Why Walmart Just Paid $3 Billion for a Company that is Less than a Year Old
On August 8th, 2016, Wal-Mart Stores confirmed that it is indeed purchasing Jet.com for US$3.3 billion. Wal-Mart Stores issued a press release about the acquisition. This was followed by a conference call with the media hosted by the president and chief executive officer of Wal-Mart Stores, Doug McMillon.
Why buy a company that’s only a year old?
Jet.com’s innovative front-end and back-end technologies were the main reasons for the acquisition. On the front end, McMillon says that he admires the control that customers have over prices by making certain selections. This is in line with Wal-Mart’s philosophy on getting the best price for the customer. The technology also encourages bigger baskets—key for successful ecommerce companies. According to executives from Jet.com, the average basket size is six items with an average order of over US$80. The back-end technology routes the order to the most efficient way of fulfilling the order, saving on shipping costs.
Jet.com has also forged relationships with more sellers on its marketplace model and with brands that wouldn’t work with Wal-Mart. According to Wal-Mart’s press release, Jet.com has 2,400 retailer and brand partners on its marketplace. Overall, Jet.com has 12 million products. Wal-Mart.com has recently put new emphasis on its marketplace model by inking a deal with ChannelAdvisor in April 2016 to sign up more vendors. As of April 2016, Robert W. Baird & Co. estimated that Wal-mart.com only had 300 vendors on its marketplace.
Jet.com’s customers are different from Walmart.com’s customers. Jet shoppers tend to skew towards millennials, urbanites and those with higher incomes than the average Walmart.com shopper.
But probably the biggest reason to acquire Jet.com is to bring Marc Lore, an experienced e-commerce veteran, into the Wal-Mart fold to energize growth at the ecommerce division.
What are the logistics of the acquisition?
Marc Lore will run both Jet.com and Walmart.com and both brands will remain separate. At a later date, Wal-Mart will issue a public filing that details the compensation incentives in place for Lore as well as the financial impact of the acquisition. McMillon praised Lore for his ecommerce mindset and Lore’s plans for both brands. He emphasized that the company’s focus is on growth and profitability. Wal-Mart’s scale should help Jet.com reach profitability faster than its own plans.
In the short term, it’s not likely for much to change on either website. There are plans to integrate some of Jet.com’s technology into Walmart.com and perhaps integrate both onto the same technology platform over time.
What questions remain?
The acquisition of Jet.com is a smart move for Wal-Mart if its execution of the acquisition goes well. Wal-Mart is gaining innovative technology, the ability to quickly scale its marketplace model, a new customer type and Marc Lore. But in the world of digital commerce, slow and poor IT integration, especially a protracted merger onto a single technology platform, could at best be a distraction, at worst a death knell.
And there are a couple of questions that remain as to how some of Jet.com’s initiatives fit into Walmart.com’s overall strategy in core areas:
- 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. This is all with just a required order amount of over US$35. Does Wal-Mart get rid of ShippingPass (its US$49 annual fee for free two day shipping)?
- com is experimenting with grocery delivery. Shoppers in select areas on the East Coast can order a wide range of grocery products including fresh produce, dairy, meat and seafood. During its pilot phase, Jet is offering free shipping on orders over US$35 and deliveries are made within one to two business days. Currently, fresh groceries and delivery are offered only in select East Coast areas but Jet has plans to expand into more cities in the future. Wal-Mart trialed online grocery in 2014, but those trials seem to have gone nowhere. In June 2016, it announced that it’s experimenting with free grocery delivery with Lyft and Uber as partners in Denver and Phoenix. How will the acquisition of Jet.com influence Wal-Mart’s online grocery strategy?