Walmart says it will discontinue Jet, which it acquired for $3B in 2016

Ingrid Lunden

So much for Walmart's big and expensive effort to take on Amazon with a digitally-native brand. Amid the coronavirus crisis and its impact on the retail industry, today the retail giant quietly announced in its quarterly report that it would be discontinuing Jet.com, the online-only marketplace that it acquired when it was just over one year old for $3 billion (plus $300 million in earn-outs over time), as it struggles to bring its e-commerce operations into that black after reportedly seeing a loss of $2 billion in the division in 2019 and shifting how to deliver its e-commerce strategy: by betting on giant stores, rather than online warehouses, as the hubs of its online delivery model.

Jet.com's fate was disclosed as part of a Walmart's Q1 earnings report, in which the company said it saw growth of less than 10% in its core US market, and said that it would be withdrawing guidance for fiscal 2021.

The company tried to put a positive spin on the news despite those numbers highlighting how it helped its digital transformation. "Due to continued strength of the Walmart.com brand, the company will discontinue Jet.com," the company said in a short statement. "The acquisition of Jet.com nearly four years ago was critical to accelerating our omni strategy."

Yet the news of Jet.com's discontinuation is in equal parts a surprise if probably expected by those who have been watching its progress. Surprise, because the continued impact of COVID-19 has led to a surge of people shopping online -- Walmart itself notes that e-commerce sales were up 74% in the quarter, including store pickup and delivery, ship to home, ship from store and marketplace channels -- and so it would seem that Walmart might have wanted to double down on its own online efforts.

Expected, because in reality Jet.com hasn't shaped up to be the jewel in the crown that Walmart had hoped it would become, going through a number of restructuring attempts over the years as e-commerce overall continued to bleed red.

The earnings report noted that revenue for the company this quarter was $134.6 billion, an increase of $10.7 billion, or 8.6%, actually beating expectations. "The company’s net sales and operating results were significantly affected by the outbreak of COVID-19," Walmart said. "Unprecedented demand for products across multiple categories led to strong top-line results. Certain incremental costs negatively affected operating income, including costs associated with enhanced wages and benefits as well as safety and sanitation."

However, CFO Brett Biggs' statement on removing guidance underscored how these numbers may not tell the whole story, given the lack of visibility of how the economy, the state of public health and shopping at Walmart will shape up.

“The decision to withdraw guidance reflects significant uncertainty around several key external variables and their potential impact on our business and the global economy, including: the duration and intensity of the COVID- 19 health crisis globally, the length and impact of stay-at-home orders, the scale and duration of economic stimulus, employment trends and consumer confidence,” he noted. “Our business fundamentals are strong, and our financial position is excellent. Customers trust us to deliver on our brand promise, and I’m confident in our ability to perform well in most any environment. While the short-term environment will be challenging, we’re positioned well for long-term success in an increasingly omni world."

The COVID-19 pandemic has led to a surge of people shopping online. But a number of companies, including Amazon and eBay, have found that handling business at the moment can prove to come with more overhead costs, and that's before considering what the larger effects of a collapsed economy will have on overall sales longer term, after all the toilet paper and pasta have been acquired. So while it might seem counterintuitive to get rid of Jet.com at a time like this, it's about cost cutting ultimately because of that bigger picture.

When Walmart made its bold acquisition of Jet.com in 2016, the big ambition was to give the giant retailer a complement to its brick-and-mortar stores to compete better against Amazon and its growing presence as a primary shopping destination. It was also about bringing on its experienced founder and leader Marc Lore -- who had already founded and sold an online diaper business to Amazon -- to lead both Jet and Walmart online.

“This is Walmart being even more committed to winning in e-commerce,” said Doug McMillon, president and CEO of Walmart, in a conference call with investors at the time.

But fast forward to today, amid all the strains that COVID-19 is putting on the retail sector and the wider economy, and the discontinuation is the final chapter in what ultimately was a problematic endeavour for the company that went through various stages of change. They included, last year, fully integrating Jet's teams into its own; relaunching the service; and also axing various Jet experiments like Jet Black, a personal shopping service.

While Walmart does not break out revenues and losses for e-commerce specifically, a report in the Wall Street Journal estimated that losses in e-commerce operations were around $2 billion, actually double what people had been guesstimating just months before.

In the meantime, Walmart has been working on investing and inventing more Walmart.com perks such as piloting a two-hour deliver service at the end of last month.

The big question now will be whether Walmart can continue to grow its e-commerce business, and reduce its losses, by shifting the focus from an Amazon-style model of fulfilment warehouses to giant stores, which serve a double purpose both to push its brick-and-mortar strategy, and to serve as the fulfilment hubs for the online-facing part of its business.