Wal-Mart Stores buying Jet.com in $3.3 billion deal (Updated)

Editor’s note: Story updated with numerous additions and changes throughout.
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Wal-Mart Stores is expediting its move into e-commerce and its pursuit of Amazon with a $3.3 billion deal to acquire Hoboken, N.J.-based Jet.com. The deal is expected to close this year.

According to Wal-Mart, the deal calls for a $3 billion cash payment “over time,” and $300 million in Wal-Mart shares “paid over time as part of transaction.” The company did not provide detail as to the time involved in the cash payment and share distribution.

It’s the highest price ever paid for an internet retailer, and more importantly, respected Jet.com CEO and co-founder Marc Lore is included in the deal. Wal-Mart said the two companies will continue to operate autonomously for now and Jet.com will keep its corporate offices in Hoboken, N.J. There has been no details yet disclosed as to the salaries of Lore and any of management team that should accompany him in the deal.

“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, Wal-Mart Stores, Inc. “We believe the acquisition of Jet accelerates our progress across these priorities. 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.”

The following are other reasons cited by Wal-Mart as why it moved to buy the company founded in 2014.
• Demonstrated ability to scale with speed, reaching $1 billion in run-rate Gross Merchandise Value (GMV) and offering 12 million SKUs in its first year.

• A growing customer base of urban and millennial customers with more than 400,000 new shoppers added monthly and an average of 25,000 daily processed orders.

• Best-in-class technology that rewards customers in real time with savings on items that are bought and shipped together, thereby reducing the supply-chain and logistics costs often buried in the price of goods.

• A select group of more than 2,400 retailer and brand partners tailored to create an attractive and distinctive assortment for consumers.

Retail market watchers applauded the deal, saying it’s the best way for Walmart.com to grow marketshare against Amazon as well as beef up its e-commerce talent in a highly competitive environment.

LURING LORE TO WAL-MART
Lore is no stranger to acquisition as his team co-founded Quidsi, the parent company of Diapers.com, Soap.com and Wag.com, which was acquired by Amazon.com for $540 million in late 2010. Since then this team founded Jet.com which demonstrated its ability to scale with speed, reaching $1 billion in Gross Merchandise Value (GMV) and offering 12 million stock items in its first year.

Wal-Mart management said the acquisition of Jet will infuse Wal-Mart with fresh ideas and expertise, as well as an attractive brand with proven appeal, especially with Millennials, the first generation of true digital natives. Walmart was attracted to Jet because of a growing base of urban and millennial customers with more than 400,000 new shoppers added monthly and average of 25,000 daily processed orders.

“We started Jet with the vision of creating a new shopping experience,” Lore said. “Today, I couldn’t be more excited that we will be joining with Walmart to help fuel the realization of that vision. The combination of Walmart’s retail expertise, purchasing scale, sourcing capabilities, distribution footprint, and digital assets – together with the team, technology and business we have built here at Jet – will allow us to deliver more value to customers.”

Wal-Mart and Jet will maintain distinct brands, with Walmart.com focusing on delivering the company’s Everyday Low Price strategy, while Jet will push its unique and differentiated customer experience with curated assortment. Wal-Mart and Jet said they will use their different technologies and assets to find new ways to grow their customer bases.

MOVING TO A ‘TWO-MAN GAME?’
Wall Street investors didn’t react much to the news as Wal-Mart shares were trading around $73.21, down 55 cents in the morning session on Monday following the announcement. Perhaps that is because Jet.com has yet to turn a profit, despite a growing subscription base and market reach. Jet has also reportedly spent between $20 million and $25 million toward marketing its shopping platform in this first year.

Earlier this year Lore spoke publicly about how tough it was to raise the funds it needed to fuel its growth, indicating that it could be 2020 before Jet.com reached profitability.

Annibal Sodero, a supply chain professor at the University of Arkansas, told Talk Business & Politics that Jet’s difficulty in raising capital was likely a reason why they were open to talks with Wal-Mart and why he thinks Wal-Mart is acquiring Jet.com at a discounted rate. He also said growing through acquisition was the best chance Walmart.com has to expand its marketshare against Amazon. He favored the deal for Walmart saying that there is key insight that Jet’s management can bring to the table that could help Walmart with its online reach.

Stephens Inc. retail analyst Ben Bienvenu told Talk Business & Politics the deal is important for Wal-Mart because it further demonstrates management’s commitment to the e-commerce space.

“It also adds a complimentary customer set of millennial and urban shoppers to Walmart’s base. While it’s going to be difficult to close the gap with Amazon as there is only so much marketshare to grab, it could perhaps make it a two-man game or at least move in that direction,” Bienvenu said.

He said the $3.3 billion price is not a wildly unreasonable multiple, despite the fact Jet has yet to turn a profit.

“Perhaps they are looking more heavily at long term opportunity and an overall revenue perspective. When you consider how Wal-Mart’s buying power, logistics and supply chain efficiencies and scale could likely bring down the operating costs of Jet there are no doubt efficiencies to be gained with this merger. Getting Marc Lore with the deal is also a huge bonus,” Bienvenu said. “It’s also attractive because there are some similarities in their low cost strategies.”

MARRIAGE OF ‘ASSETS AND CAPABILITIES’
Carol Spieckerman, CEO of Spieckerman Retail, said the capabilities aspects of the deal are compelling enough, but through the acquisition, Walmart is also bringing recognized digital talent in Marc Lore who who has proven to be a successful serial entrepreneur in the digital space.

“Walmart is smart to take advantage of Lore’s expertise rather than simply grabbing Jet.com and attempting to integrate it into Walmart’s existing platform. Engaging Mr. Lore also essentially takes him off the market, at least for an agreed time period, mitigating the very real possibility of Walmart having to compete against yet another Lore-powered e-venture,” Spieckerman added.

Keith Anderson, e-commerce expert with Profitero, recently told Talk Business & Politics that 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 fairly well-aligned strategic owner with a similar focus on low prices on everyday essentials and higher margin discretionary items are positives for Jet.com.

Anderson and Sodero agree that even a combined Jet.com and Walmart.com aren’t anyway near even footing with Amazon. Anderson said the deal has the potential to accelerate Walmart’s growth online 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.

Wal-Mart Stores CEO Doug McMillon is participating in media press conference call at 1:30 p.m. Talk Business & Politics will update this story following that call.