Wal-Mart emerging from Amazon's shadow

by Josh Sosland
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Walmart logo with Amazon logo in shadow behind it
Wal-Mart executives see groceries as key to competing with Amazon.

As Wal-Mart Stores, Inc. steadily builds its e-commerce business at a cost of billions of dollars, the company’s strategy for competing with the world largest on-line retailer, Amazon.com, increasingly is taking shape. In a recent investment presentation, it was clear top executives believe groceries will be pivotal in catapulting the company forward in the on-line marketplace.

Wal-Mart’s e-commerce plans together with its decision to raise the starting wage for most of its associates were two key topics discussed by company executives Oct. 14 during the company’s 22nd annual meeting for the investment community.

The Wal-Mart executives appeared mindful that the strategic moves the company has made, and the near-term drag they expect the actions to have on earnings, could leave them subject to second guessing. In immediate response to the presentation, which included projections of near-term operating losses, shares of Bentonville, Ark.-based Wal-Mart lost about 10% of their value in New York Stock Exchange trading and continued to drift lower in the days that followed.

To C. Douglas McMillon, president and chief executive officer, though, inaction in the face of a rapidly changing retail landscape was no option.

“Retail history is very clear: those that are unwilling or unable to change go away; those that get ahead of the curve will thrive,” he said. “That is why we are taking decisive steps now to change and grow our business.”

Over the course of the meeting, Mr. McMillon and other executives offered further details into the company’s on-line strategy, beyond what was shared in a major presentation in June during a presentation by Neil Ashe, president and chief executive officer of Global e-Commerce at Wal-Mart. The company said its capital expenditures on e-commerce and digital will total $1.1 billion in fiscal 2017 alone.

In the latest presentation, the crucial role of grocery in the plans was given particular emphasis.

In several markets, the company allows customers to order groceries on-line with free same-day pickup at a local store. Delivery is available in certain markets. In Denver, customers may reserve 2-hour time slots for delivery at a $7 charge and 4-hour slots for $5.

Wal-Mart pick up service website
In several markets, Wal-Mart allows customers to order groceries on-line with free same-day pickup at a local store.

“On-line grocery has the potential to bring in meaningful amounts of new customers,” Mr. McMillon said. “In the last six months in Denver, one in four of these customers using grocery pickup is new to Wal-Mart.”

Attractive to consumers, Mr. McMillon said, is their ability to combine on-line grocery shopping with the full range of Wal-Mart products.

“It is a key differentiator for us that customers can eventually pick up a snow shovel in the winter with their milk and eggs without getting out of the car,” he said.

Finding a way to encourage customers to patronize Wal-Mart both on-line and at stores will have more than a simple additive impact, Mr. McMillon said.

“Our average store-only customer in Wal-Mart US spends nearly $1,400 a year with us,” he said. “The average on-line customer spends a little over $200 a year. But the customer who shops us through multiple channels spends more than $2,500. These are the customers everyone is chasing, and we already have a relationship with so many of them.”

In his comments, Mr. Ashe characterized as a “game changer” the ability of working parents to order groceries on a computer, tablet or smartphone and pick them up later in the day without leaving their cars.

This service of free pickup has been introduced in eight new markets in addition to five where it already had been in place. All told, it will be available in 20 markets by the end of 2015 with another 20 to be announced in early 2016, he said.

Like Mr. McMillon, Mr. Ashe emphasized the potential for the service to attract new customers.

“Even in northwest Arkansas, where you would think there couldn’t be new customers, we are seeing that one out of six customers are new to Wal-Mart with grocery home shopping,” he said.

Mr. Ashe detailed the strengthened relationship built when customers shop both on-line and in stores.

“They download our app,” he said. “They log into their Walmart.com account, and if they don’t have one, they create one. Then we have the opportunity to solve so many problems for them. This provides a gateway for them to shop on Walmart.com, which has way more products than what we can put in any of our stores. There are over 7 million items today, and we’re on a ramp to over 10 million this year. Soon we expect that number to be in the tens of millions.”

Central to this expansion has been the addition of fulfillment centers around the United States. Over the summer, Wal-Mart opened centers in Pennsylvania and Indiana, and recently one more was opened in Atlanta. The company already had a fulfillment center in Dallas and is opening one next year in Southern California and two in Florida.

The centers are not standard merchandise warehouses, Mr. Ashe said.

