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Walmart Reaches Deal to Buy Jet.com for $3.3 Billion Walmart Reaches Deal to Buy Jet.com for $3.3 Billion
(about 2 hours later)
Jet.com, an online store that sells a wide range of products like groceries, books, jewelry and appliances, agreed to sell itself to Walmart Stores for $3.3 billion as they both seek to take on a mutual competitor: Amazon. 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.
The deal incorporates $3 billion to be paid to Jet.com stakeholders in cash, a portion of that to be distributed over time, while $300 million will be paid in Walmart stock over time, according to a statement released by the companies on Monday. The companies did not specify the length of the payment period. Now Walmart, the world’s largest retailer and the dominant player of big-box stores, is turning to someone else’s technology and talent. On Monday, the company said it was buying Jet, the year-old online bulk retailer, for $3.3 billion, the largest deal ever for an e-commerce company.
Before Jet.com even opened for business, the company had raised hundreds of millions of dollars from venture capitalists, who believed the start-up had the potential to take on Amazon, the No. 1 e-commerce giant. Founded in 2014 and based in Hoboken, N.J., Jet.com started selling products about a year ago through a special algorithm that lowered prices for consumers based on how much they purchased. The purchase, and a shuffling in the executive ranks that comes with it, are Walmart’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 company’s founder, Marc Lore, came with a good track record: He had started Diapers.com, which was sold to Amazon in 2010. “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 to it.”
For Walmart, the acquisition — among the retailer’s largest ever — is a way to further pivot from brick-and-mortar to online, potentially attracting more customers who are seeking to buy in bulk. Analysts are skeptical that the deal will help Walmart fend off Amazon altogether, but they say it could strengthen the retailer’s online presence. Over all, Walmart’s e-commerce sales have stalled. The online business grew just 7 percent last quarter, a number that Doug McMillon, the company’s president and chief executive, acknowledged at the time was “too slow.” Most recently, the company has focused much of its online strategy on expanding its curbside grocery pickup business.
“As we believe ‘catching’ Amazon online is an unrealistic goal for any brick-and-mortar retailer, Walmart now has a definite leg-up on its competitors in the very important race to be number 2 online,” Charlie O’Shea, Moody’s lead retail analyst, wrote in a note on Monday. 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.
Under the deal, Walmart and Jet will continue to operate as distinct brands. Though subject to regulatory approval, the transaction has been approved by the boards of both companies and is expected to close this year. Walmart said Jet offered it access to “urban and millennial customers,” two groups that the retailer’s large rural footprint has been slow to attract. Walmart said on Monday that Jet had added more than 400,000 users monthly.
In a mere two years, Jet.com raised more than $500 million from prominent venture capital investors such as Fidelity Investments, Bain Capital Ventures and New Enterprise Associates. The company quickly reached a $1 billion valuation, achieving so-called unicorn status at a rapid pace. 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 Walmart offers more pricing power and potentially better distribution operations through its vast network of warehouses across the country.
But the company’s path was not always smooth. Jet.com began quickly burning through the cash it had raised, spending freely on hiring and marketing. It also dropped its $50-a-year membership fee to bring more customers on the site, a move that subtracted a revenue source for the company. Still, the $3.3 billion figure is eye-popping, given that Jet.com started selling products barely a year ago.
Walmart is optimistic that the companies can benefit each other. In Monday’s statement, Doug McMillon, Walmart’s president and chief executive, said that the deal would help his company lower prices for its customers. Walmart is not valuing Jet.com solely based on traditional metrics such as profitability, which the start-up does not have. The retailer is spending billions in cash and stock in large part for something — or someone — else: Marc Lore. Mr. Lore, a serial e-commerce entrepreneur who started Jet.com, is seen as one of the few executives who can help put a dent in Amazon’s edge.
“Walmart.com will grow faster, the seamless shopping experience we’re pursuing will happen quicker, and we’ll enable the Jet brand to be even more successful in a shorter period of time,” Mr. McMillon said. “It’s another jolt of entrepreneurial spirit being injected into Walmart.” “If you looked at Jet from a fundamentals perspective, the company wouldn’t be worth what they’re paying for it,” said Anand Sanwal, the chief executive of CB Insights, a research firm covering venture capital. “They’re trying to inject Marc and probably some of the veterans on his team, and try and help Walmart figure this out.”
Mr. Lore will take over responsibility for Jet and Walmart.com, which will operate separately, Mr. McMillon said in a call with reporters. Walmart will be “thoughtful” about how it merges the two companies, and will focus on expanding both brands in the short-term, he said.
Mr. Lore will replace Walmart’s current top e-commerce executive, Neil Ashe, who will leave the company. Mr. McMillon said that now was the “natural inflection point” for a leadership change and praised Mr. Ashe for doing an “outstanding” job building the company’s online business.
Ever since Mr. Lore sold Diapers.com to Amazon six years ago for more than $500 million, investors have lined up to back him on his next venture. He raised more than $200 million before Jet.com sold a single product, and more than $500 million over all. In the latest funding in November, the company was valued at $1.5 billion, according to data compiled by CB Insights.
Recently, though, Jet.com has struggled. The company has been quickly burning through much of the cash it has raised, spending freely on hiring and marketing.To attract new customers, it dropped its annual $50 membership fee. The strategy has caused Jet.com to lose money on every shipment, something that would not have been reversed for another five years, Mr. Lore predicted in a 2015 interview.
Connecting with Walmart could help Jet.com amplify its business without the stress of private fund-raising in a market that has become more challenging for unprofitable companies.
Under the terms of the deal, Walmart will pay $3 billion in cash, a portion of which will be distributed to Jet.com stakeholders over time, while $300 million will be paid in Walmart stock over time, according to a statement released by the companies on Monday.
Walmart said that while it would incorporate some of Jet’s ideas and talent into Walmart.com, Jet would remain a separate brand, too. Yet 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 Walmart reported that global annual e-commerce revenue had risen 12 percent, to $13.7 billion, in its latest fiscal year.
For Walmart, buying Jet may not be about beating Amazon at its own game, according to Charlie O’Shea, the lead retail analyst for Moody’s.
“We view this as a race for second,” Mr. 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.”
While legacy retailers continue to struggle with how best to compete online, e-commerce represents only 8 percent of all sales, Mr. O’Shea said.
“All Walmart has to do is be better than the other brick-and-mortar guys,” he said.