Apparently deciding that the billions it was spending on omnichannel commerce and its big Walmart Labs operation in Silicon Valley wasn't getting the job done, Walmart confirmed Monday the rumors that started late last week that it was going to acquire ecommerce platform provider Jet.com for $3.3 billion.
That deal include $3 billion in cash and $300 million worth of Walmart stock. That $3 billion is about 40% of the $7.6 billion or so Walmart had in cash and other very liquid assets, so this was a major investment indeed.
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Why the deal?
Despite being the second largest retailer in on-line sales, Walmart was still well behind Amazon.com and losing ground. In the last fiscal year, Walmart's ecommerce sales were in the US were just shy of $14 billion compared to $63.7 billion at Amazon.
But the bigger issue was growth Walmart's year-over-year ecommerce sales growth in the latest quarter was just 8%, compared to Amazon's 28% US sales growth, as Amazon increased it huge lead quarter after quarter. That 8% Walmart growth is just over half of the 15% rate for all US ecommerce sales, according to Dept. of Commerce statistics.
Even worse, Walmart's total US revenues (traditional store and on-line) grew by $9.3 billion last year compared to nearly $12 billion growth in Amazon's sales from on-line alone.
By comparison, Staples does more than half of its overall sales online, according to eMarketer, and was just shy of Walmart in ecommerce sales total last year. Target only did $2.5 billion on-line last year, but is growing at a rate of roughly 30%.
But with Jet.com, primarily a provider of marketplace services for other etailers similar to China's Alibaba, without significant capabilities to warehouse inventory and fulfill orders – Walmart gets a fast growth platform, albeit at a steep price.
Just about 18 months old as a company, Jet.com's achieved Gross Merchandise Value (GMV) of $1 billion within a year of operations. GVM measures how much product was sold through the Jet.com platform, of which Jet gets a percentage of commission from the etailers operating on the Jet marketplace, just as Alibaba receives from its etail customers and Amazon receives from its marketplace offering.
Jet.com also has said it sees 400,000 new buyers every month on its shopping platform, and offers 12 million items for sale across all its partners.
Jesse Atlas, a stock analyst at Waterman Research, wrote on the Seeking Alpha web site this week that the deal is likely a good one for Walmart, if it can ultimately leverage its store network for fulfillment.
"Walmart's misguided attempt to compete with Amazon by throwing money at the problem without a strong leader with ecommerce experience has been a spectacular failure," Atlas wrote. "However, I believe this acquisition could help Walmart immensely thanks to the talent it will bring onto its team, and the cohort of millennial shoppers Walmart will gain access to."
Atlas wrote that the only advantage Walmart has over Amazon is its massive network of stores around the world.
As Amazon continues to build fulfillment centers, Atlas says that "If Walmart is able to come up with an efficient way of layering delivery technology over its existing network of stores, which could function like warehouses, it would be able to compete with fast delivery services like Amazon Prime."
He adds that outside of grocery pick up, Walmart has essentially failed to make significant use of its valuable store network to date.
Another key part of the deal is Walmart for at least some time now having Jet.com founder and CEO Marc Lore continuing to run the business.
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It turns out that in 2005, Lore founded a company called 1800DIAPERS, which eventually was rebranded and became Diapers.com. From 2005 to 2012, Lore and his co-founder Vinit Bharara launched a collection of websites that catered to selling home products to families, under an umbrella company called Quidi. In 2011, Quidi was acquired by Amazon for just over $500 million in  cash, and Lore went to work at Amazon for two years.
According to the Mashable web site "Qudsi utilized scores of algorithms in order to optimize warehousing and shipping and to maximize margins."
And Jet.com may also bring millennial shoppers to Walmart that have been flocking to Amazon.
"In the eyes of many millennials Jet.com is cool and Walmart is not," Atlas says. "Walmart is an old, very well established, brick and mortar retailer from the heartland of America. Jet.com is a fast growing, well funded, web first, start-up."
During a press call on Monday, Walmart CEO Doug McMillon described Jet.com as "more urban and more millennial than Walmart.com", adding that "Jet has been able to attract some brands that we don't have at Walmart."
It also attracts more higher income, upscale shoppers.
Jet sells everything from household goods and groceries to electronics and furniture. It aims to be cheaper than its competitors by using a model that gives customers a bigger discount when more items are added to an order. Walmart will look into adopting that strategy for its website once the deal is finalized, Walmart spokesman Dan Toporek says.
Jet.com for now will remain a separate brand and business unit, though Lore will be in charge of both jet and Walmart.com
But another Wall Street analyst, Christopher Flens-Batina, noted in his comments on the deal that "Walmart shareholders would have been better served by an in-house strategy that borrowed good ideas from their competitors, possibly through executive hires from those companies."
And Charlie O'Shea, lead retail analyst for Moody's, added that "No one catches Amazon on-line. The key is to be No. 2. Acquiring Jet helps differentiate Walmart and give it a leg up on its brick-and-mortar brethren."
Walmart's big acquisition of Jet.com - smart strategy or not? Why? Worth the price? Let us know your thoughts at the Feedback section below or the link above to send an email.
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