Can Walmart grow its online business profitably?

Associate scans items for grocery pickup - Photo: Walmart
Feb 22, 2017
George Anderson

Walmart had several positive developments to report in its fourth quarter earnings release. The company’s same-store sales in the U.S. grew 1.8 percent and its online revenues jumped 29 percent. Walmart’s gains came at a cost, however, as profits fell 18 percent ($1.22 a share) due to the retailer’s engagement in pricing competition with rivals, Target, et al.

On yesterday’s earnings call with analysts, Walmart CEO Doug McMillon pointed to progress the company is making online.

“We’re gaining traction and moving faster,” said Mr. McMillon (via Seeking Alpha). “We’re the second-largest U.S. online retailer by revenue, one of the top three online retailers by traffic and our Walmart app is among the top three apps in retail.”

Speaking about Walmart’s online marketplace, Mr. McMillon said it now contains more than 35 million SKUs, more than four times the number carried at the beginning of last year.

“We recently announced free two-day shipping on millions of items with a minimum order of $35. And as you might expect, we’ve seen a nice uptick in our e-commerce business since this launch,” he said. “The acquisitions of ShoeBuy and Moosejaw, in addition to Hayneedle, gave us immediate expertise and capabilities in new, more upscale categories of merchandise.”

Purchases made using Walmart’s Pickup Today app grew 27 percent over the holidays, according to the company. Mr. McMillon said wait times for items ordered through the app were down over the holidays even as demand increased. “Customers love being able to order an item with an app and get it that day,” he said.

Mr. McMillon expressed satisfaction with the way Greg Foran, head of Walmart’s U.S. stores, and Marc Lore, its e-commerce chief in the U.S., have been working together to “deliver the convenient shopping our customers desire, no matter how they choose to shop.”

DISCUSSION QUESTIONS: Do you think Walmart can protect profits while continuing to gain online market share? What do you see as the keys for the company to operate its e-commerce business profitably?

Please practice The RetailWire Golden Rule when submitting your comments.
"In short, no. Walmart will have to play the long game to get ahead in e-commerce."
"If Walmart wants to 'win' against Amazon they need to put more emphasis on what makes them different."
"Mr. McMillon was (smartly) using the statement “it’s more expensive to do business online” as a cover for “we’re losing more money in-store.”"

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18 Comments on "Can Walmart grow its online business profitably?"

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Mark Ryski

In the short-term, there will likely continue to be pressure on Walmart’s profitability as they work to build a sustainable, profitable online business. I think the real challenge and key to success will be in how Walmart leverages its significant brick-and-mortar store advantage to support online/omnichannel business.

Anna Tolmach

I agree, Mark. Free two-day shipping is great, but there is a lot of evidence that consumers in certain use cases prefer to actually pick up items in-store which gives Walmart a huge advantage given its vast distribution network. Thanks to Walmart Labs, Walmart is also ahead on using its vast data to predict demand versus Amazon which could provide a long-term source of competitive advantage. The point was made earlier that the two are essentially commoditizing themselves and their own product, so finding a source of sustainable competitive differentiation whether it’s from the customer’s perspective or on the supply chain side is critical. Amazon’s fulfillment capabilities have done this, now Walmart needs to catch up.

Ken Lonyai

More detail is needed as to why profits were down, but the implication is that competing online is expensive.

That said, Walmart is powerful enough that they can never be counted out. It’s not Amazon that needs to worry too much though, it’s the other mid-market retailers/discounters like Kohl’s and Target as well as mom and pops. I recently wrote a comparison of Walmart and Amazon’s target markets relative to Walmart’s two-day shipping initiative and detailed that point.

Additionally, I cannot help but ponder — if such growth is portrayed as being so easy to achieve (now that apparently there is an impetus) through acquisition or redoubling efforts, why did the world’s largest retailer wait 20 years to get it together and allow an upstart to steal market share?

Max Goldberg

Walmart seems to be successfully integrating an omnichannel policy, which is leading to higher sales across its stores, the Internet, and its app. That said, the company still has a ways to go before it can really take on Amazon. The difference is that Walmart operates more than 5,000 stores, with all of those attendant costs, and Amazon has more than 60 million households that are willing to pay $100 a year for the privilege of free two-day shipping. That’s a hard gap to close.

