Why Walmart would want to buy Jet

Walmart is apparently in talks to acquire online retailer Jet, according to a report today from the Wall Street Journal. If true, the move shouldn’t come as a surprise. Walmart has been experimenting with ways to grow its e-commerce business as of late, and CEO Doug McMillion has repeatedly said growing Walmart’s online business is a key priority. Walmart’s online sales are a fraction of Amazon’s, and Amazon has over 20x more items listed for sale than Walmart.com.

The timing is interesting, though, because Walmart is in the very early stages of several new e-commerce initiatives, including its ‘Amazon Prime killer’ ShippingPass and its commitment (a couple of billions of dollars worth) to improving the e-commerce experience via its website, app, and fulfillment (more on that below). The alleged talks with Jet come hardly a month after the nationwide rollout of ShippingPass, which would seem to suggest that the initial results of ShippingPass’ 30-day free trial weren’t overly optimistic. Also, this comes a month after Walmart sold its e-commerce business in China.

While U.S. e-commerce sales are expected to double from 2015’s figure in the span of just five years, Walmart — the second largest U.S. e-commerce retailer — has been experiencing significant slowing in its online growth. Sales growth has slowed for the past five quarters and has trailed the economy-wide e-commerce growth rate for nearly a year. While this potential acquisition could be one of Walmart’s biggest acquisitions ever, the company has trialed a variety of initiatives recently to accelerate its e-commerce growth, and Jet would be its biggest bet yet.

Within the last year, Walmart.com has experimented with free shipping on all online order promotions; launched two-day free shipping on most items through its ShippingPass membership program; agreed to spend $2 billion on building fulfillment centers, supporting ShippingPass, and optimizing its website and mobile app; put in initiatives to grow the number of sellers and items on its third party marketplace; merged its corporate tech teams; and invested in other adjacent initiatives such as Walmart Pay and grocery curbside pickup.

The initial results of these initiatives likely have not mitigated fears that Walmart is in a disadvantageous position to compete with the likes of Amazon and potentially others.

What Walmart could gain with Jet

Walmart has much to potentially gain if it acquires Jet. First, it would attain valuable data, sophisticated pricing and fulfillment software, and experienced and proven talent. Furthermore, it would receive an enthusiastic customer base of nearly 4 million users, with higher average incomes and thus higher average order values than Walmart’s. It would also be able to expand the number of products for sale on its .com platform, since Jet’s 10 million items for sale almost equals the number of Walmart.com’s current offerings.

What a Jet buy-out would say about the impact to the e-commerce industry

Jet has certainly been through a whirlwind over the past year. It went from being the infamous ‘Amazon killer’ to changing its subscription fee business model to facing turbulence with some retailers to ultimately hitting a $1 billion GMV run-rate in its first year of operation. It has become one of the fastest startups to ever reach the $1 billion valuation and, after much iteration, has claimed a market basket size of 5.5 products — much higher than estimates of Amazon and other platforms. It has also laid out a plan to spend hundreds of millions of dollars in marketing and customer acquisition and has said it doesn’t expect to reach profitability for several years.

Jet has certainly seen some success growing its top line and giving consumers a viable online alternative to established leaders including Amazon. That said, its current business plan would require increased funding and patience from its investors, so the timing for Jet would also be opportunistic. Depending on a final buyout amount from Walmart, Jet could more than double its $1.35 billion valuation from last November, all without coming anywhere near breakeven or profitability.

As for the e-commerce industry, there has been a lack of massive funding rounds or large exits for U.S. based e-commerce platforms for the past several decades. Similar to Unilever’s acquisition of Dollar Shave Club, a Jet acquisition would likely be beneficial to the industry and serve as a validation to alternative and emerging business models. I could see this help raise the credibility — and ultimately the valuation — of other e-commerce platforms, such as Boxed Wholesale.

So, how would this impact Amazon?

The immediate impact that a Walmart/Jet deal would have on Amazon is unclear. While Jet has certainly achieved some topline success and provided an alternative viewpoint to Amazon for both brands and customers, it does not seem to have had much impact on Amazon’s overall business, as is evident from Amazon’s recent earnings calls. Even if there were no overlap in product offerings between Jet and Walmart.com, Amazon would still have 10-15x more products for sale than the combined entity.

That said, a Walmart/Jet deal could cause Amazon to change its pricing and its approach to customers and vendors. While growth has continued in the 20 to 30 percent range for several quarters, Amazon certainly has areas to improve on, including browsability, bundling, product discovery, crackdown on fraudulent third-party sellers, and better product recommendations.

While Best Buy, Walmart, and others have struggled with scaling marketplaces, effective third-party marketplaces remain the biggest threat to Amazon. It would be extremely difficult for any new competitor to defeat Amazon in traditional wholesale retail models and investing in distribution centers and fulfillment. But scaling an efficient marketplace — as is the dominant model in Asia — is the best bet for anyone to make a serious dent in Amazon’s e-commerce market share in the U.S. The rapid rise and acquisition of Jet would undoubtedly motivate new players to step up to the challenge.

Fahim Naim is CEO of e-commerce consulting firm eShopportunity.