Author(s): Raghu Gopal
On 8 August 2016, Walmart announced an agreement to acquire e-commerce start-up Jet.com for $3.3 billion. For Walmart, it's an important step to modernise its image and processes. The company says that Jet will retain its independence, but there's bound to be a growing degree of cross-pollination between the two as time goes on.
Founded in 2014, Jet.com, from Hoboken, New Jersey, was just getting started. With an ambitious marketing campaign that includes prime-time television advertisements on US TV and constant mailers, Jet is getting its name out among potential customers. According to Walmart, Jet's user total is currently growing at 400,000 per month with a gross merchandise value run rate of $1 billion.
Jet's business model is based on pricing and logistics optimisation. The company offers prices customised to consumers based on their shipping addresses and their proximity to the warehouse. Jet also offers quantity discounts on some items. Its search index includes products from 2,400 retail partners and finds the best deal for customers.
Given its relative limited scale, Jet needed the type of scale that Walmart can provide. Both companies have a competitor in common: Amazon.
There's still significant room for growth in e-commerce — offline retail sales outnumber online sales by a factor of at least 10 to one. It's still early in this trend, but Amazon is the best prepared to catch the majority of the business. For Walmart and other retailers, this is lost bread and butter. In its most recent full fiscal year, Walmart's sales revenue were down 1 percent to $482 billion while Amazon's revenue increased 20 percent to $107 billion.
Walmart has a demographics problem that Jet can address. Jet's customers consist mainly of urban professionals and millennials, and its staff of 1,700 knows the digital retail world before anything else. For Walmart, Jet is an expensive bet, but the retailer knows that the market is slowly growing away from it. The bigger risk for Walmart is status quo.