“These new centers are the size of 20 football fields,” he said. “They could fit two Carnival cruise ships inside. We’re using the most advanced automation available.”

Mr. Ashe described the e-commerce initiative in terms of removing friction from the shopping process, allowing customers to have products delivered or ready for pick up.

In a move echoing the highly popular “Prime” option offered by Amazon, Mr. Ashe said Wal-Mart is testing an unlimited shipping pass service, which he said has been well received by customers. Additionally, the company intends to utilize its scale and resources to outcompete other food retailers.

“We have a distribution and transportation network no on-line retailer has and technology that no grocer has,” he said. “This brings up an important point about e-commerce and grocery. It is really more than just about on-line or just grocery. It is about the power to shop for millions of items
on-line and then to pick them up at our stores or other locations along with their fresh groceries… When we put it all together, we offer the precision of e-commerce at the scale of retail.”

The role Neighborhood Markets will play in the e-commerce strategy and the future within Wal-Mart of the Neighborhood Markets more generally were discussed during the meeting by Gregory S. Foran, president Wal-Mart US. Mr. Foran described the supermarkets as a “terrific complement” to Wal-Mart supercenters.

Even though the company said it is slowing the rate of new store additions (to 85 or 95 in 2015), Mr. Foran expressed confidence Neighborhood Markets will be able to compete in the marketplace and will have a place within Wal-Mart even as e-commerce grows in importance at the company.

“Doesn’t pick-up make Neighborhood Markets unique?” he asked. “What other supermarket offers you access to millions of items on-line?”

Because grocery represents a larger proportion of the Wal-Mart business than in the past and because of its importance toward the success of the on-line initiative, Mr. Foran said the company’s focus in this area, particularly around fresh foods, remains more intense than ever.

“We also know that fresh is a traffic driver,” he said. “The quality of our fresh and our fresh reputation is a key focus. We have to earn customers’ trust. So we have sequenced a plan to win in fresh by getting the basics right, building on that, and ultimately transforming our fresh from the farm to the checkout. We will do it with much better assortment, much better execution, much better processes and a great supply chain.

“Now we’ve got lots of work to do, but I can tell you customers are starting to notice the difference. In the last 52 weeks, market share in fresh is up 26 basis points. Unit comps have improved 1.5%. Markdowns are down 70 basis points since last year. Our price gap in meat is up 200 basis points versus last year, and we also know that the large majority of our customers would purchase affordable organics. So our organic offering continues to expand and it’s now much easier to find on shelf. We are also focused on providing healthy snacks and easy-prep meals. We’ll keep driving hard toward our ambition to save people money so they can eat better.”

The need to improve its execution with fresh products was evident in a response Mr. Foran offered to a question about the uneven performance of Neighborhood Markets stores across the Wal-Mart market footprint.

“Candidly, when we are up against someone who is really good at running supermarkets, frankly our fresh offering has not been on par with what it takes to win in those environments,” he said. “And if we are opening stores where the competitor is not particularly strong, then generally we will do pretty well, and a lot of that is driven by some pretty significant price gaps that we can generate.”

In the questions and answers with the executives, one analyst suggested Wal-Mart’s image as a value supplier may be a disadvantage as the company looks to compete with Amazon, which he said, “seems like it is for everybody.”

Mr. Ashe said Wal-Mart’s position in both general merchandise and groceries gives it a unique advantage in the marketplace.

“How do we attract new customers to Wal-Mart, which I think is the essence of your second question,” Mr. Ashe continued. “And that is by introducing a level of service to our offering that is different than a mass market discount retailer would historically have provided. That is why you see the progress that we are making with grocery. If you look at the categories that have moved on-line, grocery is the last. And the reason is it is the hardest.”

Asked about the small size of Wal-Mart’s e-commerce business, with $12 billion in sales in the most recent year (versus nearly $600 billion for all Wal-Mart sales), relative to that of Amazon and its modest growth rate, Mr. Ashe challenged the underlying assumptions.

“It is worth realizing that we are a big business,” Mr. Ashe said. “Only in Wal-Mart would we say our e-commerce business is not a big business. So to double — we were at what, about $6 billion of sales I think in calendar 2011, fiscal 2012? So in three years we have doubled that business. Doubling at that kind of scale is really attractive growth.”

Still, compared to Amazon annual sales of $100 billion, Wal-Mart’s e-commerce annual e-commerce sales are relatively small … at least for now.

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