Wal-Mart, the world’s biggest retailer, must do more as it keeps losing ground online to Amazon, the world’s biggest e-retailer.

Why did Wal-Mart Stores Inc. buy Jet.com? Amazon Prime.

It’s Amazon Prime that’s behind Amazon.com Inc.’s astonishing growth in U.S. e-commerce in recent years, increasing its share of U.S. online retail sales to 33% in 2015 from 25% in 2012, when counting purchases from sellers on Amazon’s marketplace. More than 63 million U.S. households belong to Amazon Prime, according to Consumer Intelligence Research Partners LLC, and Prime members buy something an astonishing 74% of the time when they go to Amazon.com, according to Millward Brown Digital. That compares to the average conversion rate of 3.2% for all e-retailers in the Internet Retailer Top 500, according to Top500Guide.com.

Wal-Mart has made big investments in e-commerce in the past decade, but nothing it—or any other retailer—has done has succeeded in slowing Amazon’s increasing dominance of online retailing.

What’s worse, for Wal-Mart and other retailers, is that Amazon is becoming increasingly profitable, giving it even more money to pour into the perks Amazon Prime members value. Those perks include faster and faster delivery as well as free movies and TV shows through Amazon’s streaming video service, Amazon Prime Video.

Amazon’s past three quarters have been its most profitable ever. And while more than half of Amazon’s $1.285 billion operating profit in the second quarter of 2016 came from the $718 million contribution of its wildly success Amazon Web Services cloud computing unit, Amazon’s retail operation contributed a respectable $567 million. A big reason for that growing retail profit is that the percentage of items sold by marketplace merchants increased to 49% from 45% a year earlier. Those sales are highly profitable for Amazon, which takes a commission on each sale without having to buy any merchandise.


Why Amazon is suddenly swimming in profit

Wal-Mart’s leadership knows it must do more to stop Amazon’s surge. They made that clear last fall when they committed to invest $2 billion in the next two years in e-commerce.

And it wasn’t like Wal-Mart was suddenly discovering the importance of the internet. The world’s biggest retailer by total sales has been investing heavily in e-commerce for several years.

In March 2013, I was among the dozen or so reporters invited to Wal-Mart’s Silicon Valley headquarters for a day of presentations by company executives meant to make clear that Wal-Mart was determined to be as big online as it is offline.


By then Wal-Mart had more than 1,500 executives in its several offices in Silicon Valley and was hiring furiously. The company had established an e-commerce research group called @WalmartLabs in 2011, folding in the personnel it had acquired by buying such web-focused startups as Kosmix. In 2012, Wal-Mart put in charge of its global e-commerce operations, Neil Ashe, who had no retail background but had been CEO of an important internet firm, CNET, best known for its website featuring technology news, reviews and advice. Wal-Mart was serious about online.

But Ashe and Wal-Mart may not have been a perfect fit. As part of the Jet announcement, Wal-Mart CEO Doug McMillon announced Ashe will be leaving, to be replaced by Jet founder Marc Lore. Lore previously launched Diapers.com and ultimately sold it to Amazon.

Under Ashe, Walmart.com’s results haven’t been bad. Walmart.com is No. 4 in the 2016 Internet Retailer Top 500, which ranks North American retailers by their online sales. And Wal-Mart’s global web sales have grown by more than 20% per year over the last five years, according to Top500Guide.com. That’s despite below-market growth of only 12.3% in 2015.

Wal-Mart has come up with some cool ideas. Among them is its Savings Catcher online and mobile feature that promises consumers a refund if they find an item at a lower price at a competing local retailer. It also has built some handy features into its mobile app that let a shopper find the products on her wish list inside Wal-Mart’s giant stores, and to show her manufacturer discounts available on those items.


Consumers like Wal-Mart’s mobile app. It was installed on 8.20% of U.S. Android devices in April, according to web measurement firm SimilarWeb. That put it behind only Amazon and eBay Inc. among major retail competitors. But Amazon was way ahead, with its shopping app installed on 36.15% of Android devices, according to SimilarWeb. (Comparable figures for Apple devices are not available.)

It is data like this, combined with Amazon’s rapidly growing market share and profits, and the power of its loyal Amazon Prime customers, that likely led Wal-Mart to take advantage of the opportunity to acquire Jet.

Jet brings with it a team of e-commerce veterans and some innovative technology that lets shoppers lower the cost of their order by buying more at one time, or agreeing not to return the items they buy. Jet’s growth in its first year didn’t live up to the massive hype Jet’s Lore generated when Jet launched last summer. But Wal-Mart says Jet’s sales have reached an annual run rate of $1 billion, which suggests Jet has attracted a fair number of shoppers. Jet also has recruited 2,400 retailers and brands to sell on its marketplace, which could help Walmart.com growth from the 600 sellers on its marketplace as it seeks to replicate the wide selection available on Amazon and eBay.

Jet isn’t going to help Wal-Mart kill Amazon. Probably nothing will. This has the look of an opportunistic move to acquire a company that needed lots of cash as it sought to scale rapidly while losing money at a steady pace. It’s reminiscent of other retailers that have acquired significant online retailers, both to add e-commerce expertise and technology. Walgreen Co. acquiring Drugstore.com and Nordstrom Inc. buying HauteLook are two examples.


In all likelihood no one at Wal-Mart knows exactly how Jet will figure into the big retailer’s e-commerce strategy. They’ll figure that out as they go along. But it’s clear Wal-Mart’s executives know they need to make bold moves to slow Amazon’s growth. This is just one of them.