Walmart’s Jet.com Buy Signals Value Retailing Evolution

NEW YORK— Walmart’s purchase of Jet.com is a major acquisition for the company, and an important e-commerce initiative, but it suggests something larger: That value retailers have an opportunity in the current economic environment to significantly increase their presence in the marketplace.

Certainly, the purchase of Jet.com signals that Walmart wants to gain ground in the e-commerce competition with Amazon.com. Yet, it also demonstrates that Walmart is determined to leverage its investment in e-commerce to yield greater dividends. The deal to purchase Jet.com comes after the company struck a strategic alliance with JD.com, which Walmart touted as China’s largest e-commerce company by revenue.

Walmart acquired Jet.com for approximately $3 billion and $300 million of its shares, portions of which it would pay over time. Although some observers quibbled about the price tag, many agreed that the acquisition would give Walmart not only additional sales but fresh access to approaches and technology it could use to grow its business with the online consumer. Walmart itself said the acquisition would build on and complement the e-commerce foundation it had established, which combines the functions of its app, website and stores, especially as the brick-and-mortar operations back up the virtual element with services such as ship to store.

In Walmart’s second quarter conference call, Doug McMillon, Walmart president and CEO, said, “Operating Walmart.com and Jet.com will allow us to reach even more customers and drive a higher level of growth more quickly. One of the things we like about the technology they’ve developed is that it rewards customers in real time with savings on a basket of goods and puts them more in charge of the price they pay. This empowers customers in a way that is true to the spirit of Walmart. When customers build a basket of goods online rather than ordering one item at a time, shipping economics are in their favor and ours. Walmart’s advantage has always been in providing the lowest prices on a basket, and Jet has created a unique way to deliver the lowest cost basket online.”

McMillon added, “It’s important to remember that customers won’t see changes immediately as we await government approval, and the necessary tech platform changes, which will take time.”

One of Walmart’s virtues is patience. For example, it spent many years developing and refining its Neighborhood Market operation, which now is helping drive growth.

Although Wall Street has become impatient at times, Walmart tends to think long term and is willing to accept mistakes and move on, as it did with its attempts a few years ago to draw more affluent consumers with changes to apparel, home and other categories, which it has since scaled back, along with its Express format. Walmart also will buy into expertise, as the company did in 1991 by acquiring McLane, a distributor known for its logistical technology, ability to move edibles and manage small deliveries, as it expanded its food business. Walmart sold McLane in 2003.

Walmart continues using its vast stores network to support its online business, extending its pick up initiatives to grocery. Today, customers can order food and consumables from Walmart for curbside pickup at 400 stores and it brought the service to 30 additional markets in the second quarter.

A Walmart spokesman told HOMEWORLD BUSINESS® that a real-life goal the company has for the program is to save shoppers the two to three hours most spend each week on their main grocery store purchasing trip. Given that consumers, such as working couples, may have qualms about having food delivered when they might not be home, and the ubiquity of Walmart stores in the U.S., a quick pickup could be an incentive for consumers to stop by and make purchases whether online or in store.

Amazon seems to believe the idea is compelling. Published reports have pointed to a new Amazon operation under development in the San Francisco Bay area and in metropolitan Seattle, where the online retailer is headquartered, that will include grocery pickup facilities.

In a similar fashion, Jet could drive more consumers into Walmart stores for product pickup. However, as McMillon said, such synergies await the process of integrating Walmart and Jet. For now, Walmart points to several benefits that its newly acquired subsidiary brings to the table including a demonstrated ability to scale with speed, as Jet managed to build $1 billion in run-rate gross merchandise value and offer 12 million SKUs in its first year in business.

Jet has established a growing customer base of urban and Millennial customers with more than 400,000 new shoppers added monthly and an average of 25,000 daily processed orders in a process that employs best-in-class technology that, as McMillon highlighted, rewards customers in real time with savings on items that are bought and shipped together, reducing supply chain and logistics costs. Jet also boasts a select group of more than 2,400 retailer and brand partners, providing shoppers with an attractive and distinctive assortment.

Walmart’s moves in the digital marketplace are happening at a time when trends in retail are becoming more evident. Clearly, e-commerce continues to grow and win purchases.

