If you own a television, view any news sites, or are part of any online retail Facebook groups, you’ve almost surely heard the news by now. WalMart has purchased Jet.com for a colossal $3billion cash and $300million in stock. This deal has rattled the online world and there has been rampant speculation about what this means for sellers. Let me start with one key point: nobody knows. There are certainly informed opinions out there, but deals like this happen all of the time and nobody really knows for sure what will happen.
That said, I have a little interest in mergers and acquisitions and I’ve looked into this deal and I think there are a few points worth mentioning that might help people think more clearly about what is going on.
- The sky is always falling. If you’ve been a third party seller on Amazon for any length of time, you know that there is a certain pattern. News is announced. Everybody thinks that the world is ending. The world goes on. People adjust to the change and move on with their life as a seller. It doesn’t matter whether it is “Retail arbitrage is dying!” or “Fees are going up!” or “Categories are being gated!” or anything else. Jet.com set out to be an Amazon killer and WalMart is the largest name in retail, so it’s natural that we’re seeing some pretty concerned reactions, but let’s pause for a second and try not to immediately fear that the end is nigh.
- WalMart has done this before. At least 15 times. They’ve been trying to figure out online retail since at least 2000 and have aggressively partnered with and bought out online companies over the past half-decade. They brought on mega-retailers like Wayfair, Hayneedle, eBags, ProTeam, Shoebuy, etc. as partnered retailers in an effort to dramatically increase the size of their online catalog. They bought out social media players Kosmix and created @WalMartLabs where they bought up several online companies to try to grow their e-commerce business.
- WalMart’s results have not been stellar. Currently, they’re actually shrinking while Amazon is growing. In other words, the culmination of all of their work is to continue to lose market share to Amazon. Now, they’re effectively doubling down, and spending a gigantic sum of money to try to buy their way to success, yet again.
- Marc Lore, the founder of Jet.com, has done this before. If you sell on Amazon, you might have seen Quidsi, Diapers.com, soap.com, etc. as third party merchants. These are actually all Marc Lore’s creation, before selling them to Amazon. This deal was a bit different as Amazon basically bought out competitors and the deal was also only about one-sixth the size. Nevertheless, it’s something to think about.
- Marc Lore’s history after selling companies has not been stellar. He stayed on with Amazon and the companies were supposed to be run independently, but he only made it a few months as it didn’t take long for him to realize that when companies spend a lot of money, they want a lot of say over what happens. Lore hasn’t had the nicest things to say about Amazon following that transaction and it’s not an accident that he raised a huge sum of money in an attempt to try to slay the giant of e-commerce.
- Jet.com is tiny by comparison. Jet has great growth numbers, but as of today, they’re hardly a shadow of Amazon. Depending on how you run the calculations, they’re something between one-fifth of one percent to 1 percent the size of Amazon. That’s not inconsequential (worth $3.3B according to WalMart!!), but it’s not exactly something to get riled up about. WalMart, by comparison, has about one-sixth the online sales as Amazon.
- Said another way: If we take Jet.com at their word and assume that their Gross Merchandise Value will get to $1billion by the end of the year, and then we found 19 other Jet.coms and we put them all together to create a giant 2o Jet.com company, it would still be smaller than eBay.
- Said another way, by the year 2025, Marc Lore plans for Jet.com to get 10% of online retail sales (and remember, entrepreneurs tend to have fairly lofty goals (Best Buy has under 3%, for example). Right now, Amazon has over 40% of the online market share and gets somewhere between 51% and 60% of all new online sales growth.
- Jet.com is a business in search of a business model. This may sound harsh, but Jet.com has not been around for very long and they’ve already had to completely change their business model. They marketed themselves as a type of Costo membership club where they would offer 10%+ discounts on products, make no money on transactions, and would charge $50 membership fee. This model failed. They realized they weren’t convincing prospective customers to pay $50, so they abandoned the model, reduced savings to customers to 4-5% and kept the rest as profit.
- Jet.com might have a sales tax problem, though. Right now Jet only has to charge sales tax in 7 states, and not the big ones like California and New York where a lot of sales come from. However, depending on how the companies are merged, it is entirely possible that Jet.com might have a sales tax nexus in all 50 states (as WalMart does), which would mean they would have to charge sales tax in nearly every state. All of a sudden, the 4-5% discount that customers get is eaten up (and more) by sales tax. Further, market researches found that when Amazon started collecting sales tax in certain states, their sales dropped about 9%. It’s possible that if the companies are run completely separately then they can avoid this problem, but then Jet misses out on a lot of the benefits of partnering with WM.
- There might also be a cultural problem. I’ve already suggested that Lore did not fit in well at Amazon, but there is reason to believe that this could be true with WalMart as well. Just last year, he had an interview with Bloomberg where he was highlighting the cultural differences between Jet.com and other major players and seems to derisively suggest that if anyone does like it, they should go to WM: “If someone is unhappy here and doesn’t see an opportunity for growth, OK, good luck, go to Wal-Mart… I want to prove to myself that a different kind of culture can work and that you don’t have to be like that to be successful.” As it turns out, it might be Lore who needs the good luck as he has chosen, indeed, to “go to Wal-Mart.”
So, what does all of this mean? In my opinion, this is really interesting news, but not really consequential news. I don’t think the sky is falling. In fact, I think almost nothing will change for the average Amazon seller. That doesn’t mean that there aren’t potential opportunities. It’s possible that Jet.com will become a market that is important to be selling on, but as of right now, it’s way below other options. If you aren’t selling on all of the other platforms, then I don’t see any reason why Jet should be special. Moreover, Jet has not made it particularly easy to sell on their site. Now, there are companies willing to bridge the technological gap for you, but it’s going to cost you. This might be a cost worth paying, but I would definitely not start there if I hadn’t already exhausted all of the other major retail platforms for third party sellers. There is a temptation to want to flock to the newest, shiniest object. If you want to go through the process of starting to sell on Jet, I have nothing against it, but you owe it to yourself to be able to articulate why you aren’t spending that time/money/effort on something like eBay or any of the other options at your disposal.
I didn’t write this article to try to change any minds. In fact, I’m not sure that it’s possible to know exactly what to think about this, yet. But, I hope that the 11 points gives you a bit of an alternative perspective to some of the other opinions that have been thrown out since this news has been released.
As Always, Best Wishes