Wal-Mart Looks to Keep Pace with Amazon

Jet.com looks to leverage Wal-Mart’s massive physical store network to grow its online business

Source: Company's Website
Source: Company’s Website

Retail giant Wal-Mart Stores Inc. (NYSE: WMT) is channeling all efforts to keep pace with rival Amazon.com Inc. (NASDAQ: AMZN), which overtook Wal-Mart by market capitalization a year ago and now has a market value that is 50% larger. While Wal-Mart’s e-commerce sales were nearly $14 billion, or 3% of its $482 billion FY15 revenue, Amazon’s revenue, including its Web-services business, leapfrogged to $107 billion in FY15.

Source: Reuters
Source: Reuters

To boost e-commerce sales that has slowed for nine straight quarters, Wal-Mart has committed $2 billion over two years to build new fulfillment centers to speed up delivery time and increase the number of product categories sold on its website, apart from local grocery delivery and curbside pickup services. As part of its plans to take competition head-on with Amazon, Wal-Mart is now in talks to buy online discount retailer Jet.com, which was started and led by Diapers.com founder Marc Lore in July 2015, as reported by The Wall Street Journal on August 3rd, 2016.

Jet.com growing at a scorching pace

The Hoboken, New Jersey-based Jet.com raised more than US$500 million in less than a year, and is looking to capture a 4% share of the growing e-commerce market in the U.S. Jet.com settled in November 2015 with investors at a value of $1.35 billion, entering the elite club of startups to cross the billion-dollar mark within a year. The Company has differentiated itself from other e-commerce retailers through its smart-cart real-time savings engine that entails customer to massive discounts as they shop. Through this technology, Jet.com sought to revolutionize e-commerce logistics by calculating in real-time the most efficient way to fulfill orders and pass those savings onto shoppers.

The possible Wal-Mart-Jet.com deal could prove to be a win-win situation for both parties since it would also allow Jet.com plans to leverage Wal-Mart’s massive physical store network to grow its online business. Besides the reach and convenience, Wal-Mart’s massive network of physical stores would offer both companies another channel to acquire customers while providing a faster purchasing experience. Thus, the possible deal will highlight the growing trend for brands that are looking to offer customers touch points across all channels, more importantly offline stores.

According to Jet.com’s data, in July 2016, the company crossed US$1 billion run rate in gross merchandise value (GMV) with over 4 million shoppers on its platform. Jet.com’s real-time savings technology has been a huge hit among consumers, who are building large baskets with over six units per order and a relatively high average order value of over US$80. However, the Company is still heavily investing in its brand-building efforts and is yet to reach profitability. With the rise of omni-channel retailing, both Jet.com and Wal-Mart believe that fine-tuning their e-commerce services will be the key to future growth.

What is Wal-Mart looking for in the prospective deal?

E-commerce has indeed proved to be a laggard for Wal-Mart, which has not been able to cut prices of its products due to costs associated with recent wage hikes and investments aimed at closing the gap with Amazon.com. Deceleration in Wal-Mart’s e-commerce business is a cause for concern; the Company’s 7% constant-currency growth in e-commerce in Q1 FY16 is down from 8% growth in Q4 FY15 and 17% growth in Q1 FY15. As a remedial measure, the Company is investing billions of dollars in setting up new fulfillment warehouses to speed up delivery times and increasing the number of products sold on its website.

Source: Wal-Mart
Source: Wal-Mart

Apart from Jet.com’s scorching pace of top-line growth, Wal-Mart is closely watching Jet.com’s ambitious five-year growth plans to reach US$20 billion in GMV by 2020. Despite its dominance in U.S. store-based retailing with a 13% market share, Wal-Mart ranks 4th in e-commerce sales with just 3% market share, as compared with leader Amazon.com with over 31% market share. Hence, the potential deal to acquire Jet.com would allow Wal-Mart to effectively compete with e-tailing giants such as Amazon.com and eBay Inc. (NASDAQ: EBAY), and improve online services with Jet.com’s innovative e-commerce practices.

Jet.com has also doubled its one-day delivery (of its own first-party products) penetration rate from 25% to 50% of U.S. households since its launch, something that Wal-Mart might not be able to achieve anytime soon. Moreover, by strategically locating its distribution centers and streamlining its logistics, Jet.com has been able to cover 99% of U.S. households for two-day delivery. In high-density regions such as New York City, Jet.com often is able to offer same-day delivery at no additional cost. Hence, Wal-Mart believes that it will gain significantly from Jet.com’s logistics and delivery expertise.

Source: Company's Website
Source: Company’s Website

Wal-Mart’s e-commerce operations would also get a fillip from Jet.com’s sophisticated pricing software, as well as warehouses and customer data. Moreover, the retailer also would get a brand that can appeal to higher-income shoppers, something Wal-Mart has not been able to do. According to Kantar Retail and as reported by The Wall Street Journal, Walmart.com shoppers’ mean annual household income was $58,000 in 2015, while Jet.com has been attracting a more affluent shopper base.

Furthermore, Wal-Mart has recently been making a bigger push into the marketplace model, which aligns well with Jet.com’s model. Jet.com has 2,300 retailers selling on its platform and 12 million products. Both companies are working to increase their product portfolios by working with committed sellers, and by supporting their sellers with technology. Hence, both companies could work on a lot of synergies if the potential deal comes through.

Ironically, Wal-Mart had in the past considered acquiring Quidsi, Marc Lore’s previous company. However, a delay on Wal-Mart’s part resulted in Amazon.com acquiring Quidsi in 2011 for US$545 million and integrating it into its operations.

A potential deal to acquire Jet.com, valued at roughly $3 billion, could be Wal-Mart’s biggest acquisition since buying South African retailer Massmart Holdings Ltd. for $2.3 billion in 2010. The possible deal could give wings to Wal-Mart’s serious efforts to grow beyond its brick-and-mortar storefronts.

Stock Performance

W5Wal-Mart’s stock ended the day at $73.76, gaining 0.63%, at the close on Friday, August 5th, 2016, having vacillated between an intraday high of $73.95 and a low of $73.46 during the session. The stock’s trading volume was at 5,403,973 for the day. The Company’s market cap was at $229.35 billion as of Friday’s close.

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