If proportional growth isn’t as impressive as was once the case, it is coming from a much larger base of shoppers. According to eMarketer, during 2015, 7.1% of about $4.8 trillion in retail sales occurred online. The proportion will continue to grow incrementally, reaching 9.8% of sales by

2019. Although that constitutes a lot of business, if retail sales grows in the 3% to 3.5% range eMarketer expects, the number still points to the fact that digital commerce will continue to gain but also that stores will remain the major generator of sales.

Off-Price Evolution

Yet, brick-and-mortar sales are shifting. For a number of reasons, mediocre stock market performance, a strong dollar making goods more expensive for fewer foreign travelers coming to the U.S. to shop, the upper end of the retail business has softened. Although more immediate reasons may weigh, long-term market shifts, including consumer spending wariness that gained in the recession, has prompted changes in shopping behavior.

As Millennials endured a profound economic shock from the recession and slow growth aftermath, the spending habits of younger consumers may suffer the most from the recessionary effect, which means that the generation currently reaching its prime shopping years is looking for retail relationships that differ from those sought by Baby Boomers or Generation X.

Although some market researchers have identified the phenomenon, they aren’t alone in recognizing that younger consumers need compelling reasons to buy. Nordstrom has proceeded with a strategy that acknowledges the need to reach value-driven shoppers to drive growth now and in the future. The strategy has paid off in the latest quarter.

Department stores have recently reported disappointing financial. At Macy’s, for example, second quarter earnings per share, operating income and comparable store sales fell from last year’s period.

However, Nordstrom was able to point to a bright spot, even though its key financials were lower year over year: Comparable sales in the company’s off-price division, which includes revenues from Nordstrom Rack stores and the online operation, increased by 5.3%. Total sales for the division increased 11.2%. Rack stores generated a 1.1% comp, while the operation’s digital comp gained 34.7%. In a similar vein, Nordstrom’s department store comp fell 6.5% while the digital operation’s comp gained 9.4%. Overall, the department store division comp fell 2.8%.

Nordstrom operates about 200 Rack locations as opposed to about 120 full-line department stores. Although the department stores are bigger and generate more revenue per unit, they are struggling and, as Nordstrom has expanded its operation, the company acknowledged that it has to win over consumers to its brand and luxury retailing in general. Although that might always have been the case, luxury retailers once counted on increasing earnings across consumer lifetimes to eventually bring a substantial proportion of shoppers into stores.

Faith in that formula has faded, and department store operators Macy’s and Hudson’s Bay have been expanding and launching off-price operations in association with their luxury department stores such as Bloomingdale’s and Lord & Taylor.

In a further outreach to the value-oriented consumer, Macy’s launched a second off-price retail concept last year, this associated with its namesake stores and dubbed Backstage. By the end of the last fiscal year, Macy’s operated six freestanding Backstage outlets. Plans called for the company to open 16 Backstage operations in 2016, one freestanding, the other 15 inside Macy’s department stores.

In Macy’s first quarter conference call, CFO Karen Hoguet, stated that the initial results from the Backstage operation were promising.

“We are pleased with how our first two Backstage in-stores opened, one in Nanuet, NY and the other in Waterbury, CT,” she said. “We are hoping these stores bring in new customers as well as add share of wallet from existing customers. So far, both objectives are being reached, but it is premature to claim success.”

She added that the company expects Backstage to roll out into “to approximately 250 to 300 of our Macy’s stores.”

However, developing an off-price business isn’t necessarily easy, and Rack has hit some bumps along the road. Macy’s continues to consider how it can use Backstage to build business.

In Macy’s second quarter conference call, Hoguet said, “Our Backstage stores are doing well in total, although performance by door is mixed, as you would expect from a new business. We are learning a lot about how to maximize this opportunity, with our focus being on the store-in-stores. We are encouraged by the early results.”

She added, “On Backstage in-store, what we’re trying to evaluate, and this is really being done category by category: What impact does it have on the Macy’s store and what impact does it have in terms of bringing new customers to the store? As you would expect, when we take space away from the rest of Macy’s, the non-Backstage part of the store will do less business. But, currently, we are seeing a lift in the total store including Backstage, which is very encouraging. But as you might imagine, different stores are behaving differently. And so we’re really just trying to learn and figure out what’s the best way of expanding this concept.”