Al McClain

Max, it’s hard for me to see Walmart converting many Amazon Prime customers, who presumably are the ones they most covet. Once one gets used to the ease, speed, and assortment of Amazon Prime, it really would take something BIG to get a Prime member to switch to Walmart. The only two things I can think of are quicker shipping (perhaps in one day from a store?) or a significant difference in price. But, I think many Prime members start at Amazon and stay there with their searches, unless the price seems WAY out of whack.

Charles Dimov

Walmart needs to make inroads on their e-commerce business for their long-term prospects. The Walmart brand needs to be in the minds of their customers, whether it is for online, a whim purchase or a drop-by to pick up a few items on the way home. They are doing the right thing by pushing their omnichannel retail business. This is a big distinguishing factor in their fight with Amazon. As Mark points out, there will be short-term pressures … but there always are as you step toward the long-term.

Ricardo Belmar

Near-term, yes, Walmart will continue to see downward pressure on their profitability as it seems they are adopting Amazon’s “get big fast” philosophy towards e-commerce. While that may help drive market share and revenue for their online business it will come at a cost, as even Amazon has shown. The difference is that Amazon is leaning on other businesses (e.g., AWS) to help make up the gap. Walmart has to rely on their thousands of stores to make up that gap and at some point one channel is cannibalizing from the other.

While this shows great progress towards a unified commerce integration, we can see they are still being handled separately. If Walmart wants to “win” against Amazon they need to put more emphasis on what makes them different – their stores – and leverage that to its fullest potential integrating online, mobile, and stores into a unified customer experience. They are on the right path, but the competition isn’t standing still.

Brandon Rael

Walmart may experience some revenue disruptions and an increased cost structure as they grow their online business, however, these sacrifices will be critical in order to remain in lockstep competition with Amazon. The advantage that Walmart will need to leverage is their brick-and-mortar stores. This is becoming increasingly more difficult with Amazon’s amazing customer loyalty and omnipresence in the commerce and retail landscape.

Same-day fulfillment through the BOPIS strategy may reap some additional benefits, and leveraging their 5,000+ store base is where they need to focus to drive additional revenues.

Ben Ball
I didn’t listen to the conference call — but I don’t think the acquisitions were accretive to profitability in the current quarter. While Walmart chose not to mention the fact that they have significantly increased in-store labor costs through wage increases (those wage increases being viewed positively by many from a sociopolitical standpoint) — they still are hurting profits. The online model does have inherently lower profitability per-item sold when you figure in delivery deals. What it does not have (done properly) is huge dead inventory costs the way physical stores do. Mr. McMillon was (smartly) using the statement “it’s more expensive to do business online” as a cover for “we’re losing more money in-store.” I think I might have set a RetailWire record for “thumbs down” a few weeks ago when I commented that BOPIS is not the answer to convenient delivery. But BOPIS is not the answer to convenient delivery. Same-day home or “to my desired location” delivery is the answer to convenient delivery. Amazon will continue to kill any retailer relying on… Read more »
Chris Petersen, PhD.

The whole is far greater than the sum of the parts, especially for Walmart.

Yes, Walmart was late to the online party. But the recent numbers show some steady progress for both online sales and growing their marketplace.

But Walmart’s success will require growing more than online sales. Omnichannel is the new normal for customers. To succeed, Walmart must create an integrated seamless ecosystem that adds value to customers across time and place.

Walmart’s success hinges on customers NOT thinking of … but thinking of Walmart as the value place where you can shop, purchase and take delivery “your way.”

Lyle Bunn (Ph.D. Hon)

Indeed, Chris. Omnichannel is the operating expression of the “whole” and the dot-com focus of the online/mobile element has been playing into the promotional hand of online-only retail for too long. People want the experience of the physical store and those of online and mobile. The race is for the elements of interaction between brand, retailer and consumer to get to the point where the silos and lack of ubiquity are too apparent.

Meaghan Brophy
In short, no. Walmart will have to play the long game to get ahead in e-commerce. That has been Amazon’s strategy from the get-go. For example, when Amazon entered the e-book market they undercut every publisher and bookstore in price, practically giving away e-books. They absolutely did not make any money on them. However, that strategy allowed Amazon to control the e-reader category with their Kindle. They lost profit on e-books to gain market share in the long run. Same with shipping costs. Overall, Amazon lost over $7 billion on shipping alone in 2016. However, the market share they gain over time by eating this cost for consumers is well worth the initial loss. Don’t forget the investments in warehouses and fulfillment centers Amazon continues to make, putting profits on hold to come out ahead in the long run with their Prime Now delivery. If Walmart wants to gain online market share they need to follow similar strategies to Amazon and operate at a loss in the short term to gain greater profits and control… Read more »
Richard J. George, Ph.D.

