Two weeks ago, Unilever, a company with its origins in Victorian England, and whose mission at that time was ‘to make cleanliness commonplace; to lessen work for women; to foster health and contribute to personal attractiveness, that life may be more enjoyable and rewarding for the people who use our products’, spent $1 billion to buy Dollar Shave Club. This seemed like an astronomical sum to pay for a company that had $150 million in sales of razors in 2015 and expected to have $200 million in 2016, but taking a closer look under the hood, I suspect the deal had less to do with razors (the global razor market is dominated by a few players in a $10 plus billion market) and more to do with the process and the data the 5 year old company has learned and implemented in such a short time. This is important infornation for a ginat company worried about disruption in its well established markets.
Not to downplay the razor angle. It’s pretty big in its own right. Remember, Proctor & Gamble (PG) paid $55 billion for Gillette in January 2005. But this could be in many ways a more transformative deal for Unilever than PG/Gillette if the company is able to apply this direct sales / subscription model to dozens of others of their household products while cutting out online middlemen like Amazon.com… or Jet.com.
And that brings me to this morning’s announcement of Walmart’s (WMT) $3.3 billion deal to buy the aformentioned and just recently launched online retailer Jet.com. This is a different kind of deal than the one just discussed, aside from the desperation of well established consumer products / retailers to fend off the Amazon.com threat. Jet.com was founded in 2014, has only been live for a little more than a year, and per Recode’s Jason Del Rey who has been all over this story, only expected to book between $500 million and $1 billion in sales over the next 12 months, or less than 1% of AMZN’s expected $137 billion. WMT’s bet on Jet equals about 20% of its 2015 net income. And despite being the company’s largest acquisition to date, it is really a rounding error for them with $480 billion in sales, but all of this takes place in a world with an existential threat like AMZN.
WMT’s problems selling online have been well documented, per Fortune.com:
According to recent data from eMarketer, Walmart is the second largest U.S. online retailer, with $12.5 billion in sales in the last year (the figure is $13.5 billion globally) But that is a far cry from the $82.8 billion Amazon pulled in. What’s more, Walmart’s digital growth is well below the economy-wide rate of 15.1% in the first quarter, according to the U.S. Department of Commerce. E-commerce accounts for about 3% of Walmart sales, compared to 7.8% across retail.
Some of the sluggishness comes from customers not yet knowing how much they can buy on walmart.com, something McMillon said would change. (Walmart now offers 10 million different kinds of items, and it is adding to that. In contrast, Amazon’s assortment is about 300 million items.) “It takes time to build the assortment to the point where customers realize the depth of assortment,” McMillon added. Walmart is building up its marketplaces as well, in addition to what it sells itself.
WMT shareholders have reason to keep a close eye on this deal. If the company is not able to integrate Jet’s supposedly kickass tech and new management to help spur online sales in the next year (in a way that does not totally cannibalize their bricks and mortar business) then the jig could be up.
To be put their plight in context, in 2013, WMT’s net income peaked at $16.9 billion on $475 billion in sales, in 2016, WMT’s net income is expected to be $13.5 billion on record sales of $497 billion. So While WMT sales are growing in the low single digits, those sales are becoming less profitable as competition like AMZN continue to drive down prices. AMZN is growing sales at 20% plus a clip, expected to be close to $140 billion this year, and the company is able to subsidize retail with their rapidly growing and dramatically higher margin of their public cloud business (AWS). You get the point. But to drive it home, here is the important part, in the quarter just reported (June) AMZN had a profit of $857 million on sales of $30.1 billion, of which $2.9 billion came from AWS, yielding a profit of $718 million, or almost 85% of their quarterly record profit. How can WMT really compete with that?
We are probably closer to the start than the end of this sort of deal making by old timey companies desperately trying to adapt to the new world order (almost every technological advance is massively deflationary to existing businesses). Those deflationary pressures are causing massive disruption in almost every industry.