Wal-Mart (WMT, Financial)’s decision to buy e-commerce company Jet.com for $3.3 billion last month was the kind of push their fledgling online operations needed. Until the acquisition, Wal-Mart had pumped billions of dollars into building its online business, but it came up woefully short of the numbers that its chief rival Amazon (AMZN) was able to report on a consistent basis. With Amazon’s sales in North America growing at an alarming pace, Wal-Mart knew it was running out of time to stop it from poaching a bulk of its current and future customers.
After seeing its numbers steadily decline since 2015, e-commerce sales picked up some speed this year and after the Jet.com acquisition, the pace seems to have gone up a notch. Wal-Mart’s global ecommerce sales have grown sequentially by 7.0%, 11.8% and 20.6% in the first three quarters of this year, respectively.
Walmart CEO and President Doug McMillon said in an earnings call: “It’s great to see an improving ecommerce business complement the momentum we have in our stores. One of the reasons Jet.com makes sense for Walmart is the common ground we share with basket economics. Wal-Mart's advantage has always been in providing the lowest prices on a basket of goods, and Jet has created a unique way to deliver the lowest cost basket online."
Jet.com’s current position in the e-commerce world, vis-a-vis Amazon, is a David-and-Goliath relationship. Jet.com barely crossed a billion dollars in sales this year and as a much smaller company, it focuses on technology to provide the best possible pricing for its customers. Wal-Mart’s focus has always been everyday low prices or, to put it another way, as low a price as possible on every single SKU. Those two synchronous philosophies are why the Wal-Mart-Jet combination makes so much sense. But that is not the only synergy Wal-Mart can take advantage of.
Wal-Mart currently has 421 discount stores, 3,508 supercenters and 705 neighborhood markets, and looks set to multiply those numbers in the next few years. That is a footprint that is unparalleled in the U.S. Their logistics network is already in place and with Jet’s current management team and the technology to power their ecommerce operations, Wal-Mart does have a solid opportunity to expand its reach in the segment.
“We immediately set up teams to accelerate our integration efforts and we're working hard to leverage our strengths, such as optimizing our combined fulfillment networks, utilizing our scale in areas like shipping, sharing our assortment and leveraging the strengths of our marketing teams," said McMillon in Wal-Mart's third-quarter earnings release.
It is still too early to call the acquisition a great success, but Wal-Mart has the right ingredients to turn this into a success story, provided the company is willing to chip away a billion dollars at a time, one year at a time. Expand too aggressively, and it runs the risk of cannibalizing its own customer base. It has to be a fully orchestrated effort unlike its undertakings in the German market, which eventually led to closing their shutters altogether.
Wal-Mart is at the threshold of its biggest opportunity in the e-tail market, but its physical retail strengths can only go so far in helping its e-commerce segment grow. The rest depends on strategy, synergy and respect for market sensibilities. Now more than ever, it cannot afford to have a lackadaisical, “Oh, it’s my own backyard so I’m going to kill it” attitude.
Disclosure: I have no position in the stock mentioned above and no intention to initiate a position in the next 72 hours.
