Why Wal-Mart’s Acquisition of Jet.com Makes Perfect Sense

…and why other traditional enterprises must acquire innovation to stay relevant and competitive.

The retail sector is abuzz about the latest rumor Wal-Mart is acquiring or investing in Jet at a reported $3 billion valuation.

There are increasingly more examples of these “innovation acquisitions”. Incumbents view these money-losing innovators like they are fountains of youth.

Source: Catalyst Consulting; Public Records

For years, I have been advising traditional retailers/brands to “pair up” with startups. Conditions are ideal for these marriages given the slowdown in venture capital funding and the state of cash-strapped startups.

No company wants to be Blockbuster in a Netflix world. And well-funded traditional enterprises are feeding internal innovation by pouncing on wounded unicorns.

The strategic benefits to large companies from innovation acquisitions are obvious:

· Fend off disruption by digital upstarts

· Address changes in consumer preferences and shopping behaviors

· Find new growth channels, products and customers

· Acquire proven technologies and platforms

Of course, long term the preferred route is to transform traditional enterprises into lean innovation machines. However, from time to time, it makes sense to look outside for innovation.

There are three compelling reasons why incumbents like Wal-Mart should buy innovators like Jet:

REASON #1: Innovation is HARD

Building an innovative and entrepreneurial culture in large traditional enterprises is incredibly difficult. Most innovation initiatives die under the rigid controls that fuel hierarchical organizations.

Even companies that succeed in creating innovative environments run the risk of having their efforts erased during the first downturn or management change.

REASON #2: Innovation is EXPENSIVE

Wal-Mart is undisputedly the heavyweight brick and mortar champ. Unfortunately despite years of investing billions of dollars online, they have not kept pace with Amazon:

· 2015 Online Sales were only $14 billion (3% of Total Revenue of $482 billion) as compared to Amazon.com’s $80 billion in Product Sales.

· Last year, Amazon overtook Wal-Mart in market capitalization, and this year Amazon is 40% larger.

· Growth on Walmart.com has slowed for six straight quarters.

Source Fortune; Wal-Mart Stores Filings

An acquisition of Jet is a risky and expensive bet, but it’s a small price to pay for long term growth.

REASON #3: Innovation fuels GROWTH

A recent Street.com article hypothesized potential deal synergies between Wal-Mart and Jet. Assuming Street.com’s analysis is correct, the complementary nature of their customers and products could be a catalyst for Wal-Mart’s stock price.

Of course, integrating an acquisition target while realizing merger synergies is just as hard as transforming traditional enterprises. The path of “acquiring versus building” innovation is fraught with risk, and will be an uphill battle for Wal-Mart.

That said, Wal-Mart is one of the few companies with the size and scale to compete with Amazon.

A potential acquisition of Jet.com COULD turn out to be a brilliant win-win for both companies.

And that win-win could be Amazon’s Achilles heel.

Pass the popcorn.

Lockie Andrews is the CEO and Managing Director of Catalyst Consulting, a boutique advisory firm to retail and consumer brands, digital, media and technology companies, as well as venture capital and private equity funds. With 20+ years of general management experience, Lockie has assisted high growth companies (e.g. Nike, Lane Bryant, Limited Stores, and various high growth startups) in diverse areas such as strategy, innovation, digital marketing, revenue enhancement, operational/financial improvement and M&A/capital raising. Lockie is also a sector lead for the HBS Alumni Angels of NYC.

Like what you read? Give lockie andrews a round of applause.

From a quick cheer to a standing ovation, clap to show how much you enjoyed this story.