When Walmart announced last week that it was significantly increasing its investment in e-commerce, it tacitly acknowledged that it had fallen far behind Amazon in the race for online customers.
Walmart first said it would make e-commerce a priority at the dawn of Internet retailing in 1999. Back then, Walmart was a disrupter in its own right, rapidly expanding its big-box concept around the country and driving mom-and-pop stores out of business.
Though it knew Internet retailing was here to stay, Walmart in the 16 years since has often acted as though it hoped Amazon would just go away. Now, the magnitude of the task it faces has grown exponentially as e-commerce growth continues to surge globally.
“With every passing year, it becomes harder and harder for Walmart to compete with Amazon,” said Mark Mahaney, who covers Internet retailing for RBC Capital.
In 1999, Amazon was a fledgling company with annual revenue of $1.6 billion; Walmart’s was about $138 billion. By last year, Amazon’s revenue was about 54 times what it was in 1999, nearly $89 billion, almost all of it from online sales. Walmart’s was about three times what it was 15 years before, almost $486 billion, and only a small fraction of that — 2.5 percent, or $12.2 billion — came from Walmart.com.
Investors have already crowned a winner: Amazon’s stock market value eclipsed Walmart’s for the first time in July and now exceeds Walmart’s by more than $70 billion. Amazon’s stock is up more than 80 percent this year. Walmart’s has declined 30 percent. It dropped more than 10 percent in one day last week after it said that sales this year would be flat and announced its new investments in its online business. Meanwhile, on Thursday Amazon’s shares surged after the company said sales rose to $25.4 billion for the third quarter, up 23 percent compared with a year ago.
“Over the past five years, Amazon has gone through an aggressive investment cycle,” Mr. Mahaney said. “They’ve dramatically improved fulfillment, which means they can get products from click to doorstep faster and more cost-efficiently than anyone else.”
Walmart is hardly the only incumbent bricks-and-mortar chain that is threatened by Amazon and other increasingly sophisticated online retailers, which appeal to a customer who has grown increasingly comfortable shopping on a smartphone. In a thoughtful post on the website Medium about Walmart’s challenges, Jeff Richards, a partner in the venture capital firm GGV Capital, called this shopper the “Mobile Mom.”
“The shift in retail to the Internet is a huge change, and it’s not just affecting Walmart,” said Simeon Gutman, a retailing analyst for Morgan Stanley. “Every retail company is trying to manage the transition. It’s not well defined or understood and there’s no road map. Walmart is just the biggest. It’s a behemoth that was built on superstores with volume and distribution efficiencies. That whole model is being unwound.”
Mr. Mahaney noted that success in retailing has always depended on three simple factors: price, selection and convenience. Walmart has long benefited from its association with low prices, so low that it drove an earlier generation of mom-and-pop stores out of business.
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This week I picked four items and checked each at Amazon.com and Walmart.com: a Bosch stainless steel dishwasher; an UnderArmour Tactical UA Tech long-sleeve T-shirt; a Vizio 60-inch LED smart TV; and John Grisham’s latest legal thriller, “Rogue Lawyer.”
Amazon’s prices were lower on every item, in some cases substantially ($150 less for the dishwasher, $7 less for the Grisham book).
As for convenience, Amazon consistently offered delivery that was much faster — and in many cases, cheaper. (Shipping is free for Amazon Prime customers who pay $99 for an annual membership.)
For the UnderArmour T-shirt, for example, Walmart said I could have “expedited” shipping for $25.90 (the shirt itself was $33.78), which meant I would get it in two to six days. “Standard” shipping was free, but the shirt would not arrive for a week to 10 days.
At Amazon, delivery in six days was free; it also offered next-day and two-day delivery options, and the shirt was $29.99 (and even lower from affiliated retailers that sell the shirt through Amazon.)
So much for price and convenience. But what about selection? A search on Amazon.com for UnderArmour men’s clothing in the category “Sports and Outdoors” produced 18,687 items. At Walmart.com, the same search under “Sports & Outdoors” yielded 671 items. Amazon now offers over 200 million items on its site. (Those numbers are a snapshot; they change constantly.)
Ravi Jariwala, a Walmart spokesman, said it was misleading to look at only four items for Manhattan delivery. “Studies consistently show Walmart.com is price-competitive on the products customers are really searching for and buying,” he said. “We don’t move our prices up or down minute to minute.”
“Customers know they will get a good price,” he continued, “and they don’t have to pay a fee for special treatment.”
Mr. Gutman said: “Walmart pricing is decent, depending on the basket of goods, but they used to be dominant on price. They’ve lost that. Pricing is very complex and no one is really executing this all that well. On the Internet, price is transparent, and your price advantage competes away the minute you gain it. Consumers are demanding and getting the lowest possible prices.”
Walmart’s superefficient distribution system — a function of its enormous volume and geographic reach — was long the secret to Walmart’s immense profitability, as Prof. Bruce C. Greenwald of the Columbia Business School noted in his book “Competition Demystified.” And Walmart still has an immense network of stores and distribution centers that, at least in theory, it can use for superior online delivery.
The company has been rapidly building up its tech prowess, and it has committed to investing an additional $2 billion over the next two years. According to a report last week in The New York Times, Walmart has more than 2,200 engineers working in Silicon Valley and has built its own cloud data centers. Yet, as I discovered, that does not seem to be translating into faster delivery, at least to my address in Manhattan.
Mr. Jariwala said that Walmart was building vast new fulfillment centers and was rapidly enhancing its delivery capabilities. It is also taking advantage of its extensive store network to provide convenient in-store pickup. He said 70 percent of the American population lived within five miles of a Walmart store.
“This is where e-commerce is headed,” he said, which is to a hybrid online/in-store model. “Customers want the accessibility and immediacy of a physical store,” along with the benefits of online shopping.
I spoke to Professor Greenwald this week, and he wasn’t optimistic about Walmart’s prospects.
“In theory, they should be able to use their immense volume and distribution network to compete with Amazon,” he said. “But they’re not a technology company, and I don’t know what makes them think they are.” As an investor, he said, he would rather see Walmart team up with an existing technology company that already has the analytics and cloud computing capacity, rather than try to build its own. “That doesn’t inspire confidence,” he said.
Mr. Gutman of Morgan Stanley agreed that Walmart’s distribution efficiencies would not readily translate to the Amazon model.
“Distribution is very hard to get right in retail,” he said. “Walmart’s world is the giant superstore, where you have big pallets of merchandise moving to trucks moving it into the stores. You start talking about delivering individual items to consumers, and they’re out of their comfort zone.”
Mr. Mahaney at RBC Capital noted that he did not cover Walmart as an Internet analyst, but he said that traditional retailers have to support traditional distribution networks, and new technology to support Internet transactions. The investment in both threatens the companies’ profit margins, he said. There is also the problem of Internet sales’ cannibalizing in-store purchases.
At the same time, everyone I spoke to agreed that Walmart doesn’t have much choice, given that e-commerce sales continue to grow as a percentage of total retail sales.
“Retail history is very clear,” Doug McMillon, the Walmart chief executive, said last week. “Those that are unwilling or unable to change go away.”