The world’s largest brick-and-mortar retailer, Walmart, has eliminated the membership fee on its two-day shipping program ShippingPass – its strongest response yet to the growing dominance of Amazon Prime (which is not estimated to 65 million members worldwide).
According to Marc Lore, CEO of Walmart’s U.S. e-commerce division and founder of Jet.com: “In today’s world of e-commerce, two-day free shipping is table stakes.” He also called the initiative “the first of many moves we will be making to enhance the customer experience and accelerate growth.”
As the battle between Amazon and Walmart looks set to intensify — the undisputed heavyweight of online retailing versus the biggest brick-and-mortar retailer in the world — can Marc Lore and his Jet.com model rocket Walmart.com into a credible, competitive e-commerce position?
A challenging historical context
Amazon’s present dominance is built on continuous investment. Year after year, Amazon has plowed its profits into its infrastructure, creating not just an impressive demand chain (the glitzy stuff we love to talk about, like a powerful product search engine or value-added services like Prime Instant Video), but a powerful supply chain of e-commerce optimized fulfillment centers and a deep network of third-party partners.
And Walmart? Its $13.7 billion in global e-commerce sales (for fiscal year 2016) are not insignificant, but they are simply dwarfed by Amazon’s numbers — $63.71 billion in U.S. e-commerce sales alone. Two decades from its initial forays online, e-commerce remains a small portion of Walmart’s overall sales. Not only does Walmart.com lag far behind Amazon, it fails to keep pace with e-commerce growth as a whole.
The Walmart Marketplace has never been as open or efficient as Amazon. And Walmart has never made comparable investments in distribution centers tailored for e-commerce.
So far, Walmart has failed to beat Amazon on its terms. But could it win on its own terms, turning its vast brick-and-mortar footprint into an unbeatable competitive advantage?
It’s the big e-commerce “what-if?” What if Walmart could leverage its giant inventory, its huge store network, and its vast web of vendor relationships?
The prospect is tantalizing (especially for those with a legacy asset base), but…to date, no one can point to a single real-life exemplar of omnichannel retailing proving to be a superior growth engine than Amazon’s version of e-commerce. So far, omnichannel retailing has demonstrated itself to be a reasonable defense strategy for struggling traditional retailers.
And in a very practical sense, omnichannel tactics impose new challenges that are not easily overcome. To take advantage of its vast store empire, Walmart offers local in-store pickup for orders placed online. For a significant segment of Walmart’s market, waiting up to two weeks for their orders’ arrival at local stores is worth the money saved on shipping; in some parts of the country, in-store pickup can give Walmart a meaningful business edge over Amazon.
But fulfilling online orders from in-store inventory means that stores must serve two masters; their inventory, staff, and store layouts have to meet two demands from two sources — online pickup orders and in-store customers — simultaneously.
The risk is that a natural appetite for growth becomes an unwelcome case of retail cannibalism.
Once online orders absorb 10% - 15% of a store’s volume, it can actually become disruptive to customers’ experience and store economics by leading to drops in on-shelf availability, aisles crowded with staff picking orders, and decreased labor efficiency.
“Unbundling” may be Walmart’s best package for success
To win in e-commerce, Walmart may actually need to achieve two monumental objectives:
1. Prove itself a credible challenger to Amazon’s pace-setting versions of “pure-play” e-commerce, and
2. Repurpose its enormous network of stores and distribution centers to accommodate e-commerce without cannibalizing store sales.
With the acquisition of Jet.com, Walmart has demonstrated serious intent. Under Lore’s leadership, Jet has embraced key elements of both Walmart’s and Amazon’s models (particularly an emphasis on low prices) while adding a new wrinkle: Jet makes economic trade-offs between price, selection, and convenience more transparent, giving consumers opportunities to exchange privileges for a better price. Customers can get lower prices by waiving return privileges, for example, or choosing a less expensive payment option (debit versus credit). In Jet’s Smart Cart, they can enjoy even greater savings by buying the same item in quantity, or choosing an item in a nearby distribution center.
In his current Walmart role, Lore continues to show seriousness. Soon after his arrival, he cleaned house, replacing key members of the Walmart.com management team. The recent free-shipping play proves that Walmart is willing not just to meet, but beat Amazon on an important e-commerce turf.
Yet Walmart’s willingness to further Jet.com’s unbundling model may prove the most effective strategy yet. Amazon, by making its offerings increasingly complex, has exposed itself to disruption at the low end of the market.
By unbundling delivery choices, delivery times, purchasing options and other benefits from the product purchase itself, Jet and potentially Walmart.com can make themselves a destination for people willing to sacrifice convenience or selection for savings. Consider this: when Walmart.com first launched its shipping-to-store program in which customers could eliminate delivery costs if they were willing to wait two to three weeks for in-store shipment, more than half of its orders were picked up at their stores.
What to watch for
Can anyone — even Walmart — catch up to or surpass Amazon at this point?
Given Amazon’s decades of continuous investment and reinvention, perhaps the prospect of truly out-Amazoning Amazon remains dim.
The real question is whether or not there is room for a viable, second place contender. With its recent assault on the low-end — via in-store pickups, free two-day delivery, and unbundled purchasing options — Walmart seems poised to capture the most price-conscious segment of the market, which Amazon may have left exposed in its quest to lock households into an increasingly complex ecosystem of hardware, content, and services.
Walmart and Jet.com are pursuing strategies that will take three to five years to fulfill. Observers can wait and see, but Walmart cannot remain patient. E-commerce continues to grow faster than Walmart itself, and if Walmart is to substantially move the online needle, it needs to show real gains over the next 12 to 14 months.
A year from now, we’ll have some clues as to whether Walmart’s latest e-commerce moves, under Lore’s leadership, show signs of paying off. Then we’ll have to ask new questions. Where does Walmart really fit in the online universe? What’s the twenty-year plan — and does Walmart (or any other online retailer) have enough sand in the hourglass to execute one?
By Keith Anderson is senior VP of strategy & insights at Profitero.