Walmart is an e-commerce also-ran. Buying tiny, struggling startups won't help the retailing giant get any better.
The world's largest retailer is in talks to snap up online retail startup Jet.com, according to a Wednesday report in The Wall Street Journal. It should tread lightly.
Sure, Walmart needs all the help it can get these days in boosting its online sales, as consumers increasingly shift a greater proportion of their spending to the Web. And with $8 billion in cash, it has the money to do it. Private investors last valued Jet.com at $1.35 billion.
But spending big bucks to buy a company long on hype and short on business plans isn't the answer.
Despite sinking billions of dollars into building its e-commerce operations, Walmart's online sales growth has declined for nine straight quarters.
Walmart's online sales grew by just 7 percent in the first quarter from the year before, down from 17 percent in the first quarter of 2015 and 27 percent in the first quarter of 2014. That compares to 15 percent growth in total first-quarter U.S. online sales, according to the Census Bureau. Amazon's first-quarter sales growth came in at 25 percent.
Walmart's online division has a scattered past when it comes to M&A. In one of the biggest upsets for the company -- and a loss that would serve as a harbinger of what was to come -- in 2010 Walmart lost out to Amazon on a bid to buy another company started by Jet.com co-founder Marc Lore, Diaper.com parent Quidsi.
In recent years, Walmart garnered a reputation in Silicon Valley for scooping up digital companies for scraps once it became clear they could no longer exist on their own. It has made at least 14 acquisitions of small tech companies since 2011, including a recipe and meal-planning service provider and a clothes-finding app. In some cases, these deals amounted to glorified acqui-hires, tech parlance for companies that buy startups for access to its technologists.
Last month, it cut its losses in its Chinese e-commerce business, Yihaodian, by selling it to Chinese internet retailer JD.com. Walmart first invested in Yihaodian in 2011 and had acquired it outright last year. The rapid sale to JD.com was an indication Walmart no longer thought it could hack it in the cutthroat but lucrative Chinese e-commerce market.
As Gadfly pointed out in May, Walmart's investing foibles have dragged on the company. Walmart's return on invested capital, which measures how well a company puts its money to work, was once a point of pride for Walmart. It typically sunk money only into investments it could justify with a proven financial return. No longer.
And that's where Jet.com comes in. The New Jersey startup has been a master at marketing. Its ads have been everywhere, and Lore generated attention for his young company by setting some audacious goals. Even before Jet officially opened for business last year, the company projected its gross sales -- presumably akin to the "gross merchandise volume" metric that values total transactions on an e-commerce site -- would reach $20 billion by 2020. That would be about one quarter of the 2015 sales volume at eBay.
Jet's audacity of hype may help a company like Walmart. The name Walmart just doesn't scream cool and cutting edge, so it could rebrand its online shopping operation with Jet's name. It's also possible Jet has developed smart technology for setting online prices and handling shipping, though it's hard to evaluate any startup's claims of tech prowess.
Lore initially planned to sell products at deep discounts and make money mostly from a Costco-like yearly membership fee for shoppers. But just months after its launch last year, Jet gave up its original business model and became much more of a conventional online store -- which put it right in the dangerous path of Amazon. And Jet appeared to gin up sales by purchasing products on Costco and other retailers' websites and reselling them (at a loss) to Jet customers.
Those facts on the ground make it tough for Jet to sustain its $1.35 billion valuation, particularly now that startup investors are wary of backing young companies that lose money, with no profits in sight. Jet and its backers should be thanking Walmart for the potential rescue.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Jet didn't say how it defined gross sales. The GMV metric has come under scrutiny recently after the SEC questioned accounting practices include GMV calculations of e-commerce giant Alibaba.
To contact the editor responsible for this story:
Mark Gongloff at firstname.lastname@example.org