Amazon is on a pace to reach $100 billion this year.

The move away from a subscription fee means Jet will have to employ more traditional methods to turn a profit, like keeping a portion of commissions for itself or charging merchants other fees like those for preferred placement on the website, a common tactic among other e-commerce sites. If it keeps more of the commissions that means it can no longer promise the low prices that is the big selling point of the site.

The Wall Street Journal learned in July that Jet was using a tactic to build out its inventory by buying goods from other companies' sites and shipping them to Jet customers. It is an expensive proposition because Jet paid the full retail price, as well as shipping and the cost of returns.

In an analysis at the time, the Journal found that 12 items among 22 purchased on Jet were shipped by retailers such as Wal-Mart Stores Inc. and Nordstrom Inc. Jet's prices for the 12 items added up to $275.55, an average discount of about 11% from the prices Jet paid for those items on other retailers' websites. Jet's total cost, including estimated shipping and taxes, was $518.46. As a result, Jet had an overall loss of $242.91 on the 12 items.

Many of the retailers were unaware their merchandise, photos and product descriptions, in some cases, were being listed on Jet's site.

Write to Greg Bensinger at greg.bensinger@wsj.com and Rolfe Winkler at rolfe.winkler@wsj.com

Access Investor Kit for "CitiGroup Inc"

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US1729674242

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

October 07, 2015 14:25 ET (18:25 GMT)

Citigroup (NYSE:C)
Historical Stock Chart
From Mar 2024 to Apr 2024

Citigroup (NYSE:C)
Historical Stock Chart
From Apr 2023 to Apr 2024