Wal-Mart Plans To Challenge Amazon By Becoming More Like Amazon

  • Wal-Mart intends to close the huge gap between itself and Amazon in e-commerce.
  • The company intends to do this by copying many of Amazon's moves.
  • But how well will these work for Wal-Mart.

2016 is shaping up to be an annus mirabilis for Walmart (NYSE:WMT) and its investors. WMT stock is up 16% YTD, clearly outpacing the retail sector which is in negative territory.

Wal-Mart vs. SPDR S&P Retail ETF YTD Returns

WMT-2

Source: CNN Money

Part of that rally was sparked off after the company delivered a healthy first quarter report managing to exceed top and bottom line estimates. Wal-Mart reported revenue of $115.9B, good for a modest 0.9% Y/Y growth but $2.68B higher than the consensus on Wall Street. Comparable same-store sales increased 1% Y/Y marking the seventh straight quarter that same-store sales grew. Meanwhile, EPS of $0.98 was down 4.9% Y/Y but still $0.10 ahead of estimates.

Despite the drop in profits, Wal-Mart investors have been happy that the company's plans to downsize its stores as well as reward its workers with higher wages has not impacted the bottom line as much as had been earlier feared. Wal-Mart announced in January that it was planning to close 102 Wal-Mart Express Stores and another 52 full-size locations during the current year. Meanwhile, new CEO Doug McMillon took what seemed like a controversial decision to increase the wages for the company's more than one million store workers first to $9/hour and then to $10/hour.

But the increase in wages now seems to be paying off with Wal-Mart saying worker efficiency has improved and its inventory is now better-managed. Meanwhile, foot traffic has been growing--up 1.5% during the last quarter.

But that's just part of what's working well at Wal-Mart. The company is also pulling off some major e-commerce moves as it tries to bridge the still-huge gap between itself and Amazon (NSDQ:AMZN) in online commerce.

Becoming Like Amazon

With sales of $482B in 2015, Wal-Mart is the biggest retailer in the world. But the online world is a different matter altogether. While Wal-Mart's $15B in online sales in 2015 is good enough for the #2 spot in online sales, it's dwarfed by Amazon's $107B sales over the period. In fact, sales by the next 10 largest e-commerce players still don't add up to Amazon's. Online sales still account for a tiny sliver of Wal-Mart sales, unlike retailers like Williams-Sonoma (NYSE:WSM) whose brisk online registry business has helped it become the most successful brick-and-mortar retailer in online business, with 50.7% of its sales coming from ecommerce. Department stores such as Nordstrom (NYSE:JWN) and Macy's have considerably better online operations than Wal-Mart with ecommerce contributing more than 15% of their sales.

Now, Wal-Mart has adopted a different online strategy and is trying to copy a lot of moves from Amazon. Wal-Mart has for long touted its vast store network as giving it an advantage over other brick-and-mortar stores, and even Amazon. But Wal-Mart now intends to do a 180-degree turn. Instead of using its own stores for fulfillment as the case has been, Wal-Mart intends to build out more warehouses and expand its delivery network. The company figures that by increasing its ecommerce scale, it can reduce its delivery costs per package. Additionally, by separating its online operations from its physical stores, Wal-Mart will be able to deliver better customer service since store managers usually take a dim view of online customers coming to have their orders fulfilled at their stores.

And, it won't be only Amazon using drones in its operations. Wal-Mart has reported that it's only 6-9 months away from deploying drones for tasks such as inventory management. It's, however, important to note that while Amazon intends to mobilize drones for actual customer deliveries, Wal-Mart intends to use them at corporate campuses and large distribution centers to alert users to low inventory levels or incorrectly stocked items.

Further, Wal-Mart plans to challenge Amazon's same-day delivery service. The company plans to test a two-day shipping subscription service dubbed ShippingPass for $49 to challenge Amazon Prime which goes for $99 for an annual subscription.

Wal-Mart is not stopping there though and intends to start doing grocery deliveries using Uber and Lyft drivers. This appears to be a direct challenge to Amazon Flex, an on-demand delivery service that uses drivers to deliver Amazon packages. Wal-Mart is due to kick off the new service in just two weeks' time.

The big question is whether these moves will make a difference to Wal-Mart's online business. In my view some have good potential while others are not likely to make much of an impact. Doing fulfillment from warehouses instead of its physical stores certainly looks like a good idea. But don't expect ShippingPass to challenge Amazon Prime any time soon. Prime offers one-hour delivery for $8.00 per delivery while two-hour delivery is free. Meanwhile, Prime offers many other perks including streaming video and unlimited photo storage.

Short/Mid-Term Outlook Remains Good

Perhaps only time will tell whether Wal-Mart will be able to truly challenge Amazon in e-commerce. Nevertheless, Wal-Mart still has some good tailwinds for short and mid-term growth. One of the most significant is the company's lower exposure to the tepid clothes business which has lately been badly hit by low consumer spending. Wal-Mart is predominantly a grocery retailer, with only 8% of its sales coming from apparel compared to 19% by rival Target (NYSE:TGT). Wal-Mart even intends to add nine new markets to its grocery pickup program. Unlike many other major brick-and-mortar retailers, Wal-Mart's management remains confident and did not fire off a warning about anaemic consumer spending during its latest earnings call.

Wal-Mart stock could continue making solid gains for the rest of the year.

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