Wal-Mart Wants to Be an Even Bigger No. 2 in Online Retail

By Markets Fool.com

Wal-Mart (NYSE: WMT) has seen its growth slow when it comes to digital sales -- an area where it's No. 2 to Amazon.com(NASDAQ: AMZN), but a very distant No. 2. To jump-start its sales and speed up its infrastructure development, the company has paid $3.3 billion for Jet.com -- an upstart company created by Marc Lore, the digital pioneer who sold Diapers.com to Amazon.

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On this episode of Industry Focus: Consumer Goods,host Vincent Shen is joined by Fool contributor Daniel Kline to discuss whether this deal makes sense. The two talk about why Wal-Mart felt it needed to make this deal and what it's actually buying. They dig into how Jet.com is different from Amazon and Wal-Mart, as well as how it markets itself to consumers.

A full transcript follows the video.

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This podcast was recorded on Aug. 9, 2016.

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Vincent Shen:This week, it was confirmed that Wal-Mart is pivoting its e-commerce strategy once again by acquiring Jet.com for $3.3 billion.

Let me stop right there and provide background again for Jet because this is one where in my I guess unscientific sampling of friends and fellow Fools, not everyone is really familiar with this company frankly. It makes sense considering how young it is, it's only just over a year old at this point and it's been scooped up for a pretty hefty price there, I think one of the biggest e-commerce start-up price tags in history.

Daniel Kline: They have crazy multiple on sales. They do about $1 billion in sales and they sold for $3.3 billion. You don't see money-losing companies get that kind of deal very often.

Shen: That billion dollars is gross merchandise volume. Basically, the value of everything they sell on the site, but they're revenue is actually just a piece of that too, so it's a bit crazier than that.

Kline: To finish what you were saying, Jet.com was built as an Amazon competitor. What Wal-Mart is buying is partly their CEO, a guy named Marc Lore, who also started the company that owned Diapers.com, which Amazon bought. Jet.com used sort of a different method than what Amazon does. As a customer on Jet, you would build your order, and the more things you bought, the cheaper your price would get because it would be cheaper for them to deliver it to you. It's worth noting that Amazon does that after a fashion with add-on items. I think even Targetand Wal-Mart do it a little bit. The idea is to get you to go on and not just impulsively buy something but to really do your shopping and build up your orders. It's a fledgling company, but they have been adding I think the number is 400,000 shoppers a month?

Shen: Yes, that's the number.

Kline: It's growing, but this has to be the biggest gap. Wal-Mart is No. 2 when it comes to online retailers. I believe the numbers are about $100 billion for Amazon and about $13 billion for Wal-Mart? This is Coke and Pepsi except Pepsi is Royal Crown soda. It's a very small player in the space comparatively.

Shen: I think this is an interesting deal, and we can get I guess in more detail what Wal-Mart is getting here with this acquisition. I think the CEO or the co-founder of Jet.com, Marc Lore who you mentioned, he's a big part of the story, he's going to be joining Wal-Mart following the acquisition. He's going to lead Wal-Mart's e-commerce efforts going forward and Jet.com and Wal-Mart.com will still operate separately at that.

Kline: We joked about this before, but one: I think Wal-Mart is lighting money on fire here. I don't think there's anything that they couldn't have duplicated in the six months for $0.5 billion. They're spending a huge amount of money to get a guy. I get it, Marc Lore has been successful, he's been one of the few that has been able to compete with Amazon, but I don't see why Wal-Mart is buying it. I look at it say 18 months from now there's going to be the inevitable press conference where Marc Lore stands up and says, "We've decided to eliminate the Jet.com brand and just focus on our core brand of Wal-Mart.com, but of course we're going to be integrating the technology." It doesn't seem like these deals ever end up with one company operating two distinct products in the same space.

Shen: I love the fact that if you see Amazon as the archrival to Wal-Mart, it's going to be as Lore you mentioned the company that he started previously Quidsi, which owned a portfolio of stores like Diapers.com and Soap.com, that guy got bought by Amazon for about $550 million in 2010. Lore was actually at Amazon for two years, then he left, kicked out Jet.com and now lo and behold, he's going to be end up at Wal-Mart.

Kline: He's really good at raising money, but he hasn't shown that he's really good at building sales. That's what troubles me about this.

Shen: To touch on that specifically from what I could find, Jet.com has raised about $800 million through various rounds of funding and financing from a lot of actually investors from his previous ventures. He obviously has a strong track record. Something just to keep in mind is the fact that they have their smart cart where the more you buy, the cheaper it can be for shoppers. I think there have been quite a few analyses and studies from some industry followers and from shoppers themselves that have found it.

A lot Jet.com prices are competitive and better than Amazon, which is usually seen as the price leader. That was the strategy that base has used to claim so much market share and to develop such a leadership position. Basically, it comes down to the fulfillment in the logistics and the way they tie the shipping and how much you buy. You take Wal-Mart and they have this huge network of stores and warehouses. They can basically take that technology and leverage it to Wal-Mart scale.

Kline: The challenge for Wal-Mart has always been that fulfilling what a store needs versus an individual order is a massive change. This probably speeds that up, but there's going to be huge growing pains. I don't see how they're buying enough customers to have this make sense. If they had paid Mark Lore's investors back at a 25% premium and then giving him a huge deal to come in and run their digital, this would have made sense, but they're buying a brand most people haven't heard of. The second people realize that Jet.com is a Wal-Mart brand, it loses some its cache. I think it's fair to say there's a Target and Amazon customer that looks at Wal-Mart and goes, "Ugh, I don't want anything to do with Wal-Mart." I think that's going to taint the sort of hip millennial brand. It's very hard to stay cool when you're associated with Wal-Mart.

Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.