Can Wal-Mart’s Expensive New E-Commerce Operation Compete With Amazon?
Can Wal-Mart’s Expensive New E-Commerce Operation Compete
With Amazon?
A recent acquisition spree including Jet.com gives the
retail giant much-needed digital chops.
by Brad Stone and
Matthew Boyle May 4, 2017, 1:00 AM PDT
Last summer, Marc Lore, founder and chief executive
officer of e-commerce startup Jet.com Inc., sat down to record a private video
for the top officials of the world’s largest retailer: Wal-Mart. In the video,
meant for Wal-Mart executives and board members who weren’t yet part of weeks
of secret negotiations between the companies, Lore stares earnestly into the
camera and shows off his Bentonville bona fides. After humblebragging about
reading every annual report since 1972, he says he’s been “struck by Wal-Mart’s
maniacal focus” over its storied 54-year history.
But Lore’s 40-minute presentation doesn’t hold back about
the threat posed by its most fearsome and increasingly powerful archrival.
“AMAZON IS DOMINATING” reads a slide on a large screen behind him. In the
video, Lore presents a plan to bet Wal-Mart’s future not on e-commerce standbys
such as books, electronics, and toys, but on product areas only now becoming
popular online, including apparel, fresh food, and “everyday essentials” like
drugstore items. “We’ll need to take the offensive, swim upstream,” Lore says.
“As Sam Walton said, ‘Opportunity lies in the opposite direction.’ ”
The video worked exceedingly well. In August, Wal-Mart
Stores Inc. announced it would acquire Jet.com for $3.3 billion in cash and
stock. It was an extraordinary sum for a 15-month-old, purple-hued website that
was struggling to retain customers and is still far from making a profit. Even
more astonishing, Lore and his management team in Hoboken, N.J., were put in
charge of Wal-Mart’s entire domestic e-commerce operation, overseeing more than
15,000 employees in Silicon Valley, Boston, Omaha, and its home office in
Arkansas. They were assigned perhaps the most urgent rescue mission in business
today: Repurpose Wal-Mart’s historically underachieving internet operation to
compete in the age of Amazon. “Amazon has run away with it, and Wal-Mart has
not executed well,” says Scot Wingo, chief executive officer of Channel Advisor
Corp., which advises brands and merchants on how to sell online. “That’s what
Marc Lore has inherited.”
Lore’s ascendancy at Wal-Mart adds bitter personal drama
that wouldn’t seem out of place on Real Housewives of New Jersey to a battle
between two of the most disruptive forces in the history of retail. In 2010,
Wal-Mart tried to buy Lore’s first online retail company, Quidsi Inc., which
operated websites such as Diapers.com for parents and Wag.com for pet owners.
But it moved too slowly and lost out to a higher bid from Amazon.com Inc. Lore
then toiled at Amazon for a year and a half before quitting, in part out of
disappointment with its refusal to invest more in Quidsi and to integrate his
team into the company, according to two people close to him.
Jet, which he started a year after leaving Amazon, sells
almost everything—books, electronics, clothes—so it was difficult to miss an
element of revenge among his motivations. Jeff Bezos, Amazon’s CEO, certainly
noticed. In case anyone underestimated the enmity coursing through the
Lore-Bezos feud, Amazon announced in March that it was closing Quidsi, saying
it didn’t see a path to profitability. Coming from the historically
money-losing internet giant from Seattle, the pointed wording of the
announcement was widely interpreted as an effort to undermine Lore’s
credibility at Wal-Mart.
Lore cuts an unusual figure at the Bentonville
headquarters, which he now visits once a month on a private company plane, and
in the geeky hallways of San Bruno and Sunnyvale, Calif., where most of
Walmart.com’s engineers work. He’s a former bank risk manager and longtime New
Jersey resident who’s a fan of Bruce Springsteen and of figuring out ways to
simplify the routines of daily life. He recently ditched his Tesla and uses
only Uber, for example, and he visits the same sushi restaurant near his office
four times a week, always ordering the salmon sashimi. He also spends time on
customer-pleasing contrivances that, in the parlance of Silicon Valley, do not
scale. He recently devoted a 12-hour day to recording a thousand variations of
a video greeting for new Jet customers. Now when customers sign up, Lore
welcomes them by their first name.
