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Wal-Mart Stores (NYSE: WMT), the massive $225 billion market-cap retailer, is challenging Amazon.com (NASDAQ: AMZN) head-on, for better or worse.
Wal-Mart’s latest move is its purchase of privately-held Jet.com, which is backed by the likes of Google (NASDAQ: GOOG). Wal-Mart paid over $3 billion for the e-commerce upstart. Jet.com has burned through a lot of money in its own attempt to take market share from Amazon.
The big question is this: Can a company like Jet.com really move the needle for a giant like Wal-Mart, which generates nearly $500 billion a year in revenues?
One bright spot is that Wal-Mart has the balance sheet to help grow and expand the Jet.com business, ideally capitalizing on the head start that Jet.com has over the Wal-Mart online business.
And the risk is relatively small for Wal-Mart, especially when there’s so much at stake in the e-commerce world. Shares of Wal-Mart are making new 52-week highs, and as I noted just last month, Wal-Mart has been becoming even more like Amazon with its two-day delivery initiative.
What Can Jet.com Do for Wal-Mart Online?
With the Jet.com buyout, Marc Lore, Jet.com CEO, is looking to turn around the Wal-Mart online business. Before starting Jet.com, Lore founded Diapers.com, which he sold to Amazon for over $500 million in 2011. Lore knows a thing or two about the online marketplace.
Wal-Mart tried to buy Diapers.com, but was beat out by Amazon. This time Wal-Mart wasn’t about to lose. Wal-Mart will have Lore for at least five years as part of his contract.
Jet.com is a brand that appeals to millennials. But it goes beyond that: Jet.com has sophisticated pricing model and back-end technology. This includes discounted pricing based on location relative to warehouses and order size.
Growth of Wal-Mart Online Business
The Wal-Mart online business has had its struggles. Online sales were less than 5% of its total sales last year. Making $14 billion from e-commerce in 2015, Wal-Mart brought in less than a fifth of Amazon’s yearly revenues. While this might appear to be a disadvantage, in truth it could be an opportunity . . . a big opportunity, as less than 10% of retail sales in the U.S. are from e-commerce.
I’d argue that Wal-Mart is already seeing success in its online efforts with its ShippingPass, the $49 a year program that offers customers free shipping from Wal-Mart. The retailer is pulling no punches; ShippingPass products have no restrictions like Amazon’s Prime, which includes pricing and delivery restrictions on Pantry and Fresh items.
Wal-Mart online is also going full speed into grocery delivery, partnering with the ride-sharing services Lyft and Uber to deliver grocers right to online shoppers homes.
A Wal-Mart Catalyst
Will Jet.com bring efficiency to the Wal-Mart online business? That would be a big catalyst for Wal-Mart, which has lagged competitors like Target (NYSE: TGT) in terms of returns and profit margins.
Investors should note that Wal-Mart offers a 2.7% dividend yield, and has increased its annual dividend for 41 straight years.
With Wal-Mart’s help, Jet.com can leverage its startup mentality to continue to take more of Amazon’s market share; Jet.com requires no annual membership and offers lower prices for more products purchased. Leveraging Wal-Mart’s distribution network and pricing power, Jet.com should be able to make an even great dent in Amazon’s business.
The nationwide rollout of Wal-Mart’s ShippingPass last month and planned optimization of its mobile app, plus the possible beefing up of its third-party marketplace, will further juice Wal-Mart’s e-commerce plans. Those plans include doubling online revenues in just five years, which should push Wal-Mart to even new highs.