Walmart still trying to figure out home delivery

Discussion
Photo: Walmart
Jul 31, 2018
George Anderson

Walmart, like many other retailers, is still trying to work out how to meet the home delivery needs of its customers without losing money in the process.

In March, Walmart announced plans to use its network of 4,700 stores to facilitate delivery of groceries to more than 40 percent of the households in the U.S. by the end of this year.

The move by Walmart to expand its grocery delivery service is seen as a response to Target’s acquisition of Shipt last year, the continuing rollout of Amazon.com’s Prime Now service from Whole Foods and the growing number of deliveries from grocery rivals handled by Instacart.

Target plans to offer same-day delivery using Shipt from the majority of its stores by this year’s Christmas selling season.

Whole Foods announced last week that it had expanded Prime Now deliveries to areas around New York City and Florida to bring its total of markets served to 24. The service, which offers free two-hour deliveries to Prime members, will continue to be expanded throughout the year.

In February, Instacart announced it had raised $200 million in a new round of funding. The grocery home delivery service, which has been valued at $4.2 billion, works with seven of the top eight grocers in North America and more than 200 in total.

To date, Walmart’s best answer to making the home delivery math work has been to provide customers with more reasons to place orders online and go to a store to make a pickup. Walmart plans to have in-store pickup available at more than 2,200 locations by the year’s end.

The retailer, as recently reported by Reuters, has struggled to find the best way(s) to handle home deliveries.

In May, Walmart cut ties with Uber and Lyft, which had been making deliveries in some markets. The retailer shifted to Deliv, DoorDash and Postmates, which have experience delivering food.

Reuters reports that a pilot program launched by Walmart last year whereby associates made deliveries on their way home from work has been scrapped as it failed to get employee buy-in.

When the initiative was first announced in a blog post by Marc Lore, president and CEO of Walmart U.S. eCommerce, it was positioned as “a win-win-win for customers, associates and the business.” Deliveries, the thinking went, would be made “faster and more efficiently,” shipping costs would be cut for Walmart and associates would earn additional pay.

DISCUSSION QUESTIONS: How can retailers such as Walmart make grocery home delivery profitable? Do you see any retailer and/or service as the likely winner of the grocery home delivery competition?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"E-commerce is a motivator to purchase. Therefore, it should be looked at as part of the marketing expense to generate conversions. "
"Order fulfillment will be in flux for some time as autonomous delivery and other innovation continues to disrupt the space."
"I studied this for almost four years and it is hard to get through some folks’ heads that free delivery is killing bottom lines..."

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31 Comments on "Walmart still trying to figure out home delivery"


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Keith Anderson
BrainTrust

As availability and awareness of online grocery continues to grow exponentially, route density will increase, marginally improving unit economics. Flexible labor models have already improved the economics, but automation of order picking, packing, and delivery will have the most significant impact over the long term.

Paula Rosenblum
BrainTrust

I’ve never been convinced that grocery delivery can be profitable. The way Amazon is doing it (Amazon Fresh) there is so much packaging around the cold and frozen products that they’ve got to lose whatever margin they have on the product when they do the delivery.

Instacart adds fees. So they can make a few bucks — maybe. But their model is to deliver from the nearest store, so they don’t really worry about temperature control. And it’s not a perfect solution (substitutes remain an issue).

If shoppers will accept a delivery fee, then it’s possible to eke out some profits using individual drivers. Without a fee, or trying to use larger vehicles like vans the service is destined to lose money. I just don’t see a path to profitability.

Peter Charness
BrainTrust

It’s going to be quite a journey to set up on-demand home delivery internally, although Walmart like many chain retailers has a huge advantage over Amazon in the number of stores (distribution points) that are a lot closer to their customers than Amazon fulfillment centers. Since Amazon seems to be in the process of reducing reliance on UPS and FedEx, maybe there’s a smart deal to be had to outsource to someone who already has more of the infrastructure already driving down the city streets.

