Why Wal-Mart acquired Jet: It's all about transforming its customer base
Wal-Mart's blockbuster deal for upstart Jet heralds a new chapter in the retail goliath's war on Amazon's online dominance. Critics question whether Wal-Mart will keep making the same old mistakes.
After days of speculation, Wal-Mart Stores finally confirmed the worst-kept secret in retail, announcing on Monday morning its $3.3 billion acquisition of upstart Jet—the biggest deal in U.S. e-commerce startup history. Jet co-founder and CEO Marc Lore (who previously helmed Quidsi, the parent of websites including Diapers.com and Soap.com, sold five years ago to Amazon for $545 million) will remain with the company, and will soon head up Walmart.com as well as the Jet.com portal, which will continue as a separate business.
The rationale behind Wal-Mart's massive gamble seems obvious: The brick-and-mortar retail giant has faltered badly online. Wal-Mart—once an acknowledged leader in tech-based inventory and supplier management, at least for a time—grew its e-commerce sales just 0.4% in its most recent quarter, with online sales representing just 3.1% of its total revenue, according to eMarketer data supplied to Retail Dive. By comparison, Amazon generated $21.12 billion in e-commerce sales last quarter, up 2.6% over the previous period.
Year-old Jet, meanwhile, has mostly wowed observers, with sales tripling over the first six months of this year: In December, Jet sold $33 million in merchandise, compared to $90 million worth in May. July sales grew 168% relative to August 2015, according to Slice Intelligence. Wal-Mart’s online sales, meanwhile, rose only 30% over the same time period, excluding the holidays.
But Jet’s escalating online presence is just one reason Wal-Mart purchased the startup. Another is Jet's technology, in particular a signature pricing algorithm that rewards shoppers in real time with savings on items purchased and shipped together, in turn reducing supply chain and logistics costs—tech singled out Monday by Wal-Mart CEO Doug McMillon. There's also Jet's in-house talent: Lore—who spent two years at Amazon following the Quidsi acquisition—brings with him estimable insights into the endlessly complex e-commerce business as a whole, and Wal-Mart's greatest rival in particular.
But more than anything else, experts say, Wal-Mart (which did not respond to Retail Dive's requests for comment) landed Jet to help it achieve a feat that McMillon himself cited last October as an essential step to making any kind of mark online: Appealing to higher-income customers.
“[A] growth area I want to highlight is appealing to a blend of income levels,” McMillon told analysts last fall. “Globally we know growth will disproportionately come from middle- and upper-income households in the years ahead. In markets where we have a presence, middle-income households are projected to drive 50% of total retail growth. Today we appeal to value-oriented customers in all brackets.”
Wal-Mart is banking that Jet is the missing piece that can evolve its business beyond its core customer demographic, contends retail futurist Doug Stephens.
“To move Wal-Mart upmarket is a Herculean task,” Stephens, author of the forthcoming book “Reengineering Retail: The Future of Selling in a Post-Digital World,” told Retail Dive. “Any time they do, they risk losing their most loyal customers. They’ve wound themselves in a corner by virtue of just how strong their brand essence is in the market. When you say ‘Wal-Mart,’ it brings up such clear connotations. For some people it’s what they want, and for some they want nothing to do with it. Buying Jet.com is an attempt to break free from Wal-Mart’s customer base.”
Déjà vu all over again
Jet unquestionably serves a dramatically different customer base than its new parent company. For starters, Jet has aggressively marketed its platform to urban customers (which include many in the coveted millennial generation), according to Profitero VP of strategy and insights Keith Anderson, who soon after Jet’s mid-2015 launch predicted that the startup could capture Wal-Mart's interest. By contrast, a 2015 survey of more than 4,000 consumers conducted by consulting firm Kantar Retail reveals that the average Wal-Mart customer is a white, 50-year-old woman with an annual household income of $53,125.
Among the retailers studied by Kantar, millennials most often choose to shop at Target, whose average customer is younger (by five years) and wealthier (by $12,000 annually) than the typical Wal-Mart shopper. Even dollar stores, which cater to a similar demographic as Wal-Mart, are doing a better job of attracting millennials (including wealthy millennials), thanks in part to those stores’ more convenient, less suburban locations.
Regardless of where online shoppers live, they tend to hail from higher-income households: 55% of U.S. e-commerce shoppers are in households with annual incomes above $75,000, and 40% dwell in households earning $100,000 and above, according to Experian, far ahead of the U.S. median household income of about $50,000.
Acquiring Jet is hardly Wal-Mart’s first attempt at widening its appeal to deeper-pocketed customers, however. Seven years ago the retailer launched “Project Impact,” an effort to improve the quality of its apparel and home furnishings, clean up stores and present friendlier customer service. It was widely seen as a disaster.
