Walmart (WMT, Financial) has a very simple unique selling proposition: we’re cheaper than anybody else. That’s what they’re best at, and it’s what got them to $482 billion in revenues as of the 2016 fiscal.
Today, however, technology (a.k.a. Amazon [AZN] and other e-tailers) is encroaching on its business volumes and the myriad online options from mobile and web retail operators are threatening its position as the No. 1 retailer in the U.S.
Can Walmart withstand the onslaught? In turn, can it reverse the direction of attack and gain market share from dominant online players?
It can, but it has a lot of work to do to get there. What follows are the investments and initiatives that will help get it there over the next few years.
Investments in technological aspects
Walmart is no noob to tech spending. It's been putting money into technology for years, but much of that has been toward internal efficiencies such as inventory, supply chain and logistics.
That’s changing, specifically over the past two years. From getting better from the inside, it's now shifting its focus to outside opportunities – the ones that are critical to top line growth.
In 2015, it shelled out $700 million to create its ecommerce platform and built out its technical capability. We’re going to see $900 million more going into that initiative this year and $1.1 billion in 2017.
Let’s see the kind of returns it's getting on that massive investment so far.
According to a report by eMarketer this March, Walmart’s online ecommerce revenues are currently at $13.5 billion. Of course, that’s overshadowed by Amazon’s $79.3 billion, but it’s clear that it's efficiently leveraging its retail, supply chain and logistics skills in the online space.
It’s not the spend
Though its investments in technology are certainly impressive, they’re not why Walmart’s online business is growing.
The real push is coming from the infrastructure it's developing around its online presence.
Online Grocery, for example, has seen an expansion in its ability to handle in-store and in-club pickups for online orders.
Similarly, Walmart Pay is expanding the use case scenarios for its mobile app, making it easier for customers to use their credit cards, debit cards, prepaid shopping cards and even gift cards to make payments in physical stores. That initiative is being rolled out to all its stores this year.
In addition, its initiative with Neighborhood Markets is quickly gaining traction because it provides an urban convenience that the retailer has only now begun to tap into. It's already opened 667 such small-format stores and intends to keep growing unit counts through fiscal 2017.
The end result?
Revenue of $13.5 billion from retail ecommerce might look like a drop in the ocean for a company like Walmart – that’s less than 3%.
Furthermore, at a time when ecommerce is growing at the near 15% level, Walmart’s own online business is expanding at 7% year over year. That’s down 10% from the first quarter of 2015, and that’s the worrisome part.
U.S. ecommerce growth in the last 10 years
Walmart’s ecommerce growth rate year over year
Nevertheless, there are definitely traces of silver in Walmart’s cloudy outlook for ecommerce.
At this point it has only about 10 million items listed on its ecommerce sites, but CEO Doug McMillon is confident that will change:
“It takes time to build the assortment to the point where customers realize the depth of assortment.” – Source: Fortune
Ă‚
During the fourth quarter earnings call earlier this year, he said:
“We're improving our stores, adding critical capabilities and deepening our digital relationships with customers as we work to become the first to deliver a seamless shopping experience at scale.”
And this is where Walmart will win in the end – by educating its customers on how to leverage the retailer’s online presence to make their experience even more convenient than it is today.
The brick-and-mortar retail industry is in a fit about ecommerce because it’s clearly affecting its business – shown by net store closures.
According to a recent article on Nasdaq’s website:
“Office Depot (ODP, Financial) shed 181 stores. Walgreens Boots Alliance (WBA, Financial), which completed the Walgreen and Boots Alliance merger at the end of 2014, had a net loss of 57 stores in 2015 as it merged the companies. Leather goods retailer Coach (COH, Financial) lost 45 stores, and struggling women's apparel retailer bebe stores (BEBE, Financial) was down net 60 stores, among others.”
Walmart, however, intends to show a net increase in store count this year despite announcing 269 closures for 2016.
In summary, the initiatives that Walmart has undertaken over the past few quarters have resulted in stock prices reclaiming their glory of $70-plus levels.
Despite the ups and downs, the company has been extremely resilient when it comes to handling the onslaught of ecommerce. Its continued push in these three areas is what will keep them growing into the future:
Focus on small-store formats with improved pick-up convenience.
A better online experience based on a growing number of items available.
Technology investments that improve the in-store shopping experience.
Despite the differences in their business models, Amazon and Walmart are well positioned to dominate the entire retail space. With Alibaba adding its own brand of marketplace fire to the equation, neither company can afford to sit by and watch customers move away – and that’s the mission-critical point that neither can afford to miss.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
