Walmart's Efforts to Keep Up With Amazon Are Costing It

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Walmart (NYSE: WMT) has been pouring billions into its domestic e-commerce operations for the past three years, since acquiring Jet.com and installing Marc Lore as the head of U.S. e-commerce. It’s bought several digitally native brands, including Bonobos and Modcloth, and it’s successfully attracted new brands to Walmart.com and created its own brands in-house.&nbsp;” data-reactid=”11″>Walmart (NYSE: WMT) has been pouring billions into its domestic e-commerce operations for the past three years, since acquiring Jet.com and installing Marc Lore as the head of U.S. e-commerce. It’s bought several digitally native brands, including Bonobos and Modcloth, and it’s successfully attracted new brands to Walmart.com and created its own brands in-house. 

But its online grocery business, a business in place before the Jet.com acquisition, has been the star of the show the last few years. Online grocery helped propel Walmart’s U.S. e-commerce business to 40% revenue growth last year, and a similar level of growth will help Walmart reach between $21 billion and $22 billion in online sales this year.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="While grocery is a standout winner, Walmart's efforts to capture share of more traditional online purchases have come at a huge cost. The company is set to lose more than $1 billion this year from its U.S. e-commerce operations, according to a report from&nbsp;Recode.&nbsp;” data-reactid=”13″>While grocery is a standout winner, Walmart’s efforts to capture share of more traditional online purchases have come at a huge cost. The company is set to lose more than $1 billion this year from its U.S. e-commerce operations, according to a report from Recode. 

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="That's the cost of taking on Amazon.com (NASDAQ: AMZN), but there are reportedly detractors within Walmart that aren’t willing to keep losing money on e-commerce.” data-reactid=”14″>That’s the cost of taking on Amazon.com (NASDAQ: AMZN), but there are reportedly detractors within Walmart that aren’t willing to keep losing money on e-commerce.

More

Image source: Walmart.

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="You gotta spend money to make money” data-reactid=”27″>You gotta spend money to make money

Walmart has been willing to spend hundreds of millions on small e-commerce acquisitions over the past few years, as well as investing in its digital grocery platform and other online shopping endeavors, but management doesn’t seem to have a stomach for losses.

Lore has reportedly pushed to expand Walmart’s network of warehouses for online orders, but he’s met significant resistance from CEO Doug McMillon. Amazon has 110 fulfillment centers nationwide while Walmart has, at most, 20, according to Recode. Building out more warehouses would cost Walmart hundreds of millions of dollars, and it can take a few years from the day a warehouse opens until it’s running at full capacity. 

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Those are long-term investments Amazon is more than willing to make and has been making for 20 years. CFO Brian Olsavsky recently told analysts the company will invest an additional $800 million in the second quarter to improve its fulfillment network to facilitate one-day shipping for the 100 million unique items it currently ships from its warehouses. It’s already capable of shipping 10 million different items to customers with a one-day guarantee.” data-reactid=”30″>Those are long-term investments Amazon is more than willing to make and has been making for 20 years. CFO Brian Olsavsky recently told analysts the company will invest an additional $800 million in the second quarter to improve its fulfillment network to facilitate one-day shipping for the 100 million unique items it currently ships from its warehouses. It’s already capable of shipping 10 million different items to customers with a one-day guarantee.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Walmart, meanwhile, has decided to compete with Amazon with its own one-day shipping program, NextDay. The service is rolling out to select metro areas throughout the year, and it’ll ship over 200,000 items to customers within 24 hours. Walmart says its strategy of only shipping NextDay orders from a single warehouse and relatively short distances will be more profitable than average online orders.&nbsp;” data-reactid=”31″>Walmart, meanwhile, has decided to compete with Amazon with its own one-day shipping program, NextDay. The service is rolling out to select metro areas throughout the year, and it’ll ship over 200,000 items to customers within 24 hours. Walmart says its strategy of only shipping NextDay orders from a single warehouse and relatively short distances will be more profitable than average online orders. 

But Recode’s Jason Del Rey points out that the items available through NextDay typically have very thin margins. Even with lower shipping expenses, Walmart will have a tough time generating a profit on NextDay orders.

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="E-commerce acquisitions aren’t working out” data-reactid=”33″>E-commerce acquisitions aren’t working out

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="As part of Amazon's e-commerce shopping spree, it bought several fashion brands, including Bonobos, Modcloth, and most recently Eloquii. It was able to snatch these companies up after they failed to raise another round of venture capital because of slowing sales growth. That strategy seemed unwise at the time, and sure enough, all three businesses remain unprofitable, according to Recode’s sources.” data-reactid=”34″>As part of Amazon’s e-commerce shopping spree, it bought several fashion brands, including Bonobos, Modcloth, and most recently Eloquii. It was able to snatch these companies up after they failed to raise another round of venture capital because of slowing sales growth. That strategy seemed unwise at the time, and sure enough, all three businesses remain unprofitable, according to Recode’s sources.

Read More