Why Wal-mart wants to buy Jet.com and what you need to know about the potential deal

It was recently announced that Wal-Mart Stores Inc. is in discussion to acquire an up and coming US etailer, Jet.com.

Jet.com seeks to revolutionize the logistics of ecommerce

Marc Lore founded Jet.com just last year in July 2015. He’s known for his previous ecommerce ventures such as Quidisi.com. Jet.com raised more than US$500 million in less than a year, and was highly anticipated to capture a large share of the growing ecommerce market in the US.

Jet.com differentiated itself from other ecommerce retailers through its real-time savings engine that gives customers the power to drop prices while they shop. Through this technology, Jet sought to revolutionize ecommerce logistics by calculating in real-time the most efficient way to fulfill orders and pass those savings onto shoppers.

Jet.com showed impressive growth within a year

Based on the data released by the company in July 2016, the etailer has shown impressive topline growth, crossing a US$1 billion run rate in gross merchandise value (GMV) with over 4 million shoppers on its platform. Executives from Jet.com have also emphasized that customers are, in fact, embracing Jet’s real-time savings technology by building large baskets with over six units per order and a relatively high average order value of over US$80. In July 2016, executives from Jet.com revealed that the company is still heavily investing in its brand-building efforts and had not yet reached profitability.

As ecommerce sees continued growth, retailers both online and offline are ramping up their ecommerce efforts. With the rise of omnichannel retailing, perfecting ecommerce services will be key to future growth for all types of retailers.

Wal-Mart is likely after Jet’s assets other than gross merchandise value

Even though Jet.com reached an impressive run rate of US$1 billion in less than a year, US$1 billion is not much in the big world of ecommerce (less than 1% of the total market in 2015). Therefore, it is likely that Wal-Mart would like other things from Jet.com (described below) other than gross merchandise value from this acquisition. However, it could be that Wal-Mart believes in Jet’s ambitious five-year growth plans to reach US$20 billion in gross merchandise volume by 2020. Growing from zero to US$20 billion in five years is faster growth than what Walmart.com has achieved from 2010 to 2015, so there is a chance that the acquisition is for online GMV growth. But even at US$20 billion in 2020, Jet.com would only have 4% of the ecommerce market in the US.

Acquiring Jet.com will enable Wal-mart to become more competitive online

Despite its uncontested dominance in US store-based retailing with 13% market share (followed by Kroger with just 4% market share), Walmart ranks 4th in ecommerce sales with just 3% market share. The leader of US internet retailing is Amazon.com with over 31% market share.

Acquiring Jet.com would allow Walmart to become more competitive with etail giants such as Amazon and eBay, as Jet’s innovative ecommerce practices would greatly assist Wal-Mart to improve its online services. By strategically locating its distribution centers and streamlining its logistics, Jet has doubled its one-day delivery (of its own first-party products) penetration rate from 25% to 50% of US households since its launch, and is approaching 99% of US households for two-day delivery. In select high-density regions such as New York City, Jet often is able to offer same-day delivery at no additional cost to both Jet and its shoppers. Wal-Mart will gain significantly from Jet’s logistics and delivery expertise.

Additionally, Jet.com has already expanded into grocery delivery, something that Wal-Mart has yet to experiment with. Although Jet is still in its trial period for grocery delivery, the etailer has received positive feedback from customers. Jet’s learnings from this experience can greatly add to Wal-Mart’s very likely attempt at grocery delivery in the near future.

Furthermore, Wal-Mart has recently been making a bigger push into the marketplace model, which aligns well with Jet’s model. Jet.com has 2,300 retailers selling on its platform and 12 million products. Both companies are working to increase their product portfolios by working with committed sellers, and by supporting their sellers with technology.

Other bidders may emerge

In the past, Wal-Mart had discussed the possibility of acquiring Quidsi, Marc Lore’s previous company, but did not move quickly enough. Instead, Amazon.com acquired Quidsi in 2011 for US$545 million and integrated the company into its business. It will be interesting to see if other bidders emerge.