10 People Built an Amazon Competitor for $1 Million—in Just 90 days

If Amazon is the online Walmart, Boxed is the online Costco.

CHRISTOPHER MIMSNOV 22 2013, 12:52 PM ET

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Reuters

“Being a scrappy startup, it’s funny to see some of our designers forklift once in a while,” chuckles Chieh Huang, CEO of Boxed. Unlike most of Silicon Valley, which seems obsessed with multi-billion-dollar valuations for whatever ephemera the kids are into these days, Boxed moves just as many atoms as bits. It’s an online store that, like Amazon, will deliver whatever you buy to your door—but only in bulk. If Amazon is the online Walmart, Boxed is the online Costco.

Boxed began building its e-commerce platform just six months ago, with a little over $1 million in initial funding. Three months later, it went live with an app for the iPhone (there’s now an Android app too but so far, at least, it’s not building a shopping website) and a pilot program delivering in New York and New Jersey. It rapidly expanded, and as of a week ago, it can now ship to everywhere in the lower 48 states of the US. Shipping is free on orders of $75 or more, and they are delivered overnight to Philadelphia, Washington DC, Boston, New York and Los Angeles, and within two days to everywhere else.

Scaling at that rate is easy for software-only companies. Doing it for a nationwide retail operation, with supply chains and warehouses and delivery logistics, using a team of just 10 engineers and project managers who mostly came from building mobile games, feels like a minor miracle.

Part of the secret is that a lot of the physical work can be farmed out to others. UPS handles the “last mile” problem of delivery so well that Boxed doesn’t need a fleet of trucks, just some warehouse space in which to store goods before sending them out. (Amazon, likewise, relies on others for delivery.) The warehouse is rented. The wholesale goods themselves are ordered directly from manufacturers, and Boxed doesn’t re-package them.

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That meant the main problems to be solved were software problems. One of those was inventory management. ”Early on, we realized most warehouse management software out there is utter crap,” says Huang, referring to the systems used by warehousing companies that aren’t giants like Target and Amazon. “Everything on the back end powering our logistics we built from scratch.”

In order to offer Costco-like prices and free overnight shipping, Huang and his team also had to figure out where to store goods so that they’d be a single UPS truck drive away from the biggest cities on the east coast. They settled on a warehouse in New Jersey. Their proprietary software manages the contents of the warehouse.

To accomplish the same thing on the west coast, Boxed contracted with a warehouse company in Las Vegas. That ensures overnight delivery to Los Angeles, and a hub from which to reach the rest of the country. Eventually, says Huang, Boxed will build its own warehouse. For perspective, Amazon has spent $14 billion on warehouses since 2010, in order to speed its own delivery times.

The other main problem to solve was the part customers see—the app and its underlying e-commerce platform. That took just three-and-a-half months to build, according to Huang. “It was actually a lot easier to build than a game.” The roots of Boxed in gaming—most of the company’s engineers and designers previously worked with Huang at Astro Ape, a games company he founded, or  Zynga, which later acquired it—are apparent in the app, which has big, friendly icons and a mascot like a game character.

Stay Away From the Heavy Stuff

Boxed has been generating revenue from the day it launched, and while it offers free shipping on orders above $75, it has kept costs low by carrying only a limited range—currently about 600 items. Those are the things people are most likely to buy, says Huang.

Except, that is, for things like bottled water and 50-pound bags of dog food. Items that are especially heavy and especially cheap break the business model.  ”Bottled water selling for $3 apiece doesn’t make sense right now—we would lose $30 per order,” says Huang. “But detergent, we found a way to make that work.”

But What About Amazon?

New parents love Amazon for overnighting huge parcels full of diapers and other essentials. So it’s curious that something like Boxed needs to exist at all. But in Huang’s view, “Amazon doesn’t do wholesale. If you look up stuff we sell in sizes we sell, Amazon either doesn’t carry it, or they carry it through a reseller who marks it up 25-30% higher than we do. Online, there’s not many things per unit that are cheaper than what we sell right now.”

Like most new businesses, though, the concept isn’t the one it started with. When Huang and his team started Boxed, they thought their most avid buyers would be young, technologically savvy men in cities who would buy things like protein powder and energy bars—but those items barely moved. “It turns out the use case is actually… you’re a mom who would rather spend time with her kids on the weekend than burn a whole afternoon at Costco,” says Huang. As a result, the company’s customers skew heavily female.

In the Future, No One Shops For Toilet Paper

So what next? Having carved out a niche, Boxed now wants to help people shop in a smarter way. The basis of that is a predictive shopping algorithm that Huang’s engineers built from scratch.

Amazon has for years been suggesting things its shoppers might want to buy, based on comparisons between their shopping histories and those of others. Many other online stores do something similar. Huang wants to go further, and understand how customers are living their lives and how fast they consume the things they buy in bulk. The idea is that, as soon as you’re out of toilet paper or granola bars, Boxed will know, and offer to re-supply you before you even think to go shopping.

