eCommerce

Will Walmart Really Buy Jet.com?

“The enemy of my enemy is my friend.”

Though often attributed to Niccoló Machiavelli, the 2,400-year-old expression actually comes via Machiavelli’s Indian counterpart Kautilya, who first used the expression in his Sanskrit epic the Arthashastra in the 4th century BCE. It has remained a popular expression for almost two-and-a-half millennia for a good reason – it works well to describe a wide variety of tactical decisions in a variety of contexts.

Like, for example, the one Walmart and Jet.com find themselves in today.

On one hand, they are very different firms.  At a little over a half-century old, Walmart is a long time player that has spent much of the last 54 years working to build the massive scale and ability to control the price points of everything on its shelves it has today. It is also probably the best known and most recognized retailer on the planet earth.

Jet.com is new, available to the general public for only a little over a year. A year that has been a turbulent one – Jet.com had to reset its business model away from memberships early on and its valuation got a quick resetting from a targeted $2 billion to the $1.34 billion valuation eventually settled on in November of last year.  But on the other hand, it did hit that unicorn valuation in less than six months – the firm found itself involved in some high profile partnerships (like this one with the White House) and has ended its years with numbers trending toward the black – but not there yet.

But differences aside, they have a common enemy in Amazon – the firm that disrupted Walmart out of being the biggest retailer on Earth by market cap, and the undisputed leader in U.S. eCommerce that Jet.com entered the field to disrupt. In some sense the firms were always natural friends despite being competitors.

And now, if recent reports are to be believed, it may be the case that Jet.com and Walmart are going to be more than friends with a common enemy, and instead may become a single firm with a common cause – retail dominance in store and online.

Should recent reports be believed.

The Very Early Talks 

According to “sources familiar with the matter,” Walmart is in talks to buy  Jet – a move that the Wall Street journal cheerfully dubbed “a disappointing end for one of the most ambitious challengers to Amazon.com Inc.”

In theory, the deal would help Walmart juice its eCommerce offerings – as it tries to bring the same kind of success and customer pull to the digital world that it has in the physical retail sector. The deal, as understood so far, is mostly chalked up as a win – for Walmart.

For Jet.com though, the reviews have been more mixed – and the buyout is taken as a sign that even with a famous (and famous for beating Amazon) founder, a strong premise and a well developed plan for profitability – eCommerce may at this point just be too difficult a field for a newcomer to crack.  Jet’s value proposition involved undercutting Amazon on price – but given the size and scope of Amazon’s logistics networks and marketplace sellers bench – that effort was much easier explained than undertaken.

What Would Walmart Pay For Jet?

The big mystery so far in the story is what would Jet’s value be if it is in fact going up for sale to Walmart? No official figure has been released, though one of those people familiar with the matter who tend to wander the landscape talking to reporters noted that Jet.com could be valued at as much as $3 billion.

That is a very big price tag – but so far Jet has taken in $500 million in funding from groups like New Enterprise Associates and Accel Partners, Fidelity Investments and Goldman Sachs Group Inc.  That funding alone brings Jet’s valuation to around $1 billion – which is a lot of change given that Jet likely has several high unprofitable years of customer acquisition and scale building ahead of it.

And that, notably, is Jet just about living up to its promises – the firm has long been open about the fact that the first few years would likely be marked by the rapid expenditure of hundreds of millions of dollars to draw new consumers to the site.

If Walmart got anywhere close to Jet’s current valuation – it would be their biggest purchase since grabbing up South Africa’s Massmart Holdings Ltd. for $2.3 billion in 2010.

Competing With Amazon 

With a purchase, Walmart would get access to Jet’s pricing software – which manages to continuously recalculate purchase prices depending on what goods customers buy and what shipping options they chose as well as their warehouses and customer data. It also gets the hard-to-quantify value of offering an alternative online commerce portal for high-income shoppers who have a psychological aversion to shopping at Walmart or Walmart.com.

Walmart.com shoppers’ mean annual household income was $58,000 in 2015, while Amazon shoppers made $68,000, according to data from Kantar Retail.

The big Jet buy would tie in with the $2 billion Walmart has already pledged to eCommerce boosting – money that thus far has gone to new fulfillment centers and supporting a two-day unlimited shipping service taking direct aim at Amazon’s popular Prime service.

Jet and Walmart collectively are better able to keep up with Amazon’s massive warehouse construction push and fast delivery—as quickly as one-hour—which have been speeding up of late.  Amazon is on track to build 18 warehouses in Q3 2016 alone.

Can Walmart and Jet.com keep up?  It remains to be seen. But it does seem their odds go up if they can find a way to efficiently pool resources.

 

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