Was Jet.com a Walmart’s lousy investment?

Tuesday, May 19th, 2020, Walmart announced to close Jet.com after acquiring the online business for four years, ending the investment of more than $3 billion. Mr. Doug McMillon, CEO of Walmart U.S., once commented that the acquisition was necessary for Walmart to push online sales and enhance customers' experience toward online shopping.

Tracking back to the history of the acquisition:

In late 2016 right after the acquisition, Marc Lore, the founder of Jet.com, was nominated to oversee Walmart.com when step by step unwinding his business. Although Marc Lore and other top talents at Jet.com did improve Walmart.com, Walmart failed to keep the two companies operating separately. In 2018, Walmart launched a strategy that Jet.com would compete in large cities, namely New York, San Francisco, Chicago, where Walmart struggled to gain market share. This strategy turned out to be challenging. After one year, Walmart had to look for ways to cut losses and integrate Jet.com into Walmart.com.

In 2019, Walmart expanded the marketing budget for Walmart.com at the expense of Jet.com. Marc Lore explained it as a "natural process of integration." In December 2019, while the retail industry enjoyed overall solid sales, Jet.com experienced a profound drop in web traffic. Similar Web, a web traffic firm, reported that Jet.com had 1.4 million visits during December, 82.5% less than 2018, and decreased almost 96% from December 2016. Deborah Weinswig, analyst and founder of Coresight Research, pointed out that the decline in Jet.com sales was partly affected by a shift in marketing focus from Jet.com to Walmart.com. While Jet.com sales tumbled by 45% in 2019, Walmart.com sales increased by 74% in the first quarter and finished the year with $50 billion of revenue.

Online retailing has become highly competitive:

● The online retailing business requires specialty knowledge to create and operate e-commerce platforms, develop pricing algorithms, and manage consumer databases. Companies must invest substantial capital to get the platform online and attract new customers. They must create strategic partnerships with manufacturers, merchants, and service providers to develop various product categories to retain consumers.

● These companies must compete with local supermarkets and stores, grocery stores, and meal kit/ meal box services which are more affordable. To better position themselves in the market, online retailing companies must meet customers’ wide range of attributes’ levels: convenience (ease of browsing and checking out), availability (access across devices), payment options, reliable and fast delivery, return options, frequency of promotion…

● Retail consumers are traditionally price-sensitive, and buyers can compare prices online before deciding or driving to physical stores to purchase the items. At the same time, the availability of substitutes with affordable prices also takes consumers away from Online retailers. Online retailers must increase their visibility through marketing campaigns and improve customers' shopping experience such as availability, variety of products, fast delivery, and after-sales services to win over customers.

● As online retailers grow so large, namely Amazon, the power of suppliers becomes low. Amazon even debunked suppliers' bottlenecks by investing in automated warehouses, Amazon web service, Amazon Alexa. Other online retailers, namely Walmart, Best Buy, Target, Kroger, Costco, also have specific bargaining power over manufacturers, logistics, and warehousing services thanks to relationships built up from their traditional retailing business.

Since the acquisition, Jet.com has lost some of its momentum for development despite successfully entering the market. First, right after the purchase, Marc Lore and other top talents at Jet.com shifted their focus to improve Walmart.com. Second, Walmart trapped Jet.com in a highly competitive market, namely New York, San Francisco, Chicago, where the power of Buyers, Industry rivals, and substitutes is very high. Last and most importantly, the bearing market cost of Walmart increased Jet.com and left Jet.com with minimal to no marketing budget to attract consumers. A range of ineffective strategies made Jet.com compete ineffectively on the market and led the company to operate at a loss.

The upside of the acquisition:

● Avoid hold-up risk: Walmart acquired Jet.com to hold up the risk of a potential future bottleneck when Walmart signed a long-term contract to sell products on Jet.com.

● Avoid future competition: Walmart.com and Jet.com competed in the Online retailing market. While Walmart.com struggled to match the market average growth rate, Jet.com’s growth far outpaced Walmart's since 2015. At the same time, Jet.com’s real-time pricing algorithm provided customers with better prices, which competed directly with Walmart’s ‘everyday low price’ credo. By acquiring Jet.com, Walmart cleared up the way for Walmart.com to expand in the online retailing market.

● Improve efficiencies: the acquisition of Jet.com helped Walmart achieve economies of learning by gaining insight into Jet.com’s pricing algorithm, business model, consumer data, and, more importantly, acquiring top talent and growth categories expertise. This strategy helped Walmart grow scopes while operating more efficiently to better compete with Amazon.

● Increase Market power: Like Amazon, Jet.com was a marketplace for customers to buy offerings from merchant partners, while Walmart’s business model resells other manufacturers' offerings. To divert business to the marketplace segment, Walmart had two options: selling products on Amazon.com as a third-party merchant partner or creating a new marketplace where they command the marketplace and set the rules. The former clearly would make Amazon become a bottleneck in the value chain. Therefore, acquiring Jet.com was logical to break the blockage and increase Walmart’s power over online merchant partners.

The downside of the acquisition:

● Jet.com’s performance did not pay off the acquisition cost: Walmart invested more than $3 billion to buy Jet.com in 2016. Three years after the acquisition, Jet.com’s web traffic firm during the end year peak of 2019 dropped 96% compared to 2016. Walmart failed to keep the two businesses operating separately.

● Ineffective expansion of business scope: Walmart.com and Jet.com have similar business models in the online retail market. Instead of complementing each other, these two businesses competed directly for the customers and market shares. This situation led to brand conflict and, as a result, turned down the competitiveness of one or two brands (in this case, Jet.com).

From the author’s perspective, Walmart gained more than it lost from this acquisition. Acquiring Jet.com helped Walmart expand its business scope to sustain long-term profits. At the same time, it helped Walmart achieve important sources of synergies to grow market share and better compete with Amazon in the future.

Truong Dinh