- Walmart is in the middle of a massive transformation, moving from traditional retail to an e-commerce business.
- The company has invested heavily in improving both back and front-ends of the e-commerce business.
- Core activities improvement is still important to support the massive shift to e-commerce.
The retail giant Walmart (NYSE:WMT) will report its fiscal Q2 2017 next week, amid significant M&A developments aimed at strengthening the company’s e-commerce business. In the previous earnings call, CEO Doug McMillon had discussed Walmart’s e-commerce efforts: “E-commerce growth here is too slow. The U.S. number is better than the global number, but neither is as high as we'd like. We can see progress against several of the necessary capabilities we need to win in e-commerce, but we're still working on a few others. We need them all to come together to see stronger growth.”
Also Read: Is Amazon.com Under Threat From Walmart
CEO McMillon touched on an important point during the previous earnings call – the company is going through a deep and fundamental shift from the traditional retail service in a brick-and-mortar location to a better, cost-efficient e-commerce service that brings great growth potential. CEO McMillon admitted that the company grew its e-commerce business too slowly, mainly due to serious headwinds in China, Brazil, and the UK markets. Shortly after the call, Walmart started acting to achieve its e-commerce growth target. The first step was to partially abandon the MCX’s consortium of retail giants that stood behind the e-payment service named ‘CurrentC’, which was aimed to compete with Apple Pay and Android Pay. While CurrentC was getting ready for a nationwide introduction, Walmart launched Walmart Pay, a standalone e-payment service that allows Walmart customers to check out and pay their Walmart bills quickly and easily.
Partnership With JD.com In China
In China, after a disappointing performance by its Chinese subsidiary Yihaodian, which Walmart acquired for $1.5B, the company decided to rethink its strategy there and joined forces with JD.com (NASDAQ:JD) to expand its business in China. The deal with JD.com included selling Yihaodian to JD.com in exchange for $1.5B worth of JD.com shares that gave Walmart a 5% stake in the Chinese e-commerce giant. There are significant benefits for both the companies from this move. It will allow Walmart to cover all of mainland China and attract massive consumers’ traffic to its online shop on the JD.com platform.
Acquisition Of Jet.com
Walmart, in an effort to strengthen its e-commerce positioning in the U.S., opened more warehouses, across the country, that would keep additional inventory to support a two-day shipping service that competes with Amazon's (NASDAQ:AMZN) Prime. The logistics centers expansion in the U.S. will allow Walmart to improve shipping speed and item availability across the country and evolve as a valid alternative to other e-commerce platforms. Improving the logistics chain was the first step that Walmart took to improve its e-commerce business domestically – the next step was to acquire the e-commerce startup, Jet.com for $3.3B.
In an earlier article, I described Jet.com as a premature business that did not threaten Amazon mainly because its business model made it hard for the company to expand the business. Jet.com relies on ultra razor-thin margins that are backed by large merchandise volume that is achieved by subsidizing purchases, keeping minuscule inventories, and incurring zero transaction costs. In October 20015, Jet.com eliminated the annual subscriber fee, which had been the primary revenue stream for the company. And that, together with increased pressure from investors, who had poured in $570M at a $1.5B valuation, ensured that the company was headed for either a buyout or bankruptcy.
eCommerce Will Be In During The Earnings
The Jet.com acquisition completes the domestic e-commerce move that Walmart had started. Through the acquisition, Walmart has strengthened the front end of the firm after dealing with the back end (logistics chain). With such a robust change in its e-commerce operations, Walmart is well positioned to compete with Amazon in the U.S. and Alibaba in China. With all the latest developments in its e-commerce business, the primary focus in the upcoming earnings will be on the company’s e-commerce progress and future growth, and that includes Walmart Pay adoption, e-commerce YoY growth, China and US potential, and developments in ShippingPass (Amazon Prime competitor).
Another aspect of the shift to e-commerce is Walmart’s physical location restructuring in the U.S., Latin America, and Asia, targeted to strengthen Walmart’s core business to support the e-commerce rise and allow this massive change in strategy. Walmart should continue to modestly improve its core business in the US and worldwide to create a stable basis for the e-commerce change to prosper.
These are Walmart’s comparable figures to watch out for in this earnings release:
|Q2 2017 Consensus||Q2 2016 Actual|