He’d like to extend Jet’s sensibility and business model
to Walmart.com, the second-biggest e-commerce destination in the U.S.,
according to ComScore Inc. A site redesign is due this summer. (He’s thinking
of recording another set of personalized introductions.) Lore also recently
announced free delivery on Walmart.com for orders of more than $35, a Jet-like
(and Amazon-like) tactic to give customers discounts for buying more stuff at
once, so it can be shipped more efficiently in a single box. He also announced
that shoppers will be able to save money on 1 million products if they order
online and pick them up at one of the chain’s 4,700 U.S. stores, where it’s
cheaper for the company to deliver.
Crowning the entire strategy is an acquisition spree:
buying middling e-commerce startups such as Shoebuy.com ($70 million), fashion
retailer ModCloth ($75 million), and outdoor apparel seller MooseJaw ($51
million); installing their founders as his deputies; and selling their products
on Walmart.com, where the selection still lags far behind Amazon’s. Later this
spring, Lore is also likely to announce Wal-Mart’s reported $300 million
acquisition of Bonobos Inc., a decade-old menswear website that offers
well-fitting pants and a team of enthusiastic customer service people—Bonobos
calls them “ninjas”—that wouldn’t normally be associated with a giant like
Wal-Mart.
Wal-Mart has a lot riding on Lore. Last year he received
$244 million in pay, 10 times that of his boss, Doug McMillon, Wal-Mart’s CEO.
His project could determine the future of Sam Walton’s legacy and the eventual
success of McMillon. It will also settle the score on whether Lore is good at
building profitable e-commerce sites or just selling unprofitable ones to his
competitors for piles of money.
“Marc’s been given quite a bit of freedom to go get it
done,” McMillon says.
“The Jet.com deal
is a big inflection point,” says a former Wal-Mart executive. “This is
Wal-Mart’s last shot here”
Since the beginning of the e-commerce era, Wal-Mart has
repeatedly failed to “get it done.” In 2000 it spun out its website as a
separate company and raised capital from the Silicon Valley venture firm Accel
Partners. Eighteen months later, after the dot-com crash, Wal-Mart bought the
operation back for an undisclosed sum. The move didn’t accomplish much of
anything: Sales were disappointing—$25 million in 2000, with $100 million in
clothes and other inventory left over after the holidays, according to a former
senior Walmart.com executive. “We had built fulfillment for apparel, but all
the demand came from electronics,” he says.
The company considered buying Gap Inc. and even Netflix
Inc., the former executive says. But the decision-makers in Bentonville,
intoxicated by the narcotic of constructing profitable superstores,
underestimated the sublime convenience of shopping from the home or office.
Many Walmart.com managers reported to Wal-Mart’s chief financial officer or
vice chairman instead of the CEO, and they were pressured to show
profitability. Over in Seattle, Bezos was building Amazon to gobble up market
share, not generate earnings for investors.
Wal-Mart showed flashes of commitment to the internet
later in the decade, engaging in a holiday price war on media products with
Amazon in 2009 and making its unsuccessful run at Quidsi in 2010. But the next
year, then-CEO Mike Duke spent $300 million to acquire a search engine, Kosmix,
run by two former Amazon executives, who then created a Silicon Valley
skunkworks called @WalmartLabs. They left after a year, partly in frustration
over Wal-Mart’s bureaucracy.
In 2012, with Amazon’s stock booming—up 45 percent that
year—Duke hired Neil Ashe, the former chief executive of the online news
network CNet, to run Wal-Mart’s global internet operation. Ashe, who had no
previous retailing experience, reported directly to Duke and was given a
mandate to deepen Wal-Mart’s digital investments. He and his team made some
progress. They rebuilt the badly outdated technology infrastructure underlying
Walmart.com, introduced smartphone apps, and constructed six fulfillment
complexes outfitted with state-of-the-art automation. The company’s U.S.
e-commerce revenue went from an estimated $4.54 billion in 2012 to $8.03
billion in 2016, according to an analysis by Wells Fargo & Co.
