Billionaire investor Warren Buffett once described the supermarket business as a non-starter.
The logic is that even if a supermarket gains lots of customers, a rival can always appear out of nowhere and take the business away by offering cheaper goods.
Such price competition will create a no-win situation for both.
The online shopping industry is facing a similar dilemma.
Walmart said earlier this week it has agreed to buy Jet.com, a startup e-commerce site for US$3.3 billion.
Launched in July 2015, Jet.com has more than 4 million registered customers and monthly sales of nearly US$100 million, and it is growing fast.
As of June, Jet.com already accounts for 3 percent of the US online shopping market, making it the fourth largest e-commerce platform behind Amazon, eBay and Walmart’s own online shopping site.
Jet.com has built a successful business model through bulk buying. Customers are encouraged to add various tagged items to their shopping carts, which can be shipped more cheaply in the same box.
The items are typically sold at a lower price than in Amazon and shipped for free. The brand is very popular among young shoppers.
One of my friends bought a TV set from Jet.com, paying about 25 percent less than the price for the same item at Amazon.
The TV set was delivered to his doorstep the very next day, a service standard that matches Amazon’s Prime plan, which costs an extra US$99 annual membership fee.
Amazon always claims to be the cheapest retailer in the United States, saying its operating margin is as low as 1 percent.
The e-commerce giant has been suffering losses or making very little money over the past two decades.
How exactly can Jet.com compete with such a formidable rival?
The truth is, while Amazon sells goods at razor-thin margin or no profit at all, Jet.com is willing to burn money to gain market share by selling products at a loss.
Despite such suicidal approach, Jet.com was able to attract numerous investors like Alibaba, Google and Goldman Sachs, according to Bloomberg.
Think about it this way: These smart investors certainly know quite well a loss-making business can’t be sustained.
Nevertheless, as long as the company can take 10 percent of business from Amazon, there could be a chance it can break even or even make money.
This possibility , though remote, represents huge upside just by looking at the US$370 billion market value of Amazon, now the fourth most valuable listed company in the US.
Now Walmart presented a quick profit-taking channel for these investors. Jet.com was only valued at US$1 billion based on its latest round of fundraising.
Walmart has been hit hard by the growth of Amazon over the last two decades.
It has tried to develop its own online shopping site in recent years in a bid to create an online-offline model. Yet the move has met with limited success.
Will the acquisition of Jet.com help Walmart win the battle against Amazon?
The answer is far from certain.
At least in the near term, both Walmart and Amazon will be losers in the price war.
That might be the reason why Buffett keeps staying away from Amazon over the years, and has cut back on his holdings of Walmart and Tesco.
This article appeared in the Hong Kong Economic Journal on Aug. 10.
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
– Contact us at [email protected]