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Wal-Mart to buy online retail newcomer Jet.com

Wal-Mart to buy online retail newcomer Jet.com
The deal for online retailer Jet.com underscores how Wal-Mart is trying to compete more aggressively and effectively for younger and more affluent customers. (Brendan Smialowski / European Pressphoto Agency)

Wal-Mart Stores Inc. is buying fast-growing online retailer Jet.com for $3 billion in cash plus $300 million in stock, scooping up a newcomer that launched a year ago with the intention of challenging online leader Amazon.com Inc.

The hefty price underscores how Wal-Mart is trying to compete more aggressively and effectively for younger and more affluent customers as it has seen its online business growth slow despite big investments in distribution centers and expanding services.

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As part of the deal, Jet.com co-founder and Chief Executive Marc Lore will oversee both that site and walmart.com and will report to Wal-Mart CEO Doug McMillon. Lore brings to the role a rich ecommerce resume: He founded Quidsi, the parent of Diapers.com, which Amazon bought for $500 million in 2010.

Analysts say the acquisition still won't enable Wal-Mart to catch up to Amazon in sales, but it will help narrow that gap and should widen the distance between Wal-Mart and other online retailers. The deal also reflects the difficulties for start-ups like Jet.com of making it on their own in a sphere Amazon dominates with its network of distribution hubs and the powerful asset of its Prime membership program.

The move follows a series of other acquisitions by major traditional retailers of online start-ups: Hudson's Bay, which owns Saks Fifth Avenue, purchased flash-sales site Gilt Group, and Bed Bath & Beyond bought One Kings Lane.

And Wal-Mart announced in June that it was forming a partnership with JD.com in China to bolster its presence in that market.

"This acquisition, in tandem with its joint venture in China with JD.com, demonstrates that Wal-Mart is attacking online retail with significant zeal," said Moody's lead retail analyst Charlie O'Shea. "As we believe 'catching' Amazon online is an unrealistic goal for any brick-and-mortar retailer, Wal-Mart now has a definite leg up on its competitors in the very important race to be No. 2 online."

As part of the deal, which Wal-Mart expects to close this year upon regulatory approval, Wal-Mart and Jet.com will maintain separate brands — for now. Walmart.com will stay focused on its low-price strategy and Jet.com will continue offering a curated assortment of products. The acquisition could help Wal-Mart grab a higher-income customer who typically is younger than its existing customers. Jet.com, launched in July 2015, sells 12 million products, from jeans to diapers, and has been growing fast. It has more than 400,000 new shoppers added monthly and an average of 25,000 daily processed orders.

Wal-Mart says it will incorporate some of Jet.com's "smart" technology that lowers prices in real time by looking for ways to cut costs. It is built on a pricing algorithm that determines which sellers are the most efficient in value and shipping and adjusts prices based on what items are in the checkout cart, as well as how far the desired products are from the shopper's location. So shoppers are encouraged to add more to build a more efficient cart and buy items labeled "smart cart" for more savings. For Jet.com, which has been pouring money into splashy TV ads and other marketing, the deal should help accelerate its path to profitability.

McMillon said Wal-Mart customers probably will see lower prices and new brands aimed at millennials that have been carried by Jet.com. Wal-Mart customers may also have more control over creating their own basket to save money.

"We have some cool ideas on how the two brands can work together," he said. As for perhaps merging the two sites eventually, McMillon said Wal-Mart wants to be thoughtful about how it approaches that. "This is about winning over time," he said.

Lore cited the benefits of Wal-Mart's purchasing scale, sourcing capabilities, distribution footprint and digital assets together with Jet.com's team and technology. Jet.com delivers to two-thirds of the country overnight in its purple boxes. In some high-density regions such as New York City, it often can offer same-day delivery at no additional cost.

Lore said he can see helping Wal-Mart with speeding up shipping, among other things. "I'm definitely in this for the long haul," he said.

In its fiscal year that ended in January, Wal-Mart had online sales of $13.7 billion, a fraction of its total revenue of $482.1 billion. And its online figure pales in comparison to Amazon.com's annual net revenue of $107 billion.

O'Shea noted that Apple is the only bricks-and-mortar retailer that outranks Wal-Mart in online sales in the U.S. But Wal-Mart reported in May that its global ecommerce sales rose 7% in the first quarter, weaker than the 8% in the previous quarter and far below the 20% increases seen less than two years ago.

So it trimmed its free-shipping pilot program ShippingPass to two-day delivery from three and cut a dollar off the membership to $49 a year in an attempt to answer Amazon's Prime program. But although Amazon's Prime membership costs $99 a year, it comes with perks that ShippingPass does not offer, such as streaming music and video and household subscriptions.

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O'Shea said that Wal-Mart is "paying a lot" for Jet.com, but that it's too soon to say if it overpaid. Shares of Wal-Mart slipped 42 cents to close at $73.34 Monday. Its shares are up 3% in the last year.

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UPDATES:

3:20 p.m.: This article was updated with additional details.

This article was originally published at 5:55 a.m.

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