Wal-Mart Stores Inc. will purchase Jet.com for about $3.3 billion, a move the retailer believes will give its e-commerce business more fuel in the ongoing competition with Amazon.com.
Wal-Mart agreed to pay $3 billion in cash and $300 million in shares of company stock, paid out over time, to acquire Jet.com, which runs an online marketplace. The sale remains subject to regulatory approval and is expected to close by the end of the year.
"This is Wal-Mart being even more committed to winning in e-commerce and continuing to build out this seamless customer relationship that we've been working towards," Wal-Mart Chief Executive Officer Doug McMillon said during a conference call with reporters Monday. "We see today's announcement as another step in that direction."
Wal-Mart's e-commerce sales of about $14 billion last year were a small part of its total revenue of $482.1 billion, but the retailer has made it a priority to grow the division in recent years. The efforts and investments haven't led to a steady rise in sales, however, with Wal-Mart's e-commerce growth slowing over the past several quarters.
"They've obviously spent a lot of money," said Neil Stern, a senior partner at Chicago-based McMillan Doolittle. "But when you look at the results of that objectively, while they are the second-largest e-commerce player in the U.S., when you compare the absolute size and growth rate relative to Amazon, it is not very impressive.
"Even more worrisome, I think, for them is the growth rate itself has been slowing."
In May, McMillon acknowledged the drop-off, saying the company's 7 percent e-commerce sales growth for the first quarter of fiscal 2017 was too slow. But McMillon said Monday that the Jet.com acquisition will help "accelerate" Wal-Mart's e-commerce business.
The acquisition will give Wal-Mart access to a platform that Jet.com CEO Marc Lore designed to take on Amazon.com. The business, which launched last year, counts 400,000 new shoppers a month and averages 25,000 processed orders a day. Jet.com lists 12 million items from 2,400 retailer and brand partners and reached $1 billion in gross merchandise value -- the total value of transactions -- in its first year. Wal-Mart also said Jet has a growing customer base of urban and millennial customers.
Another key to the deal, according to analysts, is Wal-Mart acquiring Jet.com's leadership team.
Specifically, McMillon said Lore will take on the leadership role as chief executive officer of Wal-Mart's e-commerce business and remain at the helm of Jet.com's operations after the sale is finalized.
Neil Ashe, Wal-Mart's current e-commerce chief, will depart at the end of the fiscal year. McMillon said in an internal memo the acquisition "creates a natural inflection point" for Ashe, who has been in his role since 2012.
Stephens Inc. analyst Ben Bienvenu said: "Amazon is ... so far out ahead that maybe fully closing that gap is likely unrealistic. But there's a lot of market share out there to be had. Getting someone on board at Wal-Mart that knows how to grab a lot of that I think is really, really valuable."
Lore was the co-founder of Quidsi, which is the parent company of successful e-commerce sites Diapers.com, Soap.com and Wag.com. He sold Quidsi to Amazon for more than $500 million in 2010 and, after working inside the e-commerce giant for some time, left to begin developing the new business along with co-founders Mike Hanrahan and Nate Faust.
Lore was successful in raising more than $500 million in capital for the e-commerce site, which promised to provide big savings in comparison to other retailers like Amazon with pricing software that considered aspects like the size of a customer's shopping basket. The company is not currently profitable, and analysts said Jet hasn't completely lived up to expectations. Lore has told news outlets that the company likely wouldn't be profitable until 2020.
"It's pretty clear they built something interesting, but it was going to take a lot more capital and time than they had suggested," Stern said. "There was a fair amount of ground that they had to make up. From an industry perspective, they were either going to have to raise a significant amount more of outside capital or do this kind of sale."
Jet.com found a willing buyer in Wal-Mart, which has made 15 e-commerce-related acquisitions over the past five years according to a spokesman. Lore said in a statement that joining Wal-Mart would "help fuel the realization" of the company's vision to create a new shopping experience.
"They really did aspire to be a stand-alone challenger to Amazon," said Keith Anderson, vice president of strategy and insights at Boston-based Profitero, said of Jet.com. "But given the landing place ... I think it's probably not a huge disappointment."
Under McMillon's leadership, Wal-Mart has boosted its online assortment to about 11 million items and continues to build out its network with e-commerce distribution centers. It also has expanded programs like its grocery pickup and subscription-based, two-day shipping services.
The retailer rolled out Wal-Mart Pay, its mobile payment system, to all U.S. stores last month.
Wal-Mart will continue to operate its online website and Jet.com as separate websites, according to Monday's announcement. McMillon said the company doesn't want to rush the two together.
"We'll be thoughtful about how we bring the design components together and how we merge the tech platform and do that over time," McMillon said. "I think there are ways to continue to grow both brands in the short term and over time, piece by piece, we'll end up running a business that's simpler and not completely independent."
McMillon also believes Wal-Mart will be able to help Jet reach profitability sooner than it would have without help from the world's largest retailer. But Edward Jones retail analyst Brian Yarbrough isn't convinced the acquisition will be worth the $3.3 billion price tag for Wal-Mart.
"I really question if they're ever going to get any kind of viable return out of this investment," Yarbrough said. "I do think they're buying great technology. I just don't know if it's a scalable business model and what kind of returns you're ever going to get."
Anderson agreed there are no guarantees with the acquisition, but said it was a move Wal-Mart needed to make as it continues to position itself in an evolving retail landscape.
"There's always risk," Anderson said. "But I think the reality of modern e-commerce is, the risk of doing nothing far exceeds the risk of trying the wrong thing."
Business on 08/09/2016