On the back of successfully getting its comparable store sales back on track, Wal-Mart (WMT, Financial), the largest big box retailer in the world, made a significant move by acquiring Jet.com, a fast-growing e-commerce company for $3 billion in cash. The acquisition, which is subject to regulatory approval, has been approved by the boards of both companies and is expected to close this calendar year.
“We’re looking for ways to lower prices, broaden our assortment and offer the simplest, easiest shopping experience because that’s what our customers want,” said Doug McMillon, president and CEO, Wal-Mart Stores Inc. “We believe the acquisition of Jet accelerates our progress across these priorities. Walmart.com will grow faster, the seamless shopping experience we’re pursuing will happen quicker, and we’ll enable the Jet brand to be even more successful in a shorter period of time. Our customers will win. It’s another jolt of entrepreneurial spirit being injected into Walmart.” - Walmart News
Though the news was not a big surprise considering how weak Wal-Mart’s growth has been on the e-commerce side of things, it is a significant move in that it shows flexibility rather than rigidity on the part of Wal-Mart.
But the deal itself is a double-edged sword for the company, one that could either take it to new heights or do the exact opposite. Wal-Mart’s e-commerce sales growth has steadily slowed down in the last three years as it reached $13.5 billion last year, a long way away from the $100+ billion that Amazon (AMZN, Financial) registered last year.
To be fair, Amazon has been in this segment for a long time so comparing their sales with Wal-Mart’s is wrong. But comparing their rates of growth is not.
Amazon’s total annual sales growth for the last three years read 21.87%, 19.52% and 20.25%, while Wal-Mart's quarterly sales growth, as you can see from the chart above, has come down from 27% to 7%, a clear sign that despite being smaller in size, Wal-Mart was not able to move the needle on e-tail growth.
So Wal-Mart buying Jet is not only about acquiring a brand, but also the talent that comes with that brand. Jet.com founder and CEO, Marc Lore, will now head Wal-Mart’s entire e-commerce segment while his own company operates independently as a subsidiary of the retail giant.
The key commonality between Wal-Mart and Jet is their pricing strategies. Initially taking the membership route like Costco (COST, Financial) and Amazon Prime, Jet soon did away with their $50 membership fee and started to focus on offering the lowest price possible. The same CNN article also said they were potentially a “very powerful player in retail.”
But possibly the biggest surprise was Wal-Mart agreeing to keep the Jet brand name intact. Naturally, they will be exploring synergies that will help both entities, but as far as branding goes Jet will live on to keep expanding its assortment of curated items at the lowest prices possible.
The synergies will most certainly include giving Jet access to the giant procurement and logistics spider web that Wal-Mart has built over many years, pushing its overall costs to a much lower level and allowing the company to increase pricing pressure on its competitors. And to have the man who built that company run the entire Wal-Mart e-commerce division is the icing on the cake.
Though it is still early to declare this a major e-commerce win for Wal-Mart, everything points in that direction. Can Jet successfully penetrate international markets with the money muscle it now has? Can it cross borders without the ill-will that the Wal-Mart name usually carries? Can it push its prices down even further because of shared procurement and logistics and thereby give Amazon a run for its money?
That is what I will be keeping my eye on where Jet.com is concerned. That and their Neighborhood Markets, which to me, represent the future-ready parts of Wal-Mart’s retail business.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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