Of course, a factor in the interest department stores have had in value operations is the success of independent off-pricers, such as TJX.

In an interesting note, home furnishings and housewares, which the department store off-price outlets traditionally limited, have helped boost TJX results when apparel sales have been spotty. It’s also noteworthy that recently launched department store off-pricers Backstage and, from Hudson’s Bay, [email protected] & Taylor, have substantial home departments.

In retail overall, the companies that are returning simultaneous comp and earnings growth tend to have strong value orientations, including the major dollar stores and home centers, which not only benefit from value pricing but also from do-it-yourself consumers who want to save money by working on their own homes.

Changing Consumer

The changes underway at retail actually preceded the recession. Even 20 years ago, a shift was in effect as middle-market retailers, first the “category killer” specialists such as Bed Bath & Beyond and then discount stores, began to draw sales away from retail up market. In part, consumers started turning to the mass market because of changes in tastes but also because the quality of goods improved across a range of categories.

Casual apparel, home textiles, cookware and small appliances all became categories where many consumers felt comfortable shifting purchases from department stores and upscale specialty stores to the category killers, discount stores, warehouse clubs and off-price. As they watched shopping evolve, many designer and national brands who once confined their product lines to the department and specialty store segment began developing labels specifically for mass market retailers to balance their opportunities.

At the same time, e-commerce began making pricing more transparent and established itself as a significant factor in purchasing with the effect felt in stores and online. E-commerce acceptance was significant enough to allow Amazon to become a $100 billion company in just 20 years.

Walmart thrived, too, but ran into trouble a few years ago as an ill-fated effort to draw more affluent customers cost it focus and allowed other retailers to pick up customers that it might otherwise have pursued more aggressively. With long-term trends and shorter-term concerns in the political and economic climate, Walmart has been staging a comeback, growing comparable store sales in the U.S. consistently and building earnings. The company is heavily investing in raising salaries across its workforce and developing technology projects to bolster e-commerce.

According to Erin Lash, a Morningstar analyst, Walmart will continue to take a hit on margin as it continues lowering prices at the expense of margin and investing in labor and e-commerce to keep comparable store sales growing in the 1% to 2% range. However, she pointed out in a report that, “despite the near-term hit to profitability, we think that this spending is prudent, given the threats Walmart faces from competitors, namely Amazon, that are also investing aggressively.”

Even if bolstered by short-term macro-trends, value retailers are in a position of strength now and at least some are capitalizing. Bed Bath & Beyond and Costco, like Walmart, have been making major investments in their own digital retailing. Like Walmart, Bed Bath & Beyond purchased an increased online customer base and greater e-commerce expertise, acquiring One Kings Lane. At the same time, TJX has again dipped its toe into the e-commerce waters, beginning digital sales on the T.J. Maxx website after abandoning initial e-commerce operations a few years ago.

To some extent, their ability to benefit from larger consumer trends may have made brick-and-mortar based value retailers slower to take advantage of online opportunities than they should have been. However, what is apparent today is that value-oriented retailers have a real chance to build market share as circumstances reinforce the consumer urge to frugality.

A return to spendthrift ways is unlikely, as Millennials move into their prime purchasing years, especially for home goods. Today, Millennials, who got off to a slow financial start in the soft economy, are taking on new, and costly, responsibilities.

“As many of the older Millennials get married and have children, and still have college debt, they are doing the kinds of things that often fit with that life stage like moving to the suburbs, buying a car and shopping at the stores that reliably offer the best price, convenience and overall value,” said Marsha Everton, principal, AIMsights Group.

A generation that likes smaller, more convenient and less burdensome is a tough sell for upscale retailers, which they have acknowledged by expanding off-price. Millennials are less inclined to keep up with the Joneses than to pick and choose items that differentiate themselves from neighbors.

“We’ve reached a pivot point,” Niraj Shah, Wayfair’s co-founder, recently told HomeWorld Business. He said Wayfair is identifying the emergence of Millennials as home furnishings purchasers, providing value prices on goods conveniently arranged, or customized, in a manner that allows younger consumers to express their preferences without an over commitment of time or money.

Retail is changing and fortune seems to favor thoughtful value-oriented retailers that refine formulas used to win sales from Baby Boomers and Gen X so they can now win over Millennials.