Lyle Bunn (Ph.D. Hon)
Guest

To perform a function of business without it costing you anything means simply that somebody else has to pay. The question is, who gets the greatest value? If the consumer and retailer share in the benefit then why not share in the cost.

Mark Ryski
BrainTrust

This is a hard problem to solve and Walmart’s pull-back is an important proof point. Amazon has set a very high bar for home delivery options and it’s not surprising that the largest retailers are trying to find their own solutions. It’s hard to say who will find a sustainable model for grocery home delivery, but for now there will continue to be plenty of attempts either by DIY or acquiring a company with the capabilities.

Phil Masiello
BrainTrust

Delivery needs to be viewed in a different way. Free shipping on e-commerce is a motivator to purchase. Therefore, it should be looked at as part of the marketing expense to generate conversions. If grocers want to be successful online with home delivery, creating brand loyalty and customer retention, then they need to look at delivery as part of marketing.

Certainly there has to be sales minimums and guidelines, so retailers are not making deliveries for low-value items. But delivery can be a powerful tool to drive add-on sales.

Ken Lonyai
BrainTrust

Phil: explain how calling delivery a marketing expense (or anything else) covers the cost.

Art Suriano
BrainTrust
Grocers have created a severe problem for themselves and now they are stuck. There is no doubt that in-home delivery is an excellent convenience for customers and all it took was one grocer to offer it, and now all the others are chasing after the concept. The cost is the first problem and no one has figured that out because they’re too focused on just making it work. The second problem is that when customers do not come into the store the grocer loses out on impulse buying and the opportunity for the customer to try new products. Impulse buying is a big part of any retail establishment, especially grocery. Losing out on that is very costly. The solution has got to be a balance and Walmart is on the right track. Find ways to keep delivery costs down and, most importantly, create incentives for the customers to come in still and visit the stores. Without that, I don’t see home delivery helping grocers grow and instead I see them losing business and increasing debt.… Read more »
Cathy Hotka
BrainTrust

Profitable grocery delivery is a unicorn; you can imagine it, but you won’t ever see it. Unless customers are willing to pay a hefty fee, retailers aren’t going to be able to pick and pack all those different SKUs, keeping refrigerated items cold, and deliver them within a stated period of time. I’ll be interested to see what others have to say.

Mohamed Amer
BrainTrust
Mohamed Amer
Independent Board Member, Investor and Startup Advisor
1 year 22 days ago

Think of home delivery as a differentiating element in a menu of choices for the consumer. It is part of a larger fulfillment of demand and delivery of value. It’s not a standalone profit and loss center and making business decisions based on that single lens will rob retailers of growing their business and attracting repeat customers.

The focus needs to be on the overall cycle and re-adjusting upstream processes to make up for the higher per unit cost of fulfillment. In parallel, if you view the incremental purchases made by satisfied customers, I suggest these increases can boost profitability given the relatively higher fixed cost nature of traditional grocery retailing with its physical assets and inventories across hundreds or thousands of stores.

Anne Howe
BrainTrust

Shoppers already expect free delivery on any purchase made, thanks to Amazon and others, That said, why wouldn’t Walmart test a membership fee that covers some of the cost of deliveries in high-density areas? Someone’s gotta pay something — there really is no such thing as a free lunch!

Shawn Harris
BrainTrust

Current retail supply chains are still optimized to maximize profit by pushing the largest shipping unit to a destination. That’s why retailers would love to drop a pallet on your doorstep instead of a box or boxes of eaches. I think the innovation to drive the profitable deliver of eaches will come through the resetting of cost models via the accelerated use of automation (robotics and ML/AI). What needs to happen is a supply chain system reimagination, not just a new piece of software. Ocado has rethought the grocery supply chain system; Kroger will benefit from that as they look to enhance the last mile, profitably.

