A new start-up is taking on the world’s biggest Internet retailer in the battle to deliver ever-cheaper products online.
Amazon is undercutting everyone, from local bookshops to your DIY store. After a food distribution deal it signed with supermarket Morrisons in February, Amazon may even outmuscle the supermarket industry. But what if somebody undercuts Amazon?
US e-commerce site Jet.com is aiming to do precisely that. The firm was only founded two years, but was quickly hyped as a threat to Amazon’s business model. A $3.3bn bid from supermarket giant Walmart, which was announced earlier this week, suggests that at least part of that hype was justified.
Jet.com operates a simple business model. Customers get better deals if they buy in bulk. The more items you add to your basket, the further prices fall. Jet makes zero profit on the items it handles, passing them on at cost price, but makes money by charging a slender $50 annual membership fee. So far it has signed up four million customers.
Jet.com’s founder and Chief Executive Marc Lore has successfully clashed with Amazon before. His previous e-commerce venture, baby-products site Diapers.com, forced Amazon to slash the price of nappies to squeeze his business. Amazon’s baby division was losing $1m a day, but was willing to carry the losses to deter future competition.
Eventually, Amazon bought Diapers.com and Lore’s other e-commerce sites for $545m. In this case another deep-pocketed rival seems to have got there first. Walmart plans to keep Jet separate from its existing online business, but Lore will take charge of both. He is also due to pocket around $750m from the deal.
With 12 million product lines, Jet.com could evolve into a significant rival to Amazon, which already faces wafer-thin margins. Amazon’s sales totalled $107bn last year, having tripled since 2010, but its profit margins are just 0.56%. Rather than lowering its markup, which is typically around 30% per item, Amazon’s founder Jeff Bezos has focused on ever-faster delivery times. For example, the Amazon Prime service charges $99 per annum in the US and £79 per year in the UK, in exchange for a one-day delivery promise.
Jet does not need to compete with Amazon directly, Lore says. Instead, it can become a “very large number two” in the trillion-dollar ecommerce market. Walmart is currently a long way behind Amazon online, handling $14bn of web-based orders last year, rising to $15bn after the Jet deal. But its bricks-and-mortar retail business is nearly five times bigger than Amazon by total sales. Its profit margins are also far wider. Coupling Walmart’s muscle with Jet’s radical online ambitions means that Amazon finally has a serious competitor to contend with.
Bids & deals: Gambling emporium falls apart
An audacious three-way deal that would have created a vast gambling emporium, bringing William Hill and Mecca Bingo under one roof, has quickly fallen apart. Rank Group, which owns Mecca, has teamed up with online gambling outfit 888 to launch a £3.6bn bid for bookmaker William Hill.
For weeks, details of the deal have been leaked, but the offer was formalised this week, only to be promptly rejected by William Hill’s board. It is currently Britain’s biggest bookmaker, boasting profits of £190m last year, but has been left vulnerable to a takeover by smaller rivals. Ladbrokes recently leapfrogged the firm by size by merging with Coral, and William Hill’s chairman dismissed the company’s chief executive last month, saying he needed to “face up” to having failed to deliver a big enough online business. Fierce competition for customers online has prompted a spate of gambling mergers.
Only last year William Hill tried to buy 888, which specialises in online poker. By also combining with Rank, the three companies would command total revenues of £2.7bn, but William Hill has rejected the terms of the deal, saying it “substantially undervalues” the company. A spokesman for 888 responded: “We thought they were a bit rude about us”. Analysts believe a higher offer would bring William Hill back to the table. But a counter-bid for 888 would resolve several difficulties at once for William Hill’s board.
Big movers
Amec Foster
Up 17%
Shares in oil engineering specialist Amec Foster Wheeler rebounded this week, after the company outlined plans to pay down debt. Sales in the US, its key market, have nosedived with the oil price in the last year, as customers in the fracking industry have delayed or cancelled contracts. But the company is planning to offload £500m of assets by next June, halving its net debt from £1.1bn.
BHP Billiton
Up 11%
BHP Billiton, the world’s largest mining company, has continued to march higher, up 80% since January, as investors pile into mining stocks. The industry was hammered last year after a slowdown in China weighed on metal prices, but stimulus initiatives by Beijing have fed through into higher prices for iron ore and copper, BHP’s mainstay commodities. A fatal dam burst at one of its operations in Brazil has forced BHP to set aside $1.3bn in provisions, less than originally feared.
Randgold
Down 10%
Gold miner Randgold fell sharply on the back of poor production figures. Its shares have raced higher with the gold price in recent months, but investors had over-egged expectations. Production has fallen 11% in the last three months, due to “operational wrinkles” and a power outage at the company’s mines in the Ivory Coast and the Democratic Republic of Congo.
Aggreko
Down 14%
Shares in Aggreko, the Glasgow-based generator firm, tanked this week after it warned that a drop in the oil price will dent demand. Its generators are rented by the oil industry and by countries with poor power supply. It also supplies festivals and events, such as the Olympic Games. But after several years of rapid growth, Aggreko’s fortunes have turned since the departure of Chief Executive Rupert Soames two years ago.