Since becoming CEO of Wal-Mart Stores Inc. (NYSE:WMT) in early 2014, Doug McMillon has tried several different strategies to gain leverage in internet retailing against Amazon.com, Inc. (NASDAQ:AMZN). The latest move, due to be announced today, is the purchase of Jet.com for $3 billion. It’s practically an acqui-hire – Jet co-founder and CEO Marc Lore will be put in charge of Walmart.com.
Amazon shareholders are not shaking in their shoes, as AMZN shares are actually up slightly in Monday’s premarket trade. Walmart stock is up fractionally, too, but don’t expect this Jet.com acquisition to be the cure to all of WMT’s online ails.
Walmart’s Previous Online Moves? Not That Great.
Jet is the latest in a series of moves that McMillon has made to gain traction against Amazon, which did about $100 billion in merchandise sales in 2015 against Walmart’s $14 billion. Since McMillon became CEO, Amazon has continued to extend its online lead.
First came in-store pick-up of online orders. It turns out breaking bulk is hard, and once items are on a shelf, in front of people, they move around — a lot. Even when they can be found, the cost of pulling them and packing them inside the store is high. I saw this with my own eyes last year when I needed something for a trip. Three WMT employees were put on the hunt for the item. I finally found it on a manager’s screen, figured out what shelf it was on and got it myself.
Second came just copying Amazon. McMillon has a network of warehouses, bigger than Amazon’s, with which to fulfill stores and online orders, and 10 now serve online orders. Recently, he’s even tried out drones.
Third came consolidation, a move of all digital operations to Silicon Valley. The company’s in-store tech group and @WalMartLabs became Wal-Mart Technology, with up to 8,000 employees and want ads throughout the Valley.
All this may fix the back end of the problem, but the front end is still a mess, from a merchandising standpoint.
What WMT Is Getting
Compare the Jet and Walmart sites, and it’s actually difficult to see what McMillon is buying. Both sites offer the same merchandise at roughly the same prices, and with the same urgency. Jet offers wholesale goods, quick re-orders of basic merchandise and a feature called Smart Kart that lets it drop prices as people shop, based on calculations of its own fulfillment costs. Walmart.com offers pick-up services, “cyber rollbacks” and sales tied to seasons.
However, Lore is a “get” who was able to sell his previous company, Quidsi — with lines like Diapers.com, Beauty.com and Soap.com — to Amazon for $546 million back in 2010. Lore brought in $800 million to Jet over multiple funding rounds.
And Jet does have interesting online tools and a network of 2,000 suppliers who list their products on its site and ship from their own warehouses, taking a cut ranging from 8% to 15%. In this way it is similar to Alibaba Group Holding Ltd (NYSE:BABA), the Chinese e-commerce giant, or Amazon’s own “fulfilled by Amazon” service.
But McMillon is paying a high price. Jet is expected to bring in $500 million in revenue over the next year — a mere fraction of Walmart’s own online sales.
Since Lore owned 25% of Jet, he is expected to net $750 million for himself.
Can Jet Stay Hungry?
The question becomes whether Lore and his team will stay hungry.
Certainly the challenge of managing Walmart’s huge budget, and its top priority, would make most executives salivate. But all Lore has proven so far is that he can sell ideas to investors, get companies started, then sell those companies for big profits.
Lore hasn’t proven he can run a giant company, and that makes him a gamble — the biggest of McMillon’s career, in fact. If he fails, it’s hard to see where Walmart will go next for online growth.
McMillon is now a Jet all the way, and its failure may be his last.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
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