When Walmart acquired Jet.com in 2016, the e-commerce platform was viewed as its vehicle to attract the higher-income, urban and millennial shoppers it needs to better compete online with Amazon.com.
But Jet.com will have to make its mark on the demographic with fewer marketing dollars.
Walmart Chief Executive Officer Doug McMillon said late last month that the company had reduced the amount of marketing spending dedicated to Jet.com except in certain urban markets, instead shifting more of those dollars toward acquiring new customers on a national basis for Walmart.com.
McMillon said the decision was based on the fact that it is cheaper for the company to acquire new customers with the Walmart brand than Jet, adding that growing sales through Walmart.com is its top priority.
"Walmart is a really well-known brand for value throughout the country," McMillon said. "And when you get into Oklahoma and Texas, in the middle of the country, it just makes a lot of sense to invest in that brand rather than investing higher incremental dollars to introduce a brand that's less familiar."
Neil Stern, senior partner with Chicago consulting firm McMillan Doolittle said the strategy makes sense because of the national reach of Walmart.com. But the decision to pull back the marketing reins on Jet.com raises questions about Jet.com's appeal and growth going forward.
"Where exactly does this leave Jet?" Stern said. "It's a model that needs scale. I think that was the issue with it historically, which is why it required so much capital to get the thing going."
Jet was founded in 2015 under the promise that it would take on Amazon.com by offering big savings for items compared with the e-commerce giant.
The company's target demographic was urban and millennial shoppers, and Jet.com aggressively spent on marketing to grab the attention of that audience and grow quickly, according to Keith Anderson, vice president of strategy and insights at Profitero of Boston.
Jet reached $1 billion in gross merchandise sales -- the total value of transactions -- in its first year, according to media reports. But the company wasn't profitable when it was acquired by Walmart for $3.3 billion in 2016. Co-founder Marc Lore -- who would become Walmart's U.S. e-commerce chief as part of the acquisition -- told news outlets that the company likely wouldn't be profitable until 2020.
Brian Yarbrough, a retail analyst with Edward Jones, believes the biggest reason Walmart paid to acquire Jet was because of Lore and the systems behind the e-commerce platform, including the smart cart technology that promised lower prices on larger baskets of goods. But he said the chance to tap into a more affluent customer base was another key to the hefty price tag.
"All of a sudden you're going to pull back there," Yarbrough said. "I think the reason being, if they don't pull back, it's going to cost more to gain a new customer, and the losses are going to get worse."
Walmart's U.S. e-commerce sales grew 23 percent in the fourth quarter, a much slower pace than the previous three-quarters in the fiscal year. The company does not break out sales data for its individual e-commerce companies -- Jet.com, Bonobos, ModCloth, Moosejaw, Shoes.com and Hayneedle -- but McMillan Doolittle's Stern said there's a "pretty strong suggestion" Jet is not meeting growth figures.
"Certainly cutting back and reducing their marketing spend kind of reinforces the fact," Stern said.
Walmart did not specify how much it has reduced the marketing spending for the e-commerce site, but McMillon said the plans mean Jet will not grow as quickly as it did in the early days.
Instead, McMillon told investors Jet.com complements Walmart.com nicely and remains well-positioned. While Jet.com plays a "great role reaching parts of the country and selling, in some cases, some brands that are not ready to sell on Walmart.com," the company would continue to focus on its total U.S. e-commerce growth through its home website and collection of brands.
Meanwhile, Jet.com is looking for a new leader after President Liza Landsman left earlier this year to become a venture partner at New Enterprise Associates Inc. in New York
"Jet will go through a period of adjustment and then it'll start to grow again in the future, but focused on specific markets and opportunities," said McMillon, who added that executives wanted to leave their minds open after the acquisition about how to use the brand and where to position it. "Whereas Walmart will be the broad-based, big part of the business and growing it will be a priority."
The strategy has been evident in some of the retailer's most recent moves for its primary website, which offers more than 75 million items.
A Walmart.com redesign will be unveiled this spring and feature a revamped home furnishings segment that includes curated collections and nine style choices intended to make searching easier for customers. Walmart also will dedicate space for items from department store chain Lord & Taylor as part of a partnership announced last year. Jet.com's smart cart technology will be integrated into Walmart.com.
Anderson understands Walmart's intentions. If the company can attract more customers and grow sales at Walmart and Walmart.com, it would mean more to the company's top and bottom line than if Jet.com grew exponentially simply because of the sheer size of the businesses.
But he also wonders if Walmart's strategy to reduce marketing spending for Jet.com except in urban markets will have a long-term impact on the online site.
"They have to manage costs, and they've got to be profitable, but the whole reason you buy Jet or an e-commerce portfolio of companies is to grow," Anderson said. "You've got to grow. It leads me to question what kind of a time scale are they really managing. Are they making decisions for the short term that may create head winds over the long term?"
SundayMonday Business on 03/04/2018
Print Headline: Walmart curbs Jet.com marketing dollars