Zel Bianco
BrainTrust

It’s a tough problem that will take considerable trial and error to get right. It may never happen if the current model of having no cost to the consumer holds. I think that Peter Charness has a good point. Grocers do have a slight advantage to deliver cold items over Amazon due to the proximity of their stores as opposed to Amazon’s distribution centers, but will Amazon somehow open more, smaller distribution centers to fix this? It’s a logistical nightmare but one that Amazon has deep pockets to solve.

Ricardo Belmar
BrainTrust
It’s clear that home delivery for groceries has many hurdles to overcome to reach profitability. Putting aside the operational aspects for a moment, I believe retailers need to look at how they calculate the costs for this service differently. At the moment, the entire discussion centers around the delivery portion of the business to be profitable on its own merits — i.e. it’s a yet another sales channel in a silo. This isn’t the way forward. Smart retailers will recognize that this can’t be calculated in isolation. Some of the expense is really another marketing expense. Some of the expense of the delivery is just another labor cost as part of store operations (assuming we are fulfilling these orders from the nearest store). Then there is the issue of measuring overall customer satisfaction for having this service and whether or not this leads to larger basket sizes. For most customers that use it, the convenience will lead to increased brand loyalty. This has value in and of itself. Beyond this “new accounting” of the service,… Read more »
Ken Lonyai
BrainTrust
I can claim an “I told you so” when I called having Walmart associates provide home delivery “a cheap and desperate move by management” in the RetailWire discussion “Can Walmart workers deliver better last mile results on their way home from work?” but I won’t. Walmart has really stepped up in the last year or so, but they are playing catch-up for their many, many years of neglect. It’s not so easy being a follower and trying to develop a sustainable, viable delivery system that blankets the U.S. is a massive challenge. Far-fetched concepts and poorly vetted partnerships aren’t going to do it. I think there’s an opportunity for a new kind of partnership with either FedEx, UPS, or DHL that leverages their delivery logistics but as a new exclusive Walmart service for same-day, last mile, and/or two-hour service. Those companies are sweating what Amazon is up to so a new joint paradigm is worth exploring. Otherwise, Walmart is going to have to drop billions into creating a real and sustainable service of its own.… Read more »
Andrew Blatherwick
BrainTrust
It is amazing that the largest grocery retailer in the world would try to take an amateurish approach to online food retail. I can see where the thinking came from but home delivery of groceries is a serious and professional business, not something you can ask your store employees to do as a part time task. Customer expectations are very high and the standard, speed and quality of the delivery represents your brand. If it goes wrong your brand is tarnished and customers will be unhappy with the brand and not just that one delivery. Retailers around the world have grappled with the problem of whether to service online from stores or from offsite locations and there is still no definitive right way to go. When you have the store coverage that Walmart does, then this has to be an attractive route. However, retailers also need to understand the impact that the new service will have on staff, customer service and most particularly the supply chain pressures and getting the right inventory so that the… Read more »
Tony Orlando
BrainTrust

I studied this for almost four years and it is hard to get through some folks’ heads that free delivery is killing the bottom lines, without increasing the price of the goods. Why is this so hard to understand? But they will continue to push forward with this, thinking it will work itself out.

I keep running the real numbers on the total cost of delivery for groceries, and I couldn’t do it for less than $15 just to break even, if all expenses are factored in, or I raise my prices by 18 percent to 20 percent to offset the costs.

Raising the minimum purchase will help, but the labor to pull, package and deliver the food safely in a proper vehicle will eat profits away quickly. Consumers are demanding free delivery, and it is too tempting to ignore, especially for Walmart, as Amazon is their arch rival and they don’t want to lose sales no matter what the cost.

Evan Snively
BrainTrust

I have no doubt that Walmart will figure out an adequate solution soon, but I don’t see there ever being a single “winner” as the playing field is constantly changing.