If Walmart can ever figure out click and collect or BOPIS, it could represent a differential advantage vis-à-vis Amazon. However, to do this properly and to leverage its brick-and-mortar presence, the pickup as well as the return-to-store options have to be seamless. This has been something Walmart has struggled with to date.

It is ironic that the world’s largest retailer boasts that it is “the second largest U.S. online retailer by revenue, one of the top three online retailers by traffic.” Walmart is learning the lessons of online first-mover advantage that it taught to everyone else the past years.

Larry Negrich

Retailers, as never before, need to look at the entire shopping process and do what is right for the omni-channel business model they subscribe to and for the customer segment they are targeting. For established retailers who are expected to turn a profit and grow same-store, this is a difficult position to be in white still attempting to return shareholder value, though it looks like some analysts may be cutting some slack if the online is going the right way at the cost of some profit.

In Walmart’s case, the long-term competition are Amazon and a select few others. However, its online market share is being gained from all the other retailers. Walmart is sacrificing some profit to find the right formula to be an everywhere-all-the-time retailer which is the environment of retail it will be facing in the marketplace once it all shakes out. So Walmart only needs to eek out just enough profit to maintain the shareholder value while achieving its true goal of gaining more online market share.

Min-Jee Hwang

Learning from Amazon’s example, Walmart has begun to look more towards the big picture and the long term. Given their recent acquisitions and various headlines they certainly on the right path. Whether they leverage their new assets has yet to be seen but they’re slowly gaining on Amazon. Their omnichannel experience needs to revamped to be as smooth as Amazon’s delivery in order to properly compete. BOPIS is one advantage they could easily use over Amazon’s 2-day delivery as Walmart can get the item to the consumer without any additional cost past showing up to the store to get the order. It’s all up to their execution now.

gordon arnold

A look at the numbers and we see a company taking on debt with flat sales and earnings. Adding to these worries is the sliding Sam’s Club and Walmart International. The good news is that the company is doing this on their own without putting recovery pressures on the investors and/or banks like their competitors at Amazon.

I do see light at the end of the e-commerce same day delivery tunnel but the tunnel light is shinning on a different market. Getting an order for tea, crackers and cream cheese in an hour with free delivery isn’t a practical endeavor, even with putting piles of pressure on the company employees, vendors and service industry. A look at what orders will return a profit for these services and what markets will place the orders is the optimum means for profit taking expansion. Once the company finds and exploits the profitable markets, the improvements over time can be managed to expand into additional venues. Making money from jump street is the key to winning.

Kenneth Leung

The challenge of competing against Amazon as a retailer is that amazon is no longer just a retailer and can leverage the broad infrastructure and services it provides. For Walmart, the key is not to “out Amazon” Amazon but to leverage its store infrastructure and assortment to compete.

Scott Magids
2 years 6 months ago
While Walmart is the in-store retail giant, when people think of online sales, they still think of Amazon. That’s not just because Amazon is the 800-pound gorilla of Internet retail, it’s because they have cultivated an image and a great deal of loyalty. There is a very real emotional connection between online shoppers and Amazon, and to gain online market share, Walmart needs to gain consumer trust and loyalty in the online world in the same way Amazon has done — with liberal delivery terms, low prices, and plenty of data and analytics that allow them to learn more about customers at a granular level. Walmart will have to learn that cultivating relationships with online consumers requires a different strategy than is used to cultivate relationships with in-store shoppers. Amazon did this very successfully, but it took time, and they had many sequential quarters of operating at a loss before it bore fruit. Walmart has the wherewithal to take the same approach, and shouldn’t be afraid of a few years of losses in the online… Read more »
"In short, no. Walmart will have to play the long game to get ahead in e-commerce."
"If Walmart wants to 'win' against Amazon they need to put more emphasis on what makes them different."
"Mr. McMillon was (smartly) using the statement “it’s more expensive to do business online” as a cover for “we’re losing more money in-store.”"

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