The world’s biggest brick & mortar retail giant – Wal-Mart (WMT, Financial) Â recently announced that it will use its existing network of stores as distribution centres for its online business. Wal-Mart currently has a network of more than 4,500 stores across the United States, out of which approximately 80 centres are already in use now as distribution points for its ecommerce arm.
Rise of Ecommerce
But if the retail giant is serious about competing with its biggest rival – Amazon (AMZN, Financial), then it may necessarily have to make big investments in distribution centres & fulfilment facilities which will help the business in growing its online sales. WMTÂ booked $12 billion as online sales revenue in the last financial year, but the dismal quarterly revenue that the company posted on Tuesday showed how important it is for them to grow their online business further.
Ecommerce around the world has been growing at a high rate as consumers find it increasingly easy & convenient to shop on their laptops, Ipads & mobiles instead of walking to a retail store. Latest figures show Ecommerce revenues grew by a staggering 17% globally in the first quarter ending April 30. Most of the market analysts feel this is the right time to invest in ecommerce with its rising popularity over the brick & mortar retail stores. It is a big point of concern for Wal-Mart which is preparing to test a $50 membership program which would entail the member for free shipping rewards, to compete with Amazon who has already spent billions on investments for its online growth. Experts believe it may have to spend far more on investments & other costs than it had previously announced if it really wants to compete directly with Amazon.
Being cost efficient
Wal-Mart has said it plans to invest $1.2-$1.5 billion in its online business this year. It is planning to open 4 huge dedicated fulfilment centres along with the 11 centres which are already in operation. Dozens of the conventional distribution centres that the company uses have already been refitted to cater to its online business. These account for almost a fifth of its online deliveries on per unit basis. Wal-Mart Chief Financial Officer Charles Holley said on Tuesday, “We feel like that’s a great advantage that we can leverage”
The cost of converting its conventional distribution centres would cost the business giant anywhere from $20-$40 million each whereas if its plans to build a fulfilment centre from scratch it would cost a whopping $150 million as per the estimate given by Steven Osburn, director of a leading Supply chain. If Wal-Mart plans to catch up with Amazon, it may need more than 5 dedicated fulfilment centres. As Osburn said, “You are still probably talking a billion dollars plus in investment if this catches on”.
Another area of concern is the rising shipping and logistics costs. Forrester research analyst Sucharita Mulpuru believes Amazon is losing on average $2 billion a year on shipments to its Prime members, who can avail free two day shipping and in some parts of the country one hour delivery, on most of the items they purchase by paying an annual fee of $99.
On the other hand, Wal-Mart is testing its membership program “Tahoe” for a fee of $50 which is half the cost of Prime, and will offer free shipping within 3 days of the online purchase.
The future path
Wal-Mart may still find it difficult to put any significant dent in Amazon’s market share, but Mulpuru believes it can still gain a lot if it tries to capitalize on its strengths like the strong relationship it shares with the packaged goods and groceries manufacturers. David Cheesewright, the head of its International Division is known to have told the media after the company posted its earnings, “I think particularly in the area of grocery, where product knowledge, understanding of the fresh supply chain, operational excellence, is going to be a key part of being successful in that space”.
