Traditional retailers have spent more than a decade and billions of dollars trying to transform their brick-and-mortar businesses for the online shopper. Yet Amazon and other digital upstarts continue to lap them.
Wal-Mart’s $3.3 billion deal to buy Jet, the year-old online bulk retailer, and the shuffling in the executive ranks that comes with it, are Wal-Mart’s clearest acknowledgments yet that its online strategy is not working. It also sends a strong message to the rest of the consumer and retail industry: When it comes to competing against Amazon, not even the mightiest brick-and-mortar stores can go at it alone.
“The other retailers are going to be looking up to it and saying, ‘You know, absolutely, we’ve been failing at doing this,’ ” said Jharonne Martis, a retail analyst at Thomson Reuters. “Bringing in an expert might be the key.”
Overall, Wal-Mart’s e-commerce sales have stalled. The online business grew just 7 percent last quarter. Most recently, the company has focused much of its online strategy on expanding its curbside grocery pickup business.
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Jet is perhaps best known for an algorithm that encourages bulk buying, an area where Walmart.com has fallen short and could energize its sagging online growth.
Wal-Mart said Jet offered it access to “urban and millennial customers,” two groups that the retailer’s large rural footprint has been slow to attract. Wal-Mart said that Jet had added more than 400,000 users monthly.
Jet says it uses a complex formula to offer items 10 to 15 percent less than competitors by adjusting prices based on the quantity of products bought at once. The company relies heavily on suppliers, and Wal-Mart offers more pricing power and potentially better distribution operations through its vast network of warehouses.
Still, the $3.3 billion figure is eye-popping, given that Jet.com started selling products barely a year ago.
Wal-Mart is not valuing Jet.com solely based on traditional metrics like profitability, which the startup does not have. The retailer is spending billions in cash and stock in large part for Marc Lore, the serial e-commerce entrepreneur who started Jet.com. He is seen as one of the few executives who can help put a dent in Amazon’s edge.
“If you looked at Jet from a fundamentals perspective, the company wouldn’t be worth what they’re paying for it,” said Anand Sanwal, chief executive of CB Insights, a research firm. “They’re trying to inject Marc and probably some of the veterans on his team, and try and help Wal-Mart figure this out.”
Lore, 46, will take over responsibility for Walmart.com in the United States and will continue running Jet, which will operate separately, McMillon said in a call with reporters.
Lore co-founded a company, Quidsi, that grew into a collection of e-commerce websites, including Diapers.com and Soap.com. The company was sold to Amazon in 2010 for more than $500 million. He stayed at Amazon for two years, then left to figure out a new project. That venture, Jet.com, raised more than $200 million before the company sold a single product, and more than $500 million overall. In the latest funding in November, the company was valued at $1.5 billion, according to data compiled by CB Insights.
Wal-Mart said that while it would incorporate some of Jet’s ideas and talent into Walmart.com, Jet would remain a separate brand, too. Both sites will continue to face a daunting reality: Amazon.com continues to wallop the competition.
Amazon does more business online than any other retailer, yet still reports double-digit growth. In 2015, Amazon reported that net product sales rose 13 percent to $79.3 billion, while Wal-Mart reported that global annual e-commerce revenue had risen 12 percent, to $13.7 billion, in its latest fiscal year.
For Wal-Mart, buying Jet may not be about beating Amazon at its own game, said Charlie O'Shea, the lead retail analyst for Moody’s.
“We view this as a race for second,” O'Shea said. “Amazon’s lead is so great that it’s going to be virtually impossible to catch them, but you can compete with them.”