Before that, in 2005, Wal-Mart placed ads in Vogue magazine and sponsored a New York City fashion show to highlight new, higher-priced apparel lines. The result was another disaster, and another retreat.
Columbia University retail studies professor Mark Cohen has told Retail Dive that those initiatives ended badly in part because Wal-Mart was unwilling to allow them sufficient time to reach their potential, illustrating the intractability of the Wal-Mart brand, its loyal fan base and even its massive staff.
“You’re talking about the changing of the tide, and not just from the product development point of view. Wal-Mart has thousands of stores and thousands of people. Wal-Mart has an embedded culture, and the attempts they’ve made to change have failed largely because they’ve failed to change that culture,” Cohen said. "And even when Wal-Mart does change, that pressure to show immediate results works against it. As soon as their efforts wouldn’t show fruit, they’ve abandoned it. It takes two to five years to change the composition of a large store and a large number of stores without losing your core customers and your underlying business... I’ve seen these kinds of initiatives come and go at Wal-Mart, and I have never seen them stick. I think there are too many people there who are of the view ‘This too will pass.’”
The conundrum continues
But Jet has strengths that extend beyond its appeal to millennials and higher-income shoppers. “[Jet] figured out a weakness that Amazon has, which is that many of their marketplace products get shipped in an un-economical way,” Stephan Schambach, founder and CEO of mobile platform NewStore and founder of e-commerce platform Demandware (recently sold to Salesforce), told Retail Dive. “[Jet] figured out a way to essentially undercut Amazon in price and efficiency in the overall mix. They have been very clever.”
Lore, the architect behind Jet's pricing model, has shrugged off the suggestion that Jet set out to topple Amazon, telling Fortune magazine earlier this year that the aim was instead to follow in Amazon's footsteps and be “a really large No. 2, 3, or 4.”
We can only speculate on how much Jet could have grown if Wal-Mart had not come calling, but even a large No. 2 likely would have lagged far behind Amazon's pace. Stephens had several metrics at his fingertips from his upcoming book, and noted that Amazon’s share of the U.S. e-commerce market today is greater than that of Wal-Mart, Apple, Macy’s, Home Depot, Best Buy, Costco, Nordstrom, Target, Gap, Williams-Sonoma, Kohl’s and Sears Holdings combined.
For Wal-Mart, which seems to fall further behind Amazon with each passing quarter, the urgency to jumpstart its e-commerce business "is pretty plain to see,” Stephens said. “The question is whether it’s $3 billion worth of urgency.”
It's a huge chunk of cash for a company that officially went live less than 13 months ago. Some observers have expressed concerns about Jet’s stickiness: While it's ramped up its customer base, it’s having less success keeping those customers around, Slice Intelligence found. “Jet’s big vulnerability is repeat purchases, with its average customer purchasing just 1.5 times between launch and the end of February, compared with 2.2 for Target and 2.1 for Wal-Mart over the same timeframe,” according to Slice.
Ried Niziak, research lead at business intelligence firm L2, also questions just what Wal-Mart is paying for.
“Jet is a younger, hipper brand, but it’s not an established brand,” Niziak told Retail Dive. “They don’t have a defined business model yet. Think of the past year—they changed how they communicate savings to customers multiple times, there were shipping changes, they moved into fresh, they bought [home furnishings retailer] Hayneedle. The minute Wal-Mart buys Jet, Jet loses some of its value. Jet has made all these changes because they’re new and flexible. Once Wal-Mart buys them, they’re handicapped. From Wal-Mart’s perspective, I’m not sure what they’re getting here.”
The problem goes even deeper than that, according to Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates Inc. Wal-Mart's struggles are not limited to e-commerce, Davidowitz says: The retailer is mismanaged in other areas, too, and has whiffed on what he calls “giant trends.”
For example, Wal-Mart is faltering in grocery, which accounts for more than half of its business, and is allowing the likes of Aldi and Kroger to beat them on price and “eat their lunch,” Davidowitz told Retail Dive. In addition, Wal-Mart this year shuttered all Walmart Express locations (its answer to dollar stores, what Davidowitz calls one of the most successful areas in retail) without giving them a chance.
But that misses the real problem, which Davidowitz says is Wal-Mart’s history of poor returns on web commerce investments. Wal-Mart’s many Silicon Valley-based efforts and the billions it's spent on acquiring startups and talent have netted them e-commerce results that are just “3% of sales, and their increases are below everybody’s,” he said.
Time will tell if Jet is an exception. Davidowitz is betting otherwise.
“Here’s what they can do. They can spend money. They have a monster balance sheet,” Davidowitz said. “Maybe they can handle Jet, but I don’t see any indication of that. What makes anyone think that for Wal-Mart—a company that has failed miserably in the challenge of the retail market online—this is going to work?”
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