“With everything going into mobile devices, [in the future] I just can’t imagine us standing in line buying toilet paper,” says Huang. “It just won’t be a part of human behavior. We’re trying to get ahead of that game.”

Tipping Is an Abomination

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Here’s how to get rid of it.

By Brian Palmer

Illustration by Mark Alan Stamaty

When wealthy Americans brought home the practice of tipping from their European vacations in the late 19th century, their countrymen considered it bribery. State legislatures quickly banned the practice. But restaurateurs, giddy at the prospect of passing labor costs directly to customers, eventually convinced Americans to accept tipping.

We had it right the first time. Tipping is a repugnant custom. It’s bad for consumers and terrible for workers. It perpetuates racism. Tipping isn’t even good for restaurants, because the legal morass surrounding gratuities results in scores of expensive lawsuits.

Tipping does not incentivize hard work. The factors that correlate most strongly to tip size have virtually nothing to do with the quality of service. Credit card tips are larger than cash tips. Large parties with sizable bills leave disproportionately small tips. We tip servers more if they tell us their names, touch us on the arm, or draw smiley faceson our checks. Quality of service has a laughably small impact on tip size. According to a 2000 study, a customer’s assessment of the server’s work only accounts forbetween 1 and 5 percent of the variation in tips at a restaurant.

Tipping also creates a racially charged feedback loop, based around the widely held assumption—explored in an episode of Louie, in the Oscar-winning film Crash, and elsewhere—that African-Americans tend to be subpar tippers. There seems to be some truth to this stereotype: African-Americans, on average, tip 3 percentage points less than white customers. The tipping gap between Hispanics and whites is smaller, but still discernible in studies. This creates an excuse for restaurant servers to prioritize the needs of certain ethnic groups over others.

Irrelevant or insidious factors will dominate the tipping equation until quality of work becomes the main driver of tip size, but that’s unlikely to happen. And tip size isn’t the real problem anyway. The real problem is that restaurants don’t pay their employees a living wage. The federal “tip credit” allows restaurants to pay their tipped employees as little as $2.13 per hour, as long as tips make up the shortfall—which turns a customer into a co-employer. Although federal and state law requires restaurants to ensure that tips bring employees up to minimum wage, few diners know that. (Hosts/hostesses, bussers, and food runners, who receive a small fraction of the servers’ tips, often fall short of minimum wage on some nights.) The tip credit has turned the gratuity into a moral obligation, and we ought to cut it from our statute books with a steak knife.

The only real beneficiary of the preposterously complicated tip credit is lawyers. Imagine what it’s like for a company running restaurants in multiple states. There’s no tip credit in some states, like California and Washington, where tipped employees must be paid the full minimum wage. Hawaii allows the tip credit only if the combined tip and cash wage surpass the statewide minimum hourly wage by 50 cents. New York and Connecticut have different minimum wages for servers, hotel employees, and bartenders.

Then you have to consider time that employees spend on activities not likely to yield tips. Applebee’s, for example, has suffered a series of legal setbacks in lawsuitsbrought by tipped employees seeking back pay for time spent cleaning toilets and washing glassware.

The laws regarding tip sharing and tip pooling, which occur in virtually every restaurant, are even more complicated. Federal law allows mandatory tip sharing, but only among employees who customarily receive either direct or indirect tips. That means servers, bussers, food runners, and hosts and hostesses can be required to pool their tips with each other, but not with managers. Unfortunately, the line between service and management is fuzzy in many restaurants, and differences between state laws further complicate matters. A California judge ordered Starbucks to pay $105 million in 2008 for forcing 100,000 baristas to share tips with supervisors. Last week, the New York Court of Appeals reached the opposite conclusion, ruling that New York law allows the arrangement. Chili’s has also lost a multimillion dollar judgment over tip sharing.

The entire mess is begging for some certainty and predictability. Restaurants need a clear set of rules to follow. Servers should have a steadier income stream. Hosts and bussers, who have relatively little interaction with customers, ought not to be involved in tipping at all. Customers need more clarity as well, instead of worrying at the end of a meal if the waiter, or your guests, approve of your 17 percent tip.

I’d like to propose a solution. First, ask your state and federal representatives to abolish the tip credit, which would turn tips back into actual gratuities: something given free of obligation. Second, announce your tipping practice to your server as soon as you sit down. Virtually every other employee in America knows how much they’ll be paid up front, and somehow the man who sells me shoes and the woman who does my dry cleaning still manage to provide adequate service. I have no doubt waiters and waitresses are the same. Finally, tip a flat, but reasonably generous, dollar amount per person in your party. Around 20 percent of Americans, mostly older people, tip a flat amount already, so it’s not exactly revolutionary. A server’s pay shouldn’t be linked to whether or not you have room for dessert.