It was a start. But though Amazon loomed large,
Wal-Mart’s most significant fights were internal. One perennial source of
tension involved prices. Amazon typically sets them using algorithms that scour
the web to monitor and match the lowest number they find, which means prices
can change constantly on the site. Wal-Mart sets a consistent “everyday low
price” inside its stores. It’s one of the most sacrosanct brand promises in
retail, practically inscribed onto holy tablets by Walton himself as a way to
assure customers they won’t have to comparison-shop. The philosophy created
problems on the web, though. Whenever the online price dropped below the
in-store price, the merchants in Bentonville would balk. They were worried
about siphoning away customers from their stores, which account for more than
97 percent of Wal-Mart’s sales.
The company was also hesitant to let outside sellers list
their wares on Walmart.com. This “marketplace” idea generates half of Amazon’s
unit sales. It also creates a prodigious amount of unseen internal conflict,
since Amazon employees have to compete with third-party sellers who are
pursuing the same buyers. But the company tolerates and even encourages the
tension because choice and price competition are good for customers. Wal-Mart, accustomed
to dominating its relationship with brands and showing its entire assortment in
its massive stores, was reluctant to foster such competition, and it didn’t
have the technological chops to support an expansive marketplace. Instead of
focusing on increasing online selection, Wal-Mart kept building
supercenters—more than 700 from 2010 to 2016 in the U.S. alone. Walmart.com
only started adding third-party sellers in 2015, and though it now has more
than 40 million products in its marketplace—Toms canvas shoes, Rebecca Minkoff
satchels, and other stuff it doesn’t sell in stores—the number is small
compared with the 350 million or so items available on Amazon.
When McMillon, now 50, took over as CEO in late 2014,
things began to change. He’s a sandy-haired former high school point guard who
famously started at Wal-Mart as a teenager, working summers in an Arkansas
stockroom. He’s also the company’s first CEO since the founder young enough to
have high school-age children. McMillon has gradually come to shed the
customary Wal-Mart suit and tie in favor of casual sport coats and open-collar
shirts, and plays up the notion that he’s a “bit of a gadget guy.” He once
bought a Kindle for his mother, and regularly invites tech luminaries such as
Facebook Inc.’s Sheryl Sandberg to senior staff meetings. “I want us to sell VR
before the customer is ready for it,” he says. “I keep telling our folks, ‘Buy
a little and put it online, put it in 50 stores.’ Don’t tell me it won’t sell
unless you try it. You gotta catch the wave. And to catch the wave, you gotta
be early.”
Over the past few years, Wal-Mart has notched decent
numbers, including 10 consecutive quarters of same-store sales growth in the
U.S. and 1 percent to 2 percent increases in revenue each year. Over the
holidays, its online unit recorded 29 percent sales growth over the previous
year. But Amazon has been enjoying 20 percent-plus annual sales growth, and
many experts say the e-commerce market could double in the next decade. The
company already dominates the cities and coasts, and its next stop is the
heartland, home to Wal-Mart’s customer base.
McMillon has attempted to adjust to the shifting retail
landscape. He’s closed about 175 stores, reduced the size of others, and
boosted pay to full and part-time workers. He also paid a price that most
analysts thought was exorbitant, if necessary, to send a clear message to
everyone inside Wal-Mart about the urgency of the online effort. “The Jet.com
deal is a big inflection point,” says Venky Harinarayan, one of the Kosmix
founders and a former @WalmartLabs director. “This is Wal-Mart’s last shot here.”
Several analysts share the sentiment. “Doug realized
there needed to be some radical changes made, as Wal-Mart was rapidly going in
the direction of close-to-defunct retailers,” says Karen Short, who studies the
stock for Barclays PLC. “There was a realization that you have one shot to get
that customer back in the door, so you better make sure you get it right.”
Sanford C. Bernstein & Co. analyst Brandon Fletcher is reading from the
same script: “This is their last window to get it right,” he says.
Perhaps the same could be said of Lore. In the fall of
2015 he was seeking Jet’s fifth round of funding. The startup had already spent
almost $200 million in venture capital setting up its website and blanketing
cities with mailings and outdoor ads. A year after the site’s launch, critical
media reports suggested Jet wasn’t gaining traction with customers, framing the
company as an example of Silicon Valley profligacy. The accounts weren’t
altogether off-base; according to Second Measure, a company that analyzes
credit card data, among a sample of 8,000 customers who joined Jet.com that
October, fewer than 400 were still buying from the site six months later.
Publicly, Lore played it cool. Privately, he was a wreck.
