Retail watchers have mixed feelings about whether Wal-Mart Stores’ $3.3 billion purchase of Jet.com of Hoboken, New Jersey, will be the spark the Bentonville retailer needs to boost its online sales.
“It looks very irrational and desperate,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm in New York. “Right now, I would say the odds are dramatically against them.”
For eight straight quarters, Wal-Mart’s e-commerce sales growth was lower than the previous quarter. The streak was broken in its second quarter, which ended on July 31, when online sales were up 11.8 percent over the same quarter a year ago.
The Buckingham Research Group of New York also had some concern about the Jet.com deal.
The purchase “likely signals that [Wal-Mart’s] organic e-commerce growth remains tepid, in our opinion,” said John Zolidis, who covers discount retailers, in his Aug. 15 research note for BRG.
He also said that while the transaction will add “modestly to revenues” for Wal-Mart’s online sales, it will also increase the operating loss of the segment, which BRG estimates could approach $1 billion on $15.25 billion of sales this year.
Others, however, think the Jet.com purchase will pay off.
Jet.com’s lower prices target a lower income segment, said Jennifer Sherman, senior vice president of product and strategy for Kibo of Dallas, which consults with retailers about online strategy. Jet’s shopper base, however, is more likely to be urban and millennial, and those categories tend not to shop at Walmart.com.
“There are tremendous synergies there if Wal-Mart can successfully integrate the two customer bases,” she wrote in an email in response to questions from Arkansas Business.
The purchase of Jet.com, which closed Monday, will also bring with it the company’s CEO, Marc Lore, who is expected to become Wal-Mart’s president and CEO of Global eCommerce, replacing Neil Ashe, who is reportedly leaving the company.
Ravi Jariwala, a spokesman for Wal-Mart, said that Wal-Mart plans to operate both Walmart.com and Jet.com as distinct businesses, “and that’s going to help us reach more customers.”
Jariwala said that Jet.com will continue to be based in New Jersey while @WalmartLabs, which is Wal-Mart’s e-commerce division, will remain in Silicon Valley.
Praise for Jet.com
When Jet.com had its beta launch in 2015, senior analyst Matt Nemer of Wells Fargo Securities in San Francisco took notice.
“A new online marketplace launching this spring called Jet.com could be one of the most disruptive retail platforms since Amazon,” Nemer wrote in a research note in April 2015.
He noted that Jet.com was a members-only online marketplace that was founded by Lore, who was a co-founder of Quidsi, which is the parent company of Diapers.com. It sold to Amazon for $550 million in 2010.
In the Jet.com model, retailers sell on the Jet.com website just as they would on places like Amazon and eBay, Nemer wrote. But they would pay Jet a commission of up to 15 percent on sales, he said. Jet.com would handle the various costs associated with the transaction, such as payment processing and website operation, but it would put the balance of the seller’s fee toward lower prices.
The praise continued in June 2015, when Nemer tested the website. “The biggest surprise was the price delta between our basket of 25 items at Jet.com and Amazon, with Jet.com priced 36 percent lower than Amazon and beating Amazon on every single item we purchased,” Nemer wrote in the follow-up research note.
As Jet.com was gaining momentum, Wal-Mart continued to look for ways to improve its online sales.
‘Growth Is Too Slow’
In the early 2000s, Wal-Mart appeared to neglect the e-commerce sector, and online shoppers largely ignored Wal-Mart’s website. Meanwhile, the No.1 online retailer, Amazon, kept growing.
Amazon’s revenue for 2015 was $107 billion, up 20 percent from the previous year. It had net income of $596 million — barely half a percent of revenue — in 2015 after a loss of $241 million the previous year.
In 2011, Wal-Mart started spending hundreds of millions on its online division. That year its investments included $300 million to acquire the social and mobile media company Kosmix of Mountain View, California.
E-commerce sales showed some improvement. Wal-Mart’s online sales were up 12 percent to $13.5 billion for its fiscal year that ended in January. The previous year, however, e-commerce sales had increased 22 percent, and Wal-Mart CEO Doug McMillon took note.
“Growth here is too slow,” McMillion said during the first-quarter management call in May, a transcript of which was posted on Wal-Mart’s website.
In addition, Wal-Mart isn’t even the second- or third-largest online retailer in North America, according to the 2016 Top 500 Guide from Internet Retailer, an online trade journal. Behind Amazon in online sales are Apple and then Dell Inc. Wal-Mart is in fourth place, ahead of Staples Inc.
Laura Kennedy, director of retail insights at the research firm Kantar Retail of Boston, said Wal-Mart and other brick-and-mortar stores have to figure out how to incorporate their physical stores into “their broader e-commerce and digital shopping world.”
One of the issues Wal-Mart faces is the high proportion — about two-thirds — of their sales consisting of groceries and consumables, and those typically aren’t products customers buy online.
That’s changing, however, with Wal-Mart’s program allowing customers to order groceries online and pick them up at a Wal-Mart store. “I think they’re figuring out the way to use their stores and also capitalize on shoppers’ needs for convenience with online grocery pickup,” Kennedy said.
Wal-Mart spokesman Jariwala said grocery pickup is now available in more than 60 markets; last year at this time it was five.
He said the program will continue to have a “very steady cadence of additional expansion throughout this year.”
The Jet Shopper
The Jet.com purchase was “a clear sign from Wal-Mart that they need to shake things up in e-commerce,” Kennedy said.
Jet.com’s more urban and millennial shopper base could broaden Wal-Mart’s connections across categories of customers, she said.
The purchase will be a win for Wal-Mart because it now has access to an audience the retailer didn’t have before, an audience with “a high propensity to shop online,” said Traci Gregorski, senior vice president of marketing at Market Track of Chicago, a research firm that assists retailers with pricing and advertising.
And Wal-Mart will “gain insight into Jet.com customer data, which is really rich and robust,” Gregorski said.
Still, Davidowitz said, if Wal-Mart wants to be healthy in 10 years, it has to “find a way to get a real position” in online sales. “The challenge is this is a disruptive force to their business,” he said.
Jariwala said the future of online sales will be a combination of the e-commerce and the brick-and-mortar stores. “We’re all headed toward … the hybrid model,” Ravi said. “But it’s really online, in stores and mobile all coming together to make shopping easy. We’re all headed towards that, but we’re starting from different places.”