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Walmart, the world’s largest physical-destination retailer, hasn’t needed to envy many of its competitors, but Amazon.com—the world’s largest online retailer—is certainly one of the few.
Thus, in an effort to catch up with the Seattle-based superseller on the web side of the business, Walmart on Aug. 8 took a major gamble on a new-generation e-commerce application builder Jet.com and bought the company for $3.3 billion in cash and stock.
It was the largest acquisition on record of an e-commerce company in the two decades that people have been buying merchandise online.
Jet.com, based in Hoboken, N.J., whose first general availability day was July 21, 2015, set out from the beginning to disrupt both Amazon.com and Walmart by undercutting prices when and wherever possible. It has raised more than $800 million in venture and personal capital since its inception.
No Profitability Yet, but It’s Only Been a Year
Naturally, in a little more than one year the company wasn’t close to recording a profit, but promise and potential are what Walmart was seeking. Walmart has all the profit it can handle at this time.
CEO and co-founder Marc Lore will continue to run Jet.com in addition to Walmart’s U.S. e-commerce operations after the acquisition closes, according to sources cited by ReCode.
The transaction includes $3 billion in cash, as well as $300 million in Walmart stock that will be paid out over time as part of an incentive bonus plan for Jet executives.
With the deal, Walmart CEO Doug McMillon effectively admitted that his company needs outside help if it’s ever going to close the substantial online sales gap with Amazon. Time will tell if that is the right strategy for the brick-and-mortar retailer.
“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,” McMillon said. “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.”
Popular with Millennials
Despite its brief time in business, Jet.com has been popular, especially with Millennials, the first generation of true digital natives. Among other things, McMillon said, Jet has:
–Demonstrated the ability to scale with speed, reaching $1 billion in run-rate gross merchandise value (GMV) and offering 12 million SKUs in its first year.
–A growing customer base of urban and Millennial customers, with more than 400,000 new shoppers added monthly and an average of 25,000 daily processed orders.
–Best-in-class technology that rewards customers in real time with savings on items that are bought and shipped together, thereby reducing the supply chain and logistics costs often buried in the price of goods.
–A select group of more than 2,400 retailer and brand partners tailored to create an attractive and distinctive assortment for consumers.
Jet Uses Data Analytics to Find Best-Priced Items
Why was Jet.com so attractive to Walmart? Largely because it was born with new-generation IT in its formulas, including machine learning, analytics and big data batch processing.
Jet.com uses data analytics to scour through thousands of vendors to offer the lowest prices on items dialed up by buyers. The shopping cart then calculates the amount saved in addition to the retail total for the customers.
E-commerce analyst Profitero compared more than 16,000 exactly matched products across seven categories on Jet, Amazon and Walmart. It determined that Jet was priced an average of 9 percent lower than Amazon and 6 percent below Walmart.
Jet has always priced aggressively, especially on key household essentials, such as baby, beauty, pet supplies and household products, Keith Anderson, Profitero vice president of strategy and insights, said in a report last year.
“Price competition is at the center of Jet’s strategy, and the price comparisons Jet includes on its own product pages are likely to intensify competition,” Anderson said.
Anderson said that there were some price disparities across the categories, which included the baby, beauty, electronics, grocery, household, office supplies and pet sectors. For Amazon’s best-selling products, the research showed that Jet was 8 percent lower in price.
Profitero considers exact matches to be products that are identical (same UPC, brand and pack configuration). However, the company said that it’s important to note that all pricing analyses do not consider extra discounts at Jet from combined orders, waived returns and preferred payment methods.
By the way, there is plenty of head room for competitors new and old in the online retail market. According to industry analysts, about $300 billion in sales were recorded worldwide in 2014, and that’s expected to blossom to $414 billion by 2018.
The deal is expected to close in the fourth quarter.