He says he pulled two straight all-nighters while he was closing the round. He
was so exhausted on one red-eye flight, he vomited all over his coach-class
airplane seat. He eventually succeeded, though, raising $500 million, at a $1
billion valuation, from Fidelity International, Bain Capital, Google Ventures,
and Alibaba Group Holding. “That round was definitely stressful,” he says. “We
had less than four weeks of cash left in the bank when we finally closed it.”
Lore was making the same risky bet that Bezos had years
before. E-commerce businesses that start out looking frail can generate healthy
amounts of cash if they make it past infancy. And though it wasn’t working yet,
Lore argued that Jet’s “smart cart” system—which gives customers opportunities
to save money when they buy multiple items at once or agree to a longer
delivery time—would eventually entice a price-conscious swath of Middle
America. “We weren’t seeing the benefits of it because we had not yet reached
scale,” Lore says. “But the model was absolutely viable. I think the market is
massive, and even a small share of a trillion-dollar [retail industry] is a
pretty big business.”
In early 2016, with Jet churning through its new cash,
one of the startup’s board members used that pitch on Wal-Mart, hoping to get
Lore an introduction to McMillon. It worked, and Lore flew out for a meeting in
Bentonville. What started out as a preliminary discussion about an investment
in Jet flowered quickly into a corporate bromance. In June, McMillon visited
Jet’s offices in Hoboken, wearing a brand-appropriate purple shirt. Lore says
they spent considerable time at a whiteboard, sketching out a shared future:
“We just sort of immediately saw eye to eye on what needed to be done.” It’s
unclear if harps played in the background.
They both needed the partnership: McMillon to send up a
flare for employees and investors about the importance of Wal-Mart’s online
efforts, and Lore to pay off his backers and escape the fundraising circuit,
where he’d spent about half his time over the previous two years. McMillon also
came away with a handy pitch for Wal-Mart shareholders who might have blanched
over the purchase price—that the company’s founder himself would have loved
Jet.com. “The Jet concept of sharing savings with customers is a very Sam
Walton-like idea,” says Richard Cook, co-manager of the Cook & Bynum Fund,
which owns Wal-Mart stock. “You will help us lower costs, and we will share
that savings with you.”
McMillon and Lore structured the Jet deal differently
from Amazon’s purchase of Quidsi. Lore took over Wal-Mart’s entire e-commerce
business in the U.S. and combined the Jet and Walmart.com teams, though he
continues to run them as separate websites.
In January, hoping to streamline the two companies’
digital strategies, Lore eliminated 200 jobs in Silicon Valley and created a
new class of so-called category specialists, each of whom oversees a narrow
product area, such as food-storage bags or cribs, on both sites. He also
changed these employees’ incentive structure. Instead of evaluating them entirely
on quarterly profit and loss, as Wal-Mart managers have been judged in the
past, Lore introduced five bellwethers related to the customer experience, such
as whether products are in stock, how easily they can be found on the site, and
how quickly they’re delivered.
Lore says he enjoys a kind of autonomy at Wal-Mart that
he never had inside Amazon—about as close to a criticism of his former employer
as he’ll make. “When you give people all the information and you trust them and
keep everything fair,” he says, “people have room to run and to be empowered.”
The Wal-Mart fulfillment center in Bethlehem, Pa., is a
marvel of 21st century retail. It’s an absurdly vast 1.2 million square feet,
with products stacked 40 feet high on metal shelves that extend in both
directions nearly as far as the eye can see. Quotes from Sam Walton—“To
succeed, stay in front of change”—pepper the walls. The prevailing sensation in
the warehouse is one of sound: The drone of conveyor belts and
computer-controlled chutes threaded through the facility blends with a symphony
of beeps from forklifts, producing an orchestral hum that drowns out the actual
music playing on distant overhead loudspeakers. Flying along those belts at 8
mph is the bounty of modern capitalism: dog treats, underwear, Nintendo Switch
controllers, Campbell’s cream of chicken soup. “If Wal-Mart sells it, we
fulfill it here,” says David Tarnosky, the center’s general manager.
Although the fulfillment complex and its five cohorts
were built by Lore’s predecessor, they’re key to Wal-Mart’s renewed bid for
relevance. They allow the company to ship its most popular products anywhere in
the country within two days on the ground or one by air, down from a week five
years ago. These are table stakes in the pricey poker game that is contemporary
e-commerce.
