Costco's no-frills warehouses sell bulk products at low margins. Retail upstart Jet.com wants to do the same thing online.

Costco’s no-frills warehouses offer bulk products at low margins. Retail upstart Jet.com wants to do the same thing online. Photo by Rachel Coward.

We’ve heard of the “Costco effect” — the tendency to buy in higher volumes when prices and variety are low, as they are at Costco. This piece of consumer psychology has paid dividends for Costco, which sold more than $110 billion worth of goods last year.

The Costco effect has largely played out in the namesake retailer’s physical stores, where customers can browse and see the deals before their eyes. The same isn’t necessarily true online; Costco’s website is responsible for about 3 percent of sales. But a new shopping startup, Jet.com, is betting that online shoppers will buy as they do at Costco — in bulk, with an eye on prices.

“We’re trying to do something different in that, pretty much anything you want to buy from TVs to toilet paper, you could get 10-15 percent off what you normally spend, without doing anything other than coming to our site and becoming a member,” Liza Landsman, Jet’s chief customer officer, told Wired.

After securing $225 million in venture funding, Jet finally went live this week. The New Jersey company has been billed as Amazon.com’s top new competitor, but its success could have ramifications for the Puget Sound area’s brick-and-mortar wholesale stalwart, Costco.

“Whether it’s BJ’s or Sam’s Club or Costco, all of those are clearly targets. It’s a similar model that (Jet) is going after,” said Piper Jaffray retail analyst Sean Naughton.

The online marketplace’s business plan is a hybrid of Amazon’s and Costco’s approaches. Like Amazon, Jet acts as an online intermediary that facilitates transactions between buyer and third-party seller. In its attempt to trump Amazon, Jet is taking on some Costco traits. Its revenue will be driven by $50 memberships (Costco’s are $55), the lure of which are super-low prices.

When a customer searches for a product on Jet, the company’s search engine hunts for the cheapest third-party items. The discounts deepen depending on how the customer loads his or her cart; buy two items from the same vendor, for example, and a 10 percent discount might climb to 15 percent.

Jet’s trying to become a one-stop online shop, a rarity in today’s fragmented Internet world. It’s a compelling idea that, at its best, could seriously hinder retail giants like Amazon, Costco, and Walmart. If it popularizes bulk shopping online, Costco could have the most to lose. But there are logical flaws in any argument that Americans have long been waiting to buy 60 rolls of toilet paper on the Web.

First is the idea that shoppers, particularly young shoppers, do the majority of their buying online. That’s simply not the case. Millennials, the digital natives that were supposed to abandon big-box retailers like Costco, make 75 percent of their purchases in physical stores. Websites, even with increasingly rapid delivery services, still can’t match the ability of physical stores to facilitate immediate, tangible acquisition.

Naughton said there’s evidence customers will buy in bulk online — Costco’s global online sales have been growing at a 20 percent annual clip — but, “I’m not sure how much of an appetite there is for it. … There’s obviously going to be some pretty hefty costs shipping bulk products.”

Another issue is the notion that urban dwellers would buy in bulk if the option were available online. Those living in city centers, marketers argue, don’t have the trunk space, or a car at all, to haul Costco’s huge packages of granola bars and paper towels. Unfortunately for Jet, urban dwellers with small cars likely have small homes, so even if bulk items are shipped, there won’t be room in the customer’s studio for all those paper towels.

Furthermore, millennials, the demographic most likely to live in city centers, are aging into parenthood and moving into bigger homes — the life stage that falls into Costco’s wheelhouse.

Amazon and Costco, as evidenced by the widespread adoption of their membership plans, could help each other repel Jet. While Prime members can quickly and easily purchase individual products, Costco members can buy cheap bulk products. Those differences are important. “You can have a Costco membership and a Prime membership; those can be relatively symbiotic,” Naughton said. Since Jet’s business model includes elements of Costco’s and Amazon’s, the startup’s ability to trump one might mean it has to trump both of them — a tall order for any company.