Wal-Mart Makes Risky Bet It Can Loosen Amazon's Grip Online
Wal-Mart Makes Risky Bet It Can Loosen Amazon's Grip
Online
Tuesday, 11 Oct 2016 07:55 AM
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 recently told investors 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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