I do however think there is an opportunity for Walmart to differentiate themselves in the in-store pickup space if they don’t want to invest as heavily in their delivery solution. They could funnel some of those funds towards a unique loyalty/incentive structure for in-store pickup. Instead of asking the consumer to pay a $10 delivery fee, flip the script and actually give the customer money, say $3 to $10, depending on the order size, to pick up their own groceries which have still already been consolidated for them of course. The customer payment might be redeemable in the form of store credit, allowing Walmart to keep a decent cost per point and driving business back into the rest of the store, which is one of the goals of the in-store pickup to begin with.

Richard J. George, Ph.D.
BrainTrust

The “final mile” continues to plague the home delivery of goods. As noted many organizations are testing a myriad of options. However, it appears as though Amazon continues to lead in innovative means to get products to customers. Plus, its ongoing investment in DCs and a dedicated fleet of delivery vehicles raises the competitive and financial bar that others need to deal with.

Ken Morris
BrainTrust

The “last mile” is the most challenging aspect of the buy online, delivery to home business model. It is not something that retailers have experience with nor is it easy to establish this expertise. This is why a lot of retailers are opting to use third-party services for this activity.

Using Uber, Lyft and part-time employees for this service gets complicated as the people doing this are not focused exclusively on food delivery and they are probably not as efficient as companies/employees that do this as 100 percent of their business.

To protect their brand, most retailers will likely partner with experienced food delivery companies like Deliv, DoorDash and Postmates.

Regarding profitability, retailers can’t absorb home delivery costs and either have to charge a delivery fee or build the cost into a paid membership program.

Ryan Mathews
BrainTrust

I think this may be the wrong question. How about, “Since home delivery is an inescapable demand of some current and many future customers, how can retailers adjust their margin and pricing models to cover the cost of an essentially unprofitable service in a manner the majority of consumers can live with?” That’s the real question and whoever cracks that code will win.

Doug Garnett
BrainTrust

The hype of home delivery has been fascinating to watch — for 20 years. In the dot-com bust, several home delivery theories were lost.

What I can’t sort out is why it keeps coming back. From what I can see here, Amazon is doing a form of what Shahin Khan calls “digital dumping” — where a digital company starts a money-losing effort either to get bought because it threatens companies or (perhaps here) to force competitors to do money losing things.

Both Dollar Shave Club and MoviePass are good examples of classic digital dumping (and it worked for Dollar Shave Club).

The real question is, why is Amazon pursuing this? They already lose tremendous amounts of money via Prime. Why lose more?

Walmart should take care and establish a paid service for delivery for that narrow portion of the population that values it. There is no reason to deliver at a loss.

Ed Rosenbaum
BrainTrust

Similar to what some others have already said; I am not sure this can become a profit center. It might remain a financial loser simply to get more people to buy from them as opposed to buying from the competition. There can’t be much profit in groceries to begin with because of all the factors involved. Adding home delivery adds another cost to an already low-profit business. This will make it all the more difficult for the smaller and independent grocers. This might become fee-added to make it work.

Jennifer McDermott
Guest

It will be difficult for Walmart to make home delivery profitable while also making it monetarily beneficial for its customers. However, I believe as the need for home delivery increases retailers will see an increase in the the resources needed to make this service profitable.

My advice for retailers is to keep a close watch on the failures and successes of their competitors, and make adjustments based on their learnings along the way.

Sterling Hawkins
BrainTrust

Order fulfillment will be in flux for some time as autonomous delivery and other innovation continues to disrupt the space. I think the general approach here of trying different services, models and technologies is the right one on the path to coming up with a workable (profitable) mix. I don’t know if there will be only one winner in grocery delivery competition; however, retailers need to play to have a shot at the title.

Craig Sundstrom
Guest

No. (I’m tempted to say “of course not” but sometimes miracles happen). The whole premise of Walmart and its ilk is the ruthless stripping out of costs, or externalizing them onto others. Indeed, it can be argued that without the subsidy given to driving, its out-of-town locations might not even work. So WM customers are going to cover the (considerable) costs of delivery? Or, even more unlikely, WM itself will absorb them? I don’t think so.

