Retail giant Wal-Mart Stores is reportedly looking at a purchase of online startup Jet.com for an estimated $3 billion, according to the Wall Street Journal and Dow Jones Business Wires, who cited persons close to the matter.
Wal-Mart did not return a request for comment.
Online retail experts agree that if Walmart is able to pull off such a deal the result would likely be a win for Walmart.com.
“Think about it this way, the only way Walmart.com can grow at the rate it needs to grow is by acquisition. Walmart.com could not only gain access to Jet.com talent but also take a competitor out of the market at the same time,” said Annabal Sodero, assistant professor at the University of Arkansas, whose expertise in supply chain and e-commerce.
He said Jet.com and Wal-Mart have similar business goals to be the low-cost retailer, and the aligned strategies are a positive for synergy.
“While Jet.com is threat to the jugular of Walmart.com as competitor, combining forces may be the best way for Walmart to attack back and in so doing establish a better foothold in the U.S. online space. The one thing that there is no room now is another online retailer like Jet.com in the U.S. marketplace,” Sodero said.
He said Jet.com uses dynamic pricing for its goods sold online. He said Walmart.com could benefit from this same tactic, literally changing the online price several times a day if necessary to compete in certain markets.
“You have to remember that physical retailers cannot adhere to such volatile price moves, but that is how it works for online retailers like Jet.com and Amazon.com,” he said.
Sodero said the acquisition of Jet.com would be an interesting move for Wal-Mart because it would add talent. He said there remains some skepticism around Jet.com in financial circles and perhaps Wal-Mart might pay a lower price for the startup which makes the deal even better for Wal-Mart.
He said if the deal does happen it will be interesting to see if Wal-Mart brings any of the online tech talent to Northwest Arkansas, a region thirsty for more IT expertise. He said the region offers a nice quality of life and much lower cost of living than in Silicon Valley and it might be a good fit for some IT experts. Walmart.com is based in San Bruno, Calif., between San Franciso and San Jose.
The $3 billion reported price is about 3 times Jet.com’s gross merchandise value run rate which hit $1 billion earlier this year. Financial experts say venture capitalists usually like a 7 times multiple, which puts the $3 billion at a deep discount.
Since its launch in July 2015 Jet.com has amassed more than 1,600 sellers offering 10 million products. There have been a few hurdles for Jet.com, namely its inability to convert trial users into paid subscribers. The company has no trouble attracting new customers, but getting repeat business has been a challenge. As of February, 70% of all Jet.com sales were from first time buyers, according to Slice Intelligence.
Keith Anderson, analyst with Boston-based Profitero, said he has felt for some time that Jet.com might be positioning itself to land at Walmart. He said Walmart offers Jet.com superior distribution and logistics assets and capabilities, which is one of Jet.com’s weaknesses. He said buying power and a well-aligned strategic owner with a similar focus on low prices on everyday essentials and higher margin discretionary items are positives for Jet.com if the deal is done.
Anderson also said Jet.com offers Wal-Mart with talent, competitive insight into Amazon’s operating model, a potentially new customer base (largely in urban areas), and an emerging third-party marketplace platform with above market growth rates.
However, Anderson and Sodero said a combined Jet.com and Walmart.com aren’t anywhere near the same size with Amazon. Anderson said the deal would have the potential to accelerate Wal-Mart’s online growth which the retailer is under pressure to do given the $2 billion in annual spending the online business is getting at the expense of store expansion.
Anderson also said there are some questions about potential integration of Jet.com and Walmart.
“What would become of the Jet (and Hayneedle) brands? Jet has invested a lot in building awareness and equity in the Jet brand, but Walmart has historically gravitated towards monolithic branding, unlike, for example, Kroger, which has retained the banners of many of its acquisition targets,” Anderson said.
He also wondered how Wal-Mart would integrate its third party marketplace with Jet. Lastly, Anderson said he wasn’t sure if Wal-Mart would preserve Jet’s “smart cart” pricing mechanic, which has been a pillar of its strategy and price positioning.