Wal-Mart Makes Risky Bet It Can Loosen Amazon’s Grip Online
Shannon Pettypiece October 7, 2016 — 12:59 PM EDT October 7, 2016 — 2:39 PM EDT
Chain is relying on growth from e-commerce, not store openings
The challenge: ‘You aren’t going to out-Amazon Amazon’
Wal-Mart Stores Inc.’s increasing reliance on e-commerce to fuel sales comes at a time when Amazon.com Inc. is tightening its grip on the American consumer, making it a risky gambit. Wal-Mart told investors yesterday it would pull back on the number of new stores it was opening and instead invest some of that money into online operations. It’s a key milestone: For the first time, the company expects e-commerce gains to contribute more toward its growth than expanding its brick-and-mortar footprint. Analysts and investors are skeptical that Wal-Mart can pull it off. Consumers are rapidly getting ingrained in the habit of turning to Amazon for everything from toilet paper to a new dress. Among U.S. online consumers, 55 percent say they go to Amazon first when searching for a product and about half of American households have a $99-a-year Amazon Prime membership. U.S. shoppers spend 30 percent of their time online at Amazon.com’s website, compared with 3 percent on Walmart.com. “I get that you have to be in e-commerce, but you are chasing the 800-pound gorilla,” said Brian Yarbrough, an analyst with Edward Jones & Co. “You aren’t going to out-Amazon Amazon.” Cannibalizing Stores? Yarbrough worries that Wal-Mart’s growth online will mostly be coming from its existing customers -- and as a result will cannibalize its stores, which are more profitable and where customers are more likely to make an impulse buy. At the same time, Amazon has been increasing its reach into Wal-Mart’s customer base. Forty-two percent of Amazon Prime members are also Wal-Mart shoppers, compared with just 20 percent in 2013, said John Blackledge, an analyst at Cowen & Co. And there are no signs Amazon is slowing down. It is set to add 12 million Prime members this year, on top of the 10 million it added in 2015, Blackledge estimates. With at least 17 times as many items for sale as Walmart.com, Amazon is increasingly expanding its reach into areas once dominated by traditional retailers. This year, Amazon is set to sell more apparel than Wal-Mart, and by 2018 it will be the second-largest seller of consumables, such as cleaning suppliers, paper towels and diapers, Blackledge said. Speedy Delivery Then there is Amazon’s ever-increasing delivery speed. While Wal-Mart is in the early stages of offering a membership program where customers can get free two-day shipping -- rather than waiting the standard five to seven days -- Amazon is offering free same-day delivery in 27 major cities. In some markets, the e-commerce company delivers millions of products within an hour. “To compete, Wal-Mart would have to replicate the value proposition of Prime,” Blackledge said. “If they could do that at scale, then they would have something, but Amazon has been singularly focused at this for 20 years.” None of that should be news to Wal-Mart Chief Executive Officer Doug McMillon. He knows the company has a lofty goal in front of it, but since paying about $3.3 billion for e-commerce startup Jet.com, McMillon seemed to have a bit more spring in his step when talking to investors about the company’s online strategy. Pieces in Place “A lot of the foundational elements that we’ve been telling you for years that we needed to grow the e-commerce business are now in place,” McMillon said. “It’s time to invest more money. It’s time to really get this going and start growing our e-commerce business in a different way.” That new way will be led by tech-industry darling Marc Lore, who founded Jet.com and joined Wal-Mart following the acquisition. McMillon sees him as key to the company’s future. The CEO half-jokingly recalled walking down the street with Lore and instinctively stepping out in front of an oncoming car to protect him. “If Marc can be Marc within this company, great things are going to happen,” McMillon said. Wal-Mart expects online sales to grow 20 percent to 30 percent over the next three years with the addition of Jet. That would be a major acceleration: Online sales grew 7 percent in the first quarter and 12 percent in the second. But even 20 percent growth on a base of about $13 billion does little to move the needle at a company with nearly $500 billion in annual revenue. Costly Effort In the meantime, the investments are taking a toll on Wal-Mart’s bottom line. The company said profit would be flat next year in part because of the heavy spending online. Wal-Mart shares fell 3.2 percent Thursday when the retailer’s executives made their case to investors, and the stock was down an additional 1.2 percent on Friday. The question is whether Wal-Mart can change the shopping behavior of the tens of millions of Americans already entrenched in Amazon. Is Wal-Mart the retail equivalent of Microsoft Corp.’s Bing, which tried and failed to convince Americans to break their habit of going to Google? Or can Wal-Mart -- with Jet.com -- be a disruptive force in the industry? “If someone is locked into Prime, the chance of you bringing their business over is slim,” Yarbrough said. Store Pickup Wal-Mart’s main selling point has been its physical stores, which let shoppers buy items online and pick them up on the premises. That includes having employees deliver groceries to customers’ cars in the parking lot. Wal-Mart has expanded its grocery pickup service from five test markets a year ago to more than 100 markets now. The service has the potential to drive regular traffic to Wal-Mart’s website, where customers may think to pick up extra nongrocery items. Jet.com may help give it an advantage on price. The startup has developed a system where customers pay less if they are ordering items from the same location or if they opt out of services, like the option to return the item. Lore also said using store pickup and sending items from the store could help cut shipping costs. But adapting to the internet isn’t really a choice -- it’s an imperative. And that’s something Wal-Mart founder Sam Walton would recognize, McMillon said on Thursday. “The Internet and technology are changing the world, they are changing industries, and they’re changing retail,” he said. “Sometimes people ask me what would Sam think about what Wal-Mart is going today, and I don’t know. But the one thing I know for sure is we would be changing and we’d be changing quickly.”
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