Mark Price
BrainTrust
Mark Price
Managing Partner, Smart Data Solutions, ThreeBridge
1 year 22 days ago
Many grocery retailers have struggled to make home delivery profitable over the past 10 years or so. The challenge is the razor–thin margins in the grocery business, and consumer reluctance to pay extra for delivery in a time of Amazon Prime. To succeed, Walmart must make a substantial investment in infrastructure and analytics. If the home delivery system can be used to prompt consumer interest in automatic replenishment, and if delivery vehicles can store a range of commodity items, such as paper towels, that can be sold to consumers at the time of delivery, the service can be profitable. Ultimately though, the results of home delivery should be evaluated at a customer level, not at a service level. If home delivery customers purchase a higher share of wallet of their grocery needs through Walmart, and if those customers are retained at a higher level, then customer value will increase. Increased customer retention drives higher value. If customers purchase some delivery and some in-store, then their profitability must be averaged across all of their purchases. Too… Read more »
Lee Peterson
BrainTrust

It’s going to take some guts because you’re not going to profit from it at first or at least until you figure out how to get pervasive golf cart licenses, drone permits and speedy/willing employees on the case. So that takes Kroger and Macy’s out of the picture; Walmart might figure it out; Home Depot already has. That leaves us with Amazon and Whole Foods. Oh yeah, they’re already doing it.

You know who else will figure it out? Starbucks. Oh help me!

James Tenser
BrainTrust

Home delivery of grocery products will only be profitable after shoppers learn to value it as a service. The persistent mythology of “free” delivery has poisoned our thinking so much that it will take tremendous courage for Walmart — or any retailer — to charge even a break-even fee for timed, front-door delivery. Forget about making it a profit center. Free delivery will not scale well.

Key reasons why grocery delivery is different are well-known: The product needs temperature control and/or extra packaging. Orders are complex with multiple items.The product is bulky. Delivery timing is more critical compared with most other items.

For a few shoppers who want or need the extra convenience of white-glove delivery, there may be a few pennies to be made. Non-perishables will ship reasonably well via UPS and USPS. For most of the rest, a click & carry service will be far more convenient. In-store order fulfillment will remain a big challenge that I believe will be solved. The last mile will ultimately be controlled by the customer.

Marc de Speville
Guest
1 year 22 days ago
The bottom line is that online grocery, and home delivery in particular, adds far more cost and complexity than sales, even for first movers, whose advantage is short-lived as competitors react to keep their high-spending customers. To see the proof of this, you only need to look to the UK, where the trend is more advanced. Market leader Tesco lost so much money chasing online growth and driving down fees that there was nothing left in the kitty to stop the growth of limited assortment discounters Aldi and Lidl following the 2008 recession. (Despite a recent recovery, Tesco’s UK profits are still down >50% vs five years ago.) Picking from large centralised facilities, as Kroger has signed up to do with Ocado, makes it even worse, as the efficiencies from automation are far outweighed by longer and more expensive delivery routes, as well as deleverage of store sales and profits as a result of the (double-running) cost of operating the CFCs. Kroger has effectively bought an expensive shovel to dig its grave deeper and faster.… Read more »
Seth Nagle
BrainTrust

Walmart is going to need to turn to logistics if they have any chance of making home delivery profitable. Things like combing customers’ deliveries, increasing item order size through promotions, encouraging ordering ahead of time so they can plan deliveries accordingly. These three factors alone won’t get them there, but it’s a start.

Overall I’m not sure if the delivery model will be profitable, but they at least need to break even on it.

wpDiscuz
Braintrust
"E-commerce is a motivator to purchase. Therefore, it should be looked at as part of the marketing expense to generate conversions. "
"Order fulfillment will be in flux for some time as autonomous delivery and other innovation continues to disrupt the space."
"I studied this for almost four years and it is hard to get through some folks’ heads that free delivery is killing bottom lines..."

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