Retail behemoth Wal-Mart appears to be undergoing a mid-life crisis. In recent years, the 54 year-old company has converted to the cult of agility, flirted with Uber as a delivery option and bought the equivalent of an electric blue Lamborghini – rapidly growing ecommerce start-up jet.com.
The latter didn’t come cheap, setting Wal-Mart back $3.3bn in cash and shares. But then Jet was hardly an impulse buy. It’s in fact a desperate punt on the superstore’s long-term future.
The wrong side of history
Wal-Mart is being disrupted by ecommerce. It’s known it for years, and it doesn’t like it. This is a firm, after all, that not long ago was itself an upstart conqueror – a regional US player as recently as the late 1980s, it had become the biggest company in the world by 2002, a position it’s held all but three years since.
Like most disrupted giants, it has put a great deal of time, effort and money ($1.1bn of investment budgeted for the coming year) into fighting back. Like most of them, it’s too little too late.
Wal-Mart’s ecommerce business turns over around $13bn a year, which is approximately 6.5% of America’s online retail sector. That’s small change for Wal-Mart, and even worse it’s barely keeping pace with the sector’s overall 10% a year growth.
That might sound like a first world problem, except for one thing: Amazon. The king of ecommerce commands 40% of the sector in North America – that’s around $80bn of trade – and it’s growing at 25% a year.
Sam Walton built a business to eat large-scale bricks and mortar retail. After that there was nowhere to go. Jeff Bezos built a business to eat everything, period. Amazon’s crushed books, DVDs and household goods - now it’s after groceries, clothes, IT infrastructure and even personal assistants. Of course Wal-Mart’s scared.
The Arkansas company fears that, if it’s not careful, it will be the losing side of the ever more ferocious battle between analogue and digital. And if it can’t compete online by itself...
There’s a reason Wal-Mart paid twice the most recent valuation for Jet. The young business is the only challenger to Amazon that’s met with any real success.
Since launching Jet a year ago, founder Marc Lore took the brave step of going mano-a-mano with Amazon on price, undercutting the larger firm by offering progressively larger discounts on bulk buys (it helps to have a few hundred million of VC money in the pocket).
The strategy has allowed Jet to acquire 3.6 million customers, adding 400,000 a month. It turns over $1bn already and is growing fast.
Although the two firms will retain their separate branding, they will be able to combine their strengths – Wal-Mart’s vast range of products, huge geographical footprint, formidable logistics infrastructure and deep pockets with Jet’s canny software, vibrant, millennial-focused brand and a leadership team.
It’s a cocktail of strengths even Amazon may find hard to stomach, and it gives Wal-Mart (or should that be Wal-Jet?) a chance of remaining a major player in ecommerce, rather than being swept away by the tides of history.
Wal-Mart would be premature to uncork the discount champagne, however. It would be unwise after all to expect Bezos to take this lying down.
Now that his cloud division AWS is turning over a tidy profit and Amazon Prime subscription service is finally gaining traction, he will have more leeway to cut retail prices and starve his new tag-team of opponents before they can develop the scale to really compete. Can you smell a price war?