Walmart shocked nearly everyone on Wednesday night when it said it had joined forces with Microsoft to try to buy social media sensation TikTok.
After all, what would the world’s biggest retailer want with a service known for lip-synch videos and dancing?
“I was kind of surprised,” said Brian Yarbrough, analyst at investment firm Edward Jones. “I never thought Walmart would be one of the bidders. But when you sit back and think about it, it does seem to make sense.”
That’s debatable, but what’s clear is that the social media app is under pressure to sell after President Donald Trump, citing national security concerns, threatened to shutter the app in the U.S. if its Chinese owner, ByteDance, failed to sell its U.S. operations by Sept. 15.
Amid the growing pressure, TikTok CEO Kevin Mayer said on Wednesday that he would resign after only three months on the job. In his email to employees, Mayer said TikTok “expected to reach a resolution very soon” to its buyout odyssey. Dan Ives, analyst at Wedbush Securities, said he expects the price will be $35 billion to $40 billion.
Here are three reasons why Walmart would want to buy TikTok.
Bolster its digital chops
Walmart has been trying to increase its digital footprint for several years, but its strategy of scooping up online businesses has been muddled.
In 2018, Walmart paid $16 billion for a majority stake in Indian online retailer Flipkart. Previously, in 2016, Walmart bought online retailer Jet.com for $3.3 billion in an effort to gain ground on its fast-growing rival Amazon (it decided to close the site earlier this year). Several years earlier, in 2010, Walmart paid $100 million for streaming entertainment provider Vudu. But more recently, Walmart had second thoughts and, last month, sold that business to Fandango.
“Their digital strategy outside of Walmart.com has been all over the map,” Yarbrough said.
Buying TikTok would immediately help Walmart become more of a major digital service, analysts at investment banking firm Bard wrote on Thursday. Walmart’s “transformation under CEO Doug McMillon—from a stodgy retailer to a more digital consumer platform—has been key to the stock’s gains in recent years,” the analyst note said. “Today’s news simply furthers that narrative.”
Boost ads and online sales
TikTok recently said more than 100 million Americans use TikTok monthly. That’s 100 million more people who would be exposed to Walmart’s products and those of third-party sellers with which it works.
Walmart’s online business, which generated $24.5 billion last year, accounted for about 5% of its overall sales. Joe Feldman, analyst at investment banking firm Telsey Advisory Group, said Walmart’s online revenue is expected to increase to $35 billion this year.
TikTok’s owner is already pushing for more e-commerce on TikTok and Douyin, the Chinese version of TikTok. Walmart could continue that effort in addition to marketing its products on the service.
With the help of tech giant Microsoft, Walmart could also become a major force in online ad sales by selling ad inventory on TikTok. Walmart already sells ads on Walmart.com.
“When you think about digital ads, Facebook and Google dominate it,” Yarbrough said. “That’s a very high-margin business, much higher than retail and e-commerce.”
Better understand young shoppers
It’s unclear how much buying power TikTokers, many of whom are teenagers, have. But regardless, the data they would provide Walmart about their online habits may be invaluable.
Feldman said TikTok has repeatedly proved one thing: It’s able to get its users to continuously use its app. That’s because the service, like most social media apps, slices and dices user data to better understand what users want.
Walmart may be able to use TikTok’s strength in this area to understand how to keep shoppers on its app. And if it’s able to capture the attention of young people, it could transform them into lifelong shoppers.
“Say they get TikTok and get a better understanding of what 13-year-olds like. They can then put the right products in their stores and make sure Mom sees it,” he said. “They’re really scratching the surface on data mining.”
Walmart could also use data from TikTok to send users personalized emails and more accurately present online users with products they may be interested in. Using that strategy, it could ultimately catch the attention of young influencers on TikTok, who could then promote the products to their millions of followers.