Wall Street believes Amazon is winning the retail war with Walmart. Amazon’s market cap is twice that of Walmart, despite being a much smaller and less profitable company than Walmart. Wall Street values the growth of the ecommerce giant over the size and clout of the world’s largest retailer.
In the last few years, Walmart has invested billions to up their multi-channel capabilities. Multi-channel involves the combination of stores and a web/ecommerce presence, the ability to support sales through multiple product flow paths to the customer. Or as Doug McMillan, the CEO of Walmart, put it in the letter to shareholders in this year’s annual report, “Our strategy to serve customers through e-commerce and our stores in a seamless way … Customers are time-crunched, so we want their shopping experience with us to be fast and easy—truly seamless—in all the ways they want to shop: in stores, on their mobile device, or through pickup and delivery.”
Walmart’s investments multichannel investments include opening state of the art automated ecommerce warehouses, buying ecommerce companies like Jet.com, and big investments in IT. Some of these investments have been controversial.
In executing multi-channel, their stores can be an asset. 90 percent of Americans live within ten miles of one of its stores. Nearly four out of five of them shopped at Walmart last year.
But to satisfy investors, the world’s largest retailer not only has to grow revenues, they need to do it profitably. Many multichannel flow paths are not very profitable. Marc Lore, President and CEO or Walmart eCommerce, spoke to this in the same annual report:
“The key to success in e-commerce is winning in logistics and supply chain. Most marketplace platforms are inefficient in that the lowest priced retailer typically wins the order, regardless of their proximity to the customer. Conversely, at Jet we use smart-cart technology to let customers see how they can save money on shipping and other costs as they build bigger baskets.”
Shipping is by far the biggest cost to fulfill an e-commerce order. Ecommerce shipments that make money despite offering free shipping can only do so by marking up the cost of the item to cover the shipping costs. The marginal cost to put more stuff in a box that ships from the same warehouse is much lower than shipping an individual item, although parcel optimization can be complex.
Jet.com seeks to shape customer behavior by displaying “Smart Items” that save the customer money. These are items that drop in price as they are added to the customer’s cart because they’re coming either from the same warehouse as something else already the cart, or even better, located in the same aisle of the warehouse as items that are already in the cart. Customers can also save money by agreeing to waive their right to free returns. Returns are massively costly for retailers, so this is another place where Jet.com can split savings with customers.
Many pundits argue that for traditional retailers to achieve success in multichannel, goods must be the same price online and in the store, even though it is far cheaper for the retailer to fulfill an in-store order. But Mr. Lore’s viewpoint is that “As we make these costs transparent, we’re changing consumer behavior to save them money and make the transaction more economical for Walmart.” In this way Walmart’s “Everyday Low Price” store philosophy can apply to their multichannel efforts.
Jet.com and Walmart.com offer “free” two-day shipping on for orders of more than $35. Too make this strategy of sharing savings with the customer work, the company will need to optimize the way inventory is stored across the network. The company says that their @WalmartLabs team out in Silicon Valley crunches billions of variables and developed algorithms that determine from where inventory should be stored and where an order should ship based on a customer’s location. Shipping items other than perishables to a home will usually be much less expensive if done from an ecommerce warehouse, than from a store close to a customer.
But Walmart isn’t only concerned about making money from ecommerce. Walmart.com is also integrated with their physical stores through services like “Walmart Pickup,” “Pickup Today” and “Online Grocery.” Getting customers to order online but then pick up at the store can be profitable. While, Walmart must pay store associates to pick the order, there is also the possibility that the ecommerce personalization will suggest goods already in the store to add to the market basket, or that customers will decide they need additional items in the store.
Walmart has advantages in battling Amazon that other retailers don’t. More than half their sales in the U.S. are food. Delivering perishable items to a home is difficult and expensive. While Amazon is experimenting with these food delivery, they lack the size and scale of Walmart in this category.
In conclusion, I believe Walmart’s success in multichannel will depend upon getting consumers to buy into a share the savings approach. This will depend upon making the ecommerce sites easy to use and navigate despite the added complexity created by Smart Items. It will also depend a fairer sharing of the savings. For example, in the case of returns, the “sharing” does not seem to be significant. In most cases customers are only offered a few cents off the purchase price.