Walmart acquired jet.com, an aggressive eCommerce player founded in 2014 to take on Amazon, for $3.3 bn. Walmart is a distant second to Amazon in online sales in the US - $14 billion compared to $63 billion for Amazon. More troubling, however, has been Walmart's declining year over year eCommerce sales growth.
With eCommerce, Walmart has adapted an Omni-channel fulfillment strategy which makes sense on paper - 90% of Americans live within 15 miles of a Walmart store so the stores can serve as eCommerce fulfillment centers for the last mile delivery. Although leveraging their existing infrastructure would appear to provide a competitive advantage, it actually has hindered their own eCommerce growth and proven to be a disadvantage.
But why is this the case? A number of reasons could be evaluated; I will explore two major contributing factors:
According to disruption theory, incumbents tend to fail because they already have a successful pre-existing revenue stream. In other words, the fact that Walmart is the largest retailer in the world actually impairs their expansion into eCommerce. As a disruptive new entrant, Amazon, on the other hand, has been able to offer zero margin (or less) services as they are able to poach customers from existing retailers, grocery stores etc. and continually scale their network to offer better selection, lower prices, and incredible convenience, all of which bring more customers and reduce costs. For Walmart to offer the same services, they would be poaching their own customers from their brick and mortar stores while simultaneously reducing their profit margins. That's a hard call to make for any executive and is a tough sell to existing investors.
This is somewhat analogous to Apple self-disrupting one of their own product lines before a competitor could. In 2007, the year the iPhone was released, the iPod was Apple’s pre-existing cash cow with 48% of Apple’s revenue from iPod sales. Now, the iPod is a tiny fraction of it’s revenue. Apple was willing to kill their biggest source of revenue as they recognized the potential of the iPhone. Had Apple tried to protect their biggest moneymaker’s revenue stream, where would they be now? Is Walmart willing to do something similar? Where will Walmart be if they don’t adapt a similar mindset?
Walmart's Logistics Network
Pre eCommerce, Walmart was revered for its collaboration and technology-driven supply chain practices to move freight between suppliers, distribution centers, and stores in pallet and case quantities. Walmart was clearly an innovator in the retail supply chain and their supply chain processes played a large role in their expansion. Walmart controlled the entire store distribution process moving pallets and cases to stores on predictable fixed delivery routes on their own fleet of trucks. The network was never designed to efficiently distribute individual items to consumers and as it turns out this is a far more complex process than traditional retail distribution.
In the new model, orders are picked and packed 24/7 and may need to be delivered within a few hours. The logistics infrastructure required to compete in eCommerce is vastly different to traditional retail logistics and the changes have given rise to mega e-fulfillment centers, automated technology to pick individual items, sortation centers, parcel hubs, and urban logistics depots for same day fulfillment. None of these new developments fit very well into the old model’s logistics infrastructure. Amazon on the other hand, started their logistics infrastructure with a singular focus on eCommerce. They did not have the burden of retro-fitting existing facilities designed for store distribution into distribution to end consumers. In addition, unlike Walmart, Amazon has not had to balance eCommerce expansion with an internally-competing pre-existing retail business.
The total potential buyers for jet.com was 1 so in that respect the price seems high, but considering Walmart's inconsistent and unsuccessful eCommerce strategy, maybe paying 1.5% of your market cap is a reasonable price to pay for some fresh blood and new ideas in order to compete with a clearly more dominant eCommerce competitor in Amazon. The key will be how Walmart integrates jet into their existing business. Allow jet to build a separate online business alongside Walmart, and they have a slim chance of competing in eCommerce. Integrate jet into the existing Walmart.com, and Walmart infrastructure will make it highly unlikely that Walmart will ever be able to catch up to Amazon.