- Jet is adding products to its platform much faster than Walmart. More choice has to be a positive going forward.
- Jet has a nice slice of the millennials market, customers who are more tech savy and would buy online more frequently than others.
- Marc Lore is a key part of this deal. Walmart shareholders will be hoping he will increase buyer numbers substantially going forward.
After deciding to basically leave its Chinese eCommerce business to the locals a few months ago, Walmart (NYSE:WMT) has upped the ante in its home market by deciding to buy Jet.com for $3.3 billion. The price seems extremely high for a company whose website is barely a year old and is still hemorrhaging cash but the user growth was the calling card for Walmart. Jet.com is currently bringing in 400,000 new monthly users as well as processing 25,000 orders daily. So, the popularity is definitely there. Jet.com rewards customers depending on address and order volume. Walmart's eCommerce growth rate has been steadily declining (see chart) and I see another poor growth number for the second quarter when the company announces earnings on the 18th of August.
Walmart has been struggling to attract millennials onto its online platform, so Jet should definitely help here. Furthermore, Jet definitely seems to have its algorithms working well which rewards volume customers with steeper discounts. The scale and leverage Jet will get from Walmart's distribution network will be an enormous boost for the company and should over time bring down prices meaningfully. I still feel Walmart is investing to be the undisputed number 2 in the US behind Amazon, but will still bring in meaningful online income every year. Here is where synergies should take place between Walmart and Jet going forward.
Jet Will Add 12 Million Products Immediately To Walmart's Stock Listings
The chart below shows why Walmart needed to do something drastic in eCommerce, as Amazon is miles ahead. Walmart's site currently lists about 11 million products, which still pales in comparison to Amazon's 260 million items. Jet has managed to scale its product selection to 12 million items is 12 months which is exactly what Walmart needs to compete head on against its main online competitor. More choice has to open doors for Walmart and there is no reason why Jet can't keep on scaling up its stock of products, which should increase usage of the site.
Walmart Can Take Advantage Of Jet's Strength With Millennials
What I do like about the acquisition is that Jet has really made inroads in selling its wares to urban millennials. Walmart can really benefit here as its eCommerce customers are generally slightly older, with families, and living in the suburbs of cities and towns. Walmart's success has been built on its low-cost brand image and I think it is a smart move to keep both websites running separately at present. Jet will load up on Walmart's listings and use Walmart's extensive distribution network to target millennials all throughout the US. Remember that Jet is only using 3 distribution centers at present. So with the help of 40+ more from Walmart, prices should fall substantially on the platform.
The Hiring Of Marc Lore Was A Crucial Aspect of The Deal
Many analysts have stated that Walmart is more interested in Jet's founder Marc Lore than the company itself. Lore is well versed in eCommerce and is most notably known for selling Quidsi (parent company of Diapers.com) to Amazon for $545 million back in 2010. Walmart narrowly missed out on that deal and didn't want to slip up again when Jet hinted it was open to a buyout. Lore's job now will be to run Jet.com and specifically leverage its technology onto Walmart.com's platforms. Will Lore stay at Walmart longer than the minimum 2 years that analysts are stating? How is his leadership going to change Walmart's balance sheet going forward. Lore throughout his career has consistently spent on paid advertising in order to build out numbers. It will be interesting to see how aggressive he will be with advertising costs when he takes control. Lore has never had access to a balance sheet like this before. Let's hope for the company's shareholders sake that he uses it wisely.
To sum up, although this deal looks expensive on the surface, Jet has the potential to really improve Walmart's eCommerce capabilities. Better algorithms, millennial demand, more products and attractive brands will definitely make a difference quite quickly. Walmart investors will be looking for an update on guidance when the company announces its Q2 earnings next week. The share price may bounce around for a while until the partnership settles down so investors should be ready for some volatility in the near term.