Why did Walmart pay $3 billion for Jet.com?

Walmart has signed a deal worth over $3 billion to buy US e-tailer, Jet.com. The marketplace start-up will continue as a separate brand, but the acquisition will allow Walmart to improve the functionality and speed of its eCommerce capabilities. Walmart said Jet will "infuse Walmart with fresh ideas and expertise" for its 260 million customers shopping at 11,527 stores in 28 countries.

"We’re looking for ways to lower prices, broaden our assortment and offer the simplest, easiest shopping experience because that’s what our customers want," said Doug McMillon, president and CEO, Walmart Stores, Inc.

"We believe the acquisition of Jet accelerates our progress across these priorities," he added. "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. Our customers will win. It’s another jolt of entrepreneurial spirit being injected into Walmart."

As part of the deal, it has been reported Jet.com's founder, Marc Lore – who founded e-tailers Quidsi and Diapers.com before selling them to Amazon – will join Walmart as CEO of eCommerce, overseeing both Jet and Walmart's online propositions.

Start-up, Jet.com, has been around little over a year, launching in the US in July 2015. The new pureplay marketplace raised $255 million before launch and offered customers online "Club Price" savings, from its $49.99 yearly membership fee. It claimed members would receive 10-15% discount on products, free two-day delivery as well as video and music streaming, in an attempt to rival Amazon.

But three months later – and despite being half the price of Amazon Prime – Jet.com decided to overhaul this business model by scrapping its membership fee, which was thought to be the discounter's main source of revenue and discounts dropped to 5% per order.

But this change in direction has not slowed down its growth – Jet acquires 400,000 new urban and millennial consumers (in other words, not typical Walmart shoppers) per month and processes on average 25,000 orders every day.

Jet.com and data

Jet.com also has more than 2,400 retail partners which conduct two-thirds of customer fulfilment, with the e-tailer suppling and delivering the remaining third. But using data analytics, Jet.com offers members additional savings when shoppers add more products to their orders and are prepared to wait longer for deliveries. Using pricing algorithms, the e-tailer matches the basket item to similar items in the same merchant's warehouse and offers a real-time discount. The data is also used to triangulate the optimum merchant, packing and shipping zones to reduce system costs and in turn reduce prices for its customers.

As well as clever algorithms creating the cheapest prices, Jet.com also offers further discounts if customers part with their personal data, such as an email address.

Paula Rosenblum, managing partner at RSR Research, believes it is these algorithms which made Jet.com attractive to Walmart.

"You have to think of this as a tech play, more than a retail play," she said. "Yes, there are some opportunities Walmart gets from the Jet brand and the company’s demographics, but the real nut of it is Jet’s algorithm. It’s an algorithm that doesn’t just decide where the best shipping location is, but it adjusts the market basket price depending on how much of the order can be shipped from one place, or if the customer is willing to accept slower shipping times. That’s a very, very big thing, since Amazon is spending a fortune on shipping costs."

Every player in the retail industry is trying to compete with Amazon, and this acquisition does give Walmart another string to its bow. Rosenblum also said Walmart will be able to bring the economies of scale to allow Jet.com (and now in-turn Walmart itself) to make money from its real-time discount algorithms.

"I think Jet.com has gone down well with customers who use it. It just takes an insane amount of money to get its name out there, and to drag customers away from the juggernaut that is Amazon," she said. "This is where I see Walmart really bringing something interesting to Jet – scale and scope. And the finances to market the heck out of it."

Meanwhile, Bertie Stephens, CEO and founder of Flubit.com, said the acquisition of Jet.com highlighted how traditional retailers do not have the agility to tackle eCommerce on their own. "Small, hungry, online-only platforms are proving they can challenge Amazon’s dominance in a way no established retailer can," he said.

“What appears as a drastic measure to some commentators demonstrates the burning need of 'Big Retail' to find a way to take on Amazon. Why would Walmart pay $3 billion for an 18 month old start-up? Because the future of retail is eCommerce marketplaces that bring small retailers and consumers together. Jet.com successfully took a technology platform to market very quickly; that’s the kind of energy and pace Walmart needs."

Walmart and digital

Laura Kennedy, director, retail insights at Kantar Retail, agreed. She said Walmart is making it clear that a big move and change to the business is necessary to keep up with the digital competition.

"Walmart has attempted to build a 'technology company inside a retailer'. The website has approximately 11 million SKUs and is expanding (largely on third party sellers) but until recently it operated largely separately from stores – a detriment given that much of Walmart’s assets are tied up in stores in the US," she explained, noting how Walmart is progressing with digital and has launched a number of eCommerce and mobile features, such as curbside pick up and click & collect.

"Like many bricks and mortar retailers, Walmart has had to work backwords to current-fit an old system of distribution (of big pallets to big stores) to the new demands of shoppers to be more flexible (i.e. shipping one item at a time to a shopper’s home, to the store, etc.)."

And it's this flexibility and cost-saving algorithm which could really change the way Walmart operates as a traditional bricks and mortar retailer which launched in the US over 50 years ago.

Kennedy added: "On the back end this would also include Jet’s dedication to localised logistics and finding the lowest-cost way to get shoppers their orders based on local resources. Then, on the talent point, Jet co-founder and CEO Marc Lore has already been named the next leader of eCommerce in the US for Walmart and he’s somewhat of an eCommerce guru. The last piece that could be very beneficial to Walmart are Jet’s capabilities around vetting and managing a third-party seller marketplace—it’s an area that Walmart has struggled but Jet has been pretty good at."