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Can Jet.com Fuel Wal-Mart’s Online Growth?

Wal-Mart this week brought more muscle to its competition with Amazon by buying online shopping site Jet.com. Wal-Mart Stores will pay $3.3 billion for the two-year-old Hoboken-based firm. Jet.com’s “gain sharing” business model revolves around persuading customers to bunch their orders and pass on the savings in shipping costs with lower price tags.

Opinions are sharply divided over the wisdom of Wal-Mart’s move. For many analysts, however, Wal-Mart’s eagerness to strengthen its online attractiveness is seen as the right driver to grow its business, even if its strategies to achieve that goal are debatable.

“The Jet.com move is in that direction [of growing online sales],” said Barbara Kahn, a Wharton marketing professor and director of the school’s Jay H. Baker Retailing Center. “The customer is channel-agnostic [and does not] divide up retailers necessarily by offline or online.” She explained that today’s customers look for where they can get what they want “most conveniently at the best price.” In order to meet those needs, Wal-Mart must have an omni-channel strategy, or a presence across multiple sales channels, which is why the Jet.com purchase makes sense, she added.

Mark A. Cohen, director of retail studies and adjunct professor at Columbia University Graduate School of Business, strongly disagreed. “[The deal is] great for [Jet.com CEO and co-founder Mark Lore] and it’s great for his shareholders,” he said. Lore owns a quarter of Jet.com and could collect $750 million from the sale, according to a report by Recode.net. “[But] it’s a catastrophe for Wal-Mart. They’ve just flushed $3 billion down the drain.”

Amazon could at the stroke of a key wipe out whatever price savings Jet.com could come up with. –Mark A. Cohen

Kahn and Cohen discussed the pros and cons of Wal-Mart’s strategies on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

What Wal-Mart Saw in Jet.com

Wal-Mart was impressed that Jet.com clocked a revenue run-rate of $1 billion its very first year, as it said in its press release announcing the deal on Monday. It was also impressed that Jet.com added more than 400,000 new shoppers, including millennials, each month, and that it has partnerships with more than 2,400 retailers and brands. “It’s another jolt of entrepreneurial spirit being injected into Wal-Mart,” said Doug McMillon, president and CEO of Wal-Mart Stores, Inc.

Cohen did not share McMillon’s enthusiasm, especially for the talents of Lore and his team. “I don’t think you can acquire success by acquiring an individual, especially an individual who is supporting a business that has been losing money in dump trucks of cash, that hasn’t been able to crack the code on Amazon’s appeal,” said Cohen. He said he doesn’t think that Jet.com “can ever be profitable.”

Kahn struck a different note, and said “[Lore] was part of the reason [Wal-Mart] wanted to buy the company.” She suggested that Lore has an instinct for spotting customer trends, recalling his visit in June to the Baker Retailing Center. Lore at the time said that “more and more competition is at the platform level where retailers and customers will choose one platform over another,” she added.

In line with those trends, Wal-Mart has consciously attempted to push its online retail business in recent years, said Kahn. She noted, for example, that the company enabled store pick-ups of items ordered online, and that it had “invested significantly” in an e-commerce division in San Francisco. She said the company has also recognized that it needs to be physically close to its online customers in major U.S. cities in order to be more responsive to their needs and has invested in the requisite infrastructure.

But Cohen rated Wal-Mart’s attempts thus far to compete with Amazon as “a dismal failure.” He said Wal-Mart’s online revenues are “not insignificant, [but] it is insignificant relative to the first-mover advantage that Amazon has always had.” Wal-Mart’s online sales were about $14 billion last year — 14% of Amazon’s product and service revenues of $99 billion, as a Bloomberg report noted.

Finding the Right Model

Cohen said he appreciates that Wal-Mart wants to expand its customer base and sees Jet.com as “a pathway into the markets of the millennials,” but faults the company’s strategy. “Wal-Mart or Wal-Mart.com is not appealing enough to these customers they aspire to,” he said. “If it were me, I would have started a company with a different name, but I wouldn’t have tried to take Amazon on just on the basis of price. Amazon could at the stroke of a key wipe out whatever price savings Jet.com could come up with.”

“One has to be omni-channel — not one or the other.” –Barbara Kahn

Cohen clearly thought Wal-Mart was lost in discovering the strategy that works best. “I’ve begun to [see] Wal-Mart as the Flying Dutchman of retailing, that ghost ship that sails the seven seas without a course and without a crew, certainly not in danger of foundering but seemingly unable to find any kind of a viable path toward a port of call,” he said. The Jet.com purchase is unlikely to help Wal-Mart “meaningfully become something they just cannot be on their own,” he added.

Wal-Mart would be better off pursuing its own online strategy that is independent of what Amazon does, according to Cohen. “Wal-Mart has to express itself powerfully in the Internet space, but it has to do it in a way that’s not Amazon-like, because that opportunity has come and gone.”

He added that “at the end of the day, Wal-Mart with its massive size has to consider that it can’t grow as it is currently constituted.” He suggested that it could spin off its Sam’s Club as a separate company, or completely hive off the Internet challenge. (Sam’s Club, operated by Wal-Mart, is a chain of membership-based retail warehouse clubs.) Kahn disagreed with Cohen’s suggestion to spin off the e-commerce arm. “One has to be omni-channel — not one or the other,” she maintained. “They need both arms together.”

Jet.com, too, has experimented with its business model, Kahn noted. It began as a subscription business styled on the Costco model that serves only members. “That didn’t work and they pivoted to come up with its current model of trying to beat Amazon at low price,” she said. The current model encourages its customer to bunch their orders, say weekly, in order to save on shipping costs.

“Jet.com … was built to be bought by someone,” Kahn said. “Wal-Mart or Amazon were the only ones who could afford it.” She recalled that in 2010, Amazon bought Lore’s previous company Quidsi.com (which runs Diapers.com and Soap.com) for $550 million. “Apparently [Amazon] didn’t want to buy the second one,” she said. Added Cohen: “Amazon perhaps didn’t need to pay $3 billion to figure out yet another way to lower their already competitively low prices. This algorithm is a tricked-out offer. I’m shocked that Wal-Mart took the bait.”

I’ve begun to [see] Wal-Mart as the Flying Dutchman of retailing, that ghost ship that sails the seven seas without a course and without a crew… –Mark A. Cohen

Disruptions Ahead

Plans are for Wal-Mart to allow Jet.com to operate independently, but it has to prepare for disruptions and repositioning itself. The immediate fallout of the Jet.com deal is that Wal-Mart’s current head of e-commerce Neil Ashe has decided to step down, according to a Bloomberg report. Cohen also predicted “an enormous cultural crisis withinWal-Mart.com and Wal-Mart at large,” as Lore settles down in his new role. Kahn, too, noted, “Culturally, there may be a disconnect. Wal-Mart is an operational company whereas Mark Lore is a creative [person].”

Longer term, Wal-Mart must manage perceptions of it as well. According to Cohen, Wal-Mart has “to find ways to refine who they are without losing their customer base because they are trapped in this sort of dumbed-down, all-in view that the customers they don’t shop with have of them.”

Kahn agreed that perception of customers is an issue Walmart faces, and that one important factor is the age profile of the customers it desires. “A lot of Wal-Mart’s consumers are older [people], whereas Amazon is clearly bringing in the younger market,” she said. “The hope is that Jet.com can bring in that market for Wal-Mart.”

This article is republished with the permission from Knowledge@Wharton-the online research and business analysis journal of the Wharton School of the University of Pennsylvania-under a content licensing agreement with Future Startup.

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