At one end of the facility, among rows of
yellow-safety-vest-wearing packers earning about $14 an hour, another aspect of
the strategy reveals itself. In February, in one of his first acts in his new
role, Lore scrapped Wal-Mart’s two-year-old Amazon Prime copycat, called
ShippingPass, and instead offered free two-day shipping on any order of more
than $35. (In a rare act of following a competitor, Amazon dropped its
free-shipping minimum purchase from $49 to $35 for non-Prime members.) The
free-shipping gambit has translated into boxes packed to the brim with jumbles
of baby wipes, paper towels, and other everyday items. The sight should come as
a relief to the company’s accounting department. “Shipping one unit is ex-pen-sive,”
McMillon says, drawing out the word. “It costs five bucks to ship one item,
seven bucks to ship seven. So when you aggregate volume on the supply side, the
economics change in your favor.”
He contends that you can’t ship items individually and
make money, but that may not be entirely true. Amazon, with its vaster scale
and hyperefficient fulfillment centers, has trained consumers to order a single
product whenever they need it. Wal-Mart may never get there, but it has other
advantages, which Lore plans to exploit. The main one is the cost efficiency
produced by its 4,700 stores, hundreds of distribution centers, and 6,200
trucks, which prowl the country bearing the company slogan, “Save Money. Live
Better.” Wal-Mart has spent decades ensuring it can ship products to its stores
more cheaply than any other retailer, which also means it can do so more
cheaply than sending them directly to customer’s homes. Lore wants to entice
shoppers to stores with discounts and then lure them inside to pick up jumbo packs
of bottled water, bags of charcoal, and other products, where Wal-Mart’s prices
can’t be beat. To do so he’s experimenting with a 16-foot-tall octagonal orange
“pickup tower” code-named Rapunzel—a vending machine that sits inside a store,
holds as many as 300 orders, and spits the right one out when a customer feeds
info into a touchscreen.
He’s also prioritizing groceries. Wal-Mart, the country’s
leader in this category, allows grocery pickup from 600 locations and plans to
add an additional 525 this year. “If Wal-Mart can translate that food trip to
the digital realm, they’re in a good spot,” says Robin Sherk, an analyst at
Kantar. “For them, winning online grocery is mission-critical.”
Finally, Lore hopes to rip out the barriers between the
store and the e-commerce business that have stymied Walmart.com in the past.
For example, he’s expanding a service called Easy Reorder: Everything you buy
with a credit card at a Wal-Mart store will show up in your online account,
ready to be replenished with one click. It’ll almost certainly hurt store
traffic in favor of online sales, but Lore says that shouldn’t matter: “If you
don’t want to let another business cannibalize your customer, you have to let
them shop whatever way they want to.”
Of course, Wal-Mart’s biggest challenge is that its
primary rival isn’t standing still. An estimated half of all U.S. households
subscribe to Amazon Prime, according to a report from Consumer Intelligence
Research Partners. And Amazon currently takes more than $5 out of every $10
spent buying stuff online, says Macquarie Research. Its market value, buoyed by
its cloud-computing business, is now around twice Wal-Mart’s. In Seattle,
Amazon is also trying out concepts, such as the Amazon Go store, where
customers are automatically charged for items they pick from shelves without
going through a checkout line, and a hybrid supermarket-and-pickup center for
people who order groceries online. All of this stands to eat into Wal-Mart’s
advantages.
There are other challenges. Can Wal-Mart translate its
domestic progress overseas, particularly in the fast-moving markets of China
and India, currently outside Lore’s domain? And can Lore, a veteran of
grow-at-all-cost startups, find long-term profits in Walmart.com to satisfy the
company’s vocal investors?
Lore doesn’t seem overly anxious about that last issue.
Over lunch, he shares a story about his teenage daughter, who’s started an
online sticker-selling business whose proceeds go to philanthropies fighting
celiac disease, an autoimmune disorder. When his daughter recently told him she
was making money, Lore says, he was shocked. “How are you profitable?” he asked
her.
“Well, Dad, it’s easy,” she replied. “You just make sure
your revenues are higher than your expenses.”
“Oh,” Lore recalls saying. “I never really thought about
it that way.”
One wonders what Sam Walton would make of that.
—With Molly Smith
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