business news in context, analysis with attitude

MNB Archive Search

Please Note: Some MNB articles contain special formatting characters, and may cause your search to produce fewer results than expected.

    Published on: August 8, 2016

    In what CEO Doug McMillon referred to as a "jolt of entrepreneurial spirit being injected into Walmart," the world's biggest retailer announced this morning that it is spending $3.3 billion to acquire Jet, the start-up e-commerce company launched just a year ago and positioned as an alternative to Amazon.

    Once the deal is done, Walmart is expected to run both its own site and Jet as separate entities, while using Jet's software - which encourages customers to buy many items per transaction by lowering prices as the shopping cart gets larger - to power its own e-commerce site.

    The transaction consists of $3 billion in cash and $300 million in Walmart stock, and is expected to close later this year.

    Once the deal has been completed, Jet founder Marc Lore will take what is called a "senior leadership position" in Walmart's e-commerce business. Neil Ashe, who joined Walmart in 2012 to run e-commerce, is expected to leave the company.

    in its analysis, the Wall Street Journal writes that "the deal is the largest-ever purchase of a U.S. e-commerce startup and a sign Wal-Mart CEO Doug McMillon sees the shift to online shopping and the expansion of Inc. as existential threats to the company’s five decades of growth."

    And, the Journal writes, "The deal marks a significant shift in how Wal-Mart approaches e-commerce. It first launched more than 15 years ago and has spent billions building up its own online operations. It has opened seven large-scale distribution centers in the U.S. to fulfill orders and hired hundreds of e-commerce staffers at offices in San Bruno, Calif. However, until recently those efforts have always come secondary to the core business of running thousands of sprawling stores around the globe."

    Jet has said that it is adding 400,000 shoppers per month, and in its first year reached a run-rate of selling $1 billion worth of merchandise through its website.

    Walmart' e-commerce sales last year were just shy of $14 billion, or three percent of its $482 billion in annual sales. Amazon's total annual sales last year, including its web services business, were $107 billion.

    There is a sense of déjà vu to this deal. Lore founded Quidsi and in 2005 and sold the company to Amazon for $545 million in 2011.

    Lore went to Amazon when the sale took place, but left after two years and started up Jet when his non-compete expired.
    KC's View:
    Yes, I know I'm supposed to be taking a few days off as I drive cross-country from Oregon to Connecticut ... but I saw this story and wanted to pull off the road to report it to you.

    As I said last week when I reported on the initial speculation about this deal, I think this says as much or more about Walmart's inability to get significant traction with its own e-commerce efforts as it does about Jet knowing that it needed a significant infusion of cash in order to support the pricing structure that it needs to compete effectively with Amazon. Without this kind of cash infusion, Jet was going to continue in a kind of white-knuckle race, burning through investment capital in order to keep its prices low while hoping that it would achieve enough velocity with its sales to eventually justify better prices from suppliers before running out of money. That no longer would seem to be a problem.

    And, as we noted here last week, one of the real advantages that Jet brings to the table is its marketplace business, which gets other retailers to use its platform to make their own online sales. This has been an enormous advantage for Amazon over the years, and it is an area in which Walmart's success has been negligible.

    However, let's be clear. Jet hasn't proven yet that it can compete successfully with Amazon ... and in making this bet, Walmart has conceded that it just isn't going to get there on its own. So, you have two companies that can't yet compete with Amazon teaming up to see if the whole can be greater than the sum of its parts. This is not always the best recipe for success ... but that's not to say it can't work. But I do think there may be some issues to work out - especially because Lore has been highly specific and vocal about the kind of employee-centric culture he wanted to create at Jet, which may not be completely in synch with the Walmart model. (It'll also be interesting to see how Lore manages to survive within the Walmart bureaucracy. Betcha there are some folks already taking bets on when he leaves...)

    I'm not entirely sure about the strategy of running different websites, to be honest. That's certainly what Amazon has done, and has found success with separate sites like Zappos. But Zappos had a strong following and image before being acquired by Amazon, and I'm not sure that Jet has that yet. And, it was just a week ago that Walgreen's announced that it was closing down and, five years after it acquired the sites, because it wanted to "focus on its core site and develop the core brand's omnichannel potential." Instinct tells me that by keeping Walmart's web site and Jet separate, they may be creating a more bifurcated structure than they should ... especially because, let's not forget, Walmart already is a bifurcated company, with both bricks-and-mortar and e-commerce businesses. But, to be honest, I'm not entirely sure about this ... we'll have to see how it plays out, and if, after a couple of years, they decide to merge the sites. (Which will be the next play if they can't make a dent in Amazon's growth.)

    The larger implications, I think, will be for everybody else that competes in the CPG space - because by making a $3.3 billion bet like this, Walmart is essentially serving notice that it intends to get a lot more aggressive on the e-commerce side. That means a lot more marketing - in-store and out - of its omnichannel capabilities and advantages, and of the the low prices that it thinks can do the most damage to Amazon's growth model. And, at the same time, Amazon inevitably will begin getting even more aggressive in its pricing and selection, and in expanding its marketplace of outside retailers than makes its site so much more robust. And this is going to start today ... because there's no sense waiting around for Walmart and Jet to get their act together.

    What that means is that if you area retailer in the business of selling CPG products, the competitive environment just got a lot tougher. I suspect that you're going to be seeing a lot more marketing around e-commerce, probably a lot of it around pricing and convenience, and that means you have to figure out your competitive response.

    In the vast majority of cases, this means two things. You have to have a solid e-commerce-oriented response ... not necessarily one that tries to replicate Amazon or Walmart or Jet, or even tries to meet them on their own terms ... but one that certainly tries to use stores and customer data to create a different level of convenience for the shopper. That's your advantage - existing stores and existing customers, which you should be able to use to make a nuanced and focused competitive argument.

    The other thing you have to do is figure out what the one or two things you have that those e-commerce guys cannot replicate. It may be the best damned cinnamon bun on the planet, which makes people hungry the moment they walk through the front door. It may be a person who works in your wine department or produce department, who has the kind of knowledge that makes him or her an invaluable resource to your shoppers. It is almost always going to be your people - who you'd better start treating as if they are your most effective ambassadors, capable of driving )or killing) your business growth.

    My feeling is that you'd better double-down on your advantages and start investing in them. Now. Because if your first response to this story is that it is time to start cutting costs and "getting back to fundamentals," then you already are lost in the wilderness and you're never going to find your way back.

    I'm getting back on the road. Because I have promises to keep, and miles to go before I sleep.