Why Wal-Mart Bought Startup Jet.com

| About: Wal-Mart Stores, (WMT)

Summary

Wal-Mart’s Internet sales rivalry heats up as they encroach Amazon’s territory.

Jet.com brings Internet sales and customer acquisition innovations to Wal-mart.

Other early-stage companies could rival Jet.com’s innovations.

Wal-Mart (NYSE:WMT) is up on news that it has acquired Jet.com (Private:JET) for $3.3B. Jet.com is a startup Amazon (NASDAQ:AMZN) competitor after founder Marc Lore previously sold Quidsi to Amazon for $545 Million. Wal-Mart has long been trying to compete with Amazon by augmenting the brick and mortar business with an online marketplace. The rivalry forced Wal-Mart to look outward to innovative models of acquiring online traffic.

One of the most interesting aspects of Jet.com's success is the avoidance of credit card transaction fees. Jet.com rewards the use of debit cards over credit cards to achieve this. The high cost of credit card transactions fees has certainly benefited Visa (NYSE:V) and MasterCard (NYSE:MA) over the past ten years, but is one of the reasons lower-volume retailers have suffered. Anytime there is a large margin in financial transactions, either new technology or innovation will present itself to reduce costs. Many innovations are being created in the area of monetary transactions.

One company, Digitzs, is creating technology to virtually eliminate processing fees. Digitzs was founded by Laura Wagner, a veteran in payments, and David Jaques, the first CFO of PayPal. Digitzs' customers are white label platforms that process rent, donation and fine payments for property managers, non profits and city governments. Through the use of these niche white label platforms, merchants get numerous business management benefits, including the elimination of credit card processing fees. Accenture says platforms are a top 5 trend for 2016. If this trend continues, Jet.com's model could be hurt in the long run.

Marc Lore also implemented a way to push consumers to buy more on Jet.com by decreasing shipping and increasing savings for each additional item spent. This model should work well with Wal-Mart, which was an original innovator in selling more products to consumers that walked into the stores. The innovation was simple and echoed in their unofficial motto "Stack it deep, sell in cheap, stack it high, and watch it fly. Hear those downtown merchants cry." Startup food delivery online marketplaces such as Thrive Market and Wholeshare (an Andreessen Horowitz portfolio company) are implementing similar innovations to consumer buying. Look for these companies as acquisition targets in the future.

Finally, Wal-Mart's best move was to retain the talent of Marc Lore as their head of online. It doesn't matter which of Jet.com's innovations are diminished or replicated, Lore will likely continue to develop great ways for Wal-Mart to stay ahead. Great people don't lack great ideas. Wal-mart is a buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Wholeshare and Digitz are companies currently utilizing Crowdfunder's platform. Crowdfunder VC Index Fund, L.P. may have invested directly into some or all of these companies. Crowdfunder and its affiliates do not recommend nor offer to sell securities such companies may be offering. Any such investment must be made by the company and through its offering documents.

Additional disclosure: Steven McClurg is the President of Crowdfunder.com. Crowdfunder VC Index Fund, L.P. has invested in Wholesale. Neither Steven McClurg nor Crowdfunder make a recommendation to sell or buy Wholesale or any other company disclosed herein. Only accredited investors are able to invest in Wholeshare and any sale or offer to sell must be made by the company through its offering documents. The opinions published herein are those only of the individual and not necessarily of Crowdfunder, Inc. or its affiliates.