America’s largest retailer came slow to the e-commerce game. That may have been a winning decision.
Expanding into e-commerce and fighting Amazon for sales, Walmart has unveiled a flurry of new tactics and acquisitions. Since snapping up Jet.com last year, the world’s largest retailer has partnered with August smart-home devices, purveyor of security cameras and doorbells, enabling customers to receive packages inside their homes while they are away. The company has just acquired Parcel, a New York City-based logistics startup for less than $10 million — an acquisition that will help it execute same-day delivery in New York City. And in November, Walmart will make it easier for customers to return their online and in-store purchases, using their mobile phones.
Walmart has been hotly criticized for being slow to the e-commerce game, and its online market share is significantly smaller than Amazon’s. But the contrarian view is that Walmart was wise to move slowly into e-commerce, given how hard it is to turn a profit. “Arguably, the greatest value from Walmart’s new acquisition strategy is that they are injecting a new mindset into the organization and jump-starting a cultural transformation that can pay vast dividends,” Forbes noted recently, adding:
“Yet mostly I am struck by the words of a venture capitalist who has been struggling mightily with how he was going to salvage a multi-million dollar investment in a “disruptive” online brand that has garnered gobs of good PR but is burning through cash with no end in sight.
As he reflected on Walmart’s most recently announced acquisition he told me this: ‘Now I wake up every day and thank God for companies like Walmart.’”
Indeed, since early 2016, when Walmart announced the closure of 269 stores as its profits and revenue stalled, the company has bounced back. Now, the very asset that once had analysts worried — many felt the company was “over- stored” — is working to Walmart’s advantage as a “New Retail” model takes shape. This new model, known as O2O, or online-to-offline, involves looping online, offline, logistics, and data into a single value chain.
To achieve it, Amazon is busy making costly investments into brick-and-mortar locations, as disruption from pure e-commerce runs it course (see WILTW, August 24, 2017). Walmart, meanwhile, is working in reverse, building a digital presence into its massive network of 4,700 stores. It is a network that puts 90% of Americans live within 10 miles of a Walmart, giving the company an edge in a moment when other e-commerce giants are “embracing physical space.” As a point of comparison, just 44% of Americans lived within 20 miles of Amazon’s network as of last year, according to Motley Fool.
Speaking at a recent investor community meeting, Walmart e-commerce CEO Marc Lore was feeling bullish: “It’s really about leveraging the unique assets to play offense…The last two years was fixing the stores. Now we are planning to win.”
Walmart needs to move quickly to seize its advantage while it can. Practically speaking, that means turning Walmart’s stores into digital shopping destinations, no matter how customers shop. This means leveraging every big-box and digital asset, from the company’s fleet of 6,700 trucks to its pricing algorithm on Jet.com. Over the summer, those trucks and algorithms merged when Walmart began offering discounts on 1 million items sold online and picked up in stores — a program Walmart has been able to roll out at scale, in 1,100 stores, at no charge to the customer. As Retail Dive explained it:
“Wal-Mart is probably the most efficient distributor of retail goods in the world. The idea of passing on some of that efficiency to customers in the form of extra savings for those who choose to pick up online orders in stores is a sort of offline version of the philosophies Lore introduced at Jet.”
There are other signs that Walmart stores are evolving into “all-in-one” hubs for shopping, online distribution, and even financial services, with a special eye towards the places they serve. In a trial run, the company is testing a program in which store workers deliver some items on Walmart.com and Jet.com, a program that could put those deliveries within spitting distance of 90% of Americans. Giant, self-serve kiosks with refrigerators and freezers inside are currently in the works, streamlining online grocery pickup. And product delivery towers, now in 50 stores with 50 more coming before the holidays, are getting better all the time. “It used to be an hour to pick something up you’d bought online. Now it’s a minute,” a client told us, adding:
“The thing I keep saying to people about Walmart — to people who live in cities — is this is what life is like in flyover country, where Walmart actually does provide a service…
An investor from New York said, ‘Why would I come to Walmart to do a money transfer when I can do it from my phone?’ These people are private banking customers at Chase, not construction workers who get paid in cash.Walmart says 28% of US population is unbanked. The fact is you can order online and pay cash at Walmart and that’s what a lot of people do because they don’t have bank accounts.”
And yet one of our clients, having recently visited a number of Walmart stores, was also impressed by the quality and display of the merchandise and food, including the organic section. “Quite frankly, if we had one of those [in Manhattan] my wife and I would go there instead of ordering FreshDirect.” Walmart has spent $2.7 billion on training and raising wages for 1.2 million of its workers in the last two years, an investment that reflects the pressure it has faced to stay competitive.
All of which gives Walmart an edge as it grows its business in two directions: higher-and-lower income households. On the one hand, Walmart has targeted Amazon’s Prime business, launching free, two-day shipping on millions of items, while making acquisitions that target wealthier online shoppers (Bonobos and Parcel are two examples). At the same time, Walmart remains relentlessly focused on value. Having saturated the middle to high end of the e-commerce market, Amazon is also looking to capture Walmart shoppers (it recently announced a discount for customers on government assistance programs). But Amazon does not yet compete with Walmart’s prices, particularly in the realm of groceries. In a survey of 18 items, Bloomberg found Whole Foods was still 50% more expensive on average than Walmart, despite Amazon’s recent reductions.
“Unless they slash prices, they’re not going to dramatically expand the income band of customers they go after. It was a bold statement on the first day, but it wasn’t that many items that were moved,” Mikey Vu, a grocery expert at Bain & Co., told The Chicago Tribune.
This positions Walmart to reach lower-income shoppers online first. Looking ahead, it could also put the retailer in direct competition with Dollar General, another second-mover. Already analysts are wondering if Dollar General’s store footprint has gotten too large, following its recent slowdown in growth. “Something ‘bout dollar general just feels like, ‘Damn I’m poor as hell for being in here,’” Twitter user @LRNRose tweeted recently. But when the company recently outlined its new retail strategy, it looked a lot like Walmart’s, complete with pay increases for managers, bringing in fresh produce, and new digital investments. Dollar General is also testing smaller, 3,600 square foot stores in urban areas, targeting millennials.
For some analysts, this is a sign that Walmart, Amazon, and Dollar General are betting on a “permanent underclass in America.” Economist Michael Mandel is more optimistic, arguing that e-commerce investments by the likes of Walmart and other retailers, especially in the form of fulfillment centers and better-paying jobs, could help revitalize depressed communities, a topic we plan to explore in coming issues. For now, a few things are certain as O2O accelerates. The price wars in retail will only get fiercer. A digital-first mentality, in addition to providing a sense of place and experience, are the keys to the new retail kingdom. And new disruptors are coming for the incumbents.