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Mar 26 2020
Grocery delivery, ecommerce & the renewal of Walmart
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29 min
What’s Happening
As the economy faces extreme volatility, Walmart is one of the relatively few companies that may emerge better positioned on the other side. In one recent survey from March 13, 41% of shoppers buying groceries online were doing so for the first time (just 4% of US grocery spend took place online last year). Of these first-time online grocery shoppers, 58% bought from Walmart, followed by Amazon with 14%. Morgan Stanley is forecasting Walmart’s same-store sales to be up 3% this year (vs. its pre-COVID-19 estimate of 0.5%).
It continues a pattern that started even before the COVID-19 crisis, with Walmart edging out Amazon in a consumer survey on retailer preference in Sep 2019 and becoming the most-downloaded US shopping app on Black Friday in Nov 2019. With unemployment rising during the crisis, Walmart’s low prices will likely continue to be appealing to consumers.
Walmart is the undisputed leading retailer globally with $524B in revenue, compared to Amazon’s $245B (excluding AWS). While its overall growth has lagged behind Amazon’s retail growth (1.9% in the last fiscal year vs. Amazon’s 19%), Walmart’s US ecommerce sales grew a healthy 37% in FY20 (ending Jan). Its global ecommerce sales approached $50B, doubling over two years (partly from acquisitions).
Over the past decade, Walmart has undertaken a mixed bag of initiatives to advance its digital capabilities. Walmart’s investments in grocery pickup and delivery, as well as ecommerce and in-store automation, are serving it well right now (although the recent surge in demand has strained capacity).
This past year has been an exercise in focus – selling off ModCloth, slimming down Bonobos, absorbing and Hayneedle, shutting down its Jetblack personal shopping service, and putting Vudu up for sale. Walmart is now returning to the pursuit of profitability in its ecommerce division (which is still losing money), after chasing market share for years.
Walmart’s journey to take on Amazon
Supercenters at the heart of the “bricks and clicks” strategy
  • Walmart’s strategy is about making “bricks and clicks” work better together, with a recent emphasis on its existing footprint of 3,500+ supercenters. 90% of Americans already live within 10 miles of a Walmart, enabling more efficient delivery and pickup as well as new business lines like health centers (see below).
  • After seeing that half of its ecommerce growth was stemming from grocery pickup and delivery from stores, Walmart invested $11B last year to revamp its stores.
Integrating ecommerce and store
  • In late Feb 2020, it was reported that Walmart was combining its online and store product-buying functions under one omnichannel Merchandising team. Products purchased for the stores will be approved for the online site, and buyers will be able to place orders for both. The move is expected to help align pricing online and in stores for a more consistent customer experience, and facilitate the use of the store footprint for delivery and pickup. Walmart is looking to increase the number of products available online, and grow the average basket served from its stores.
Upping the convenience factor with curbside & in-store pickup and faster home delivery
  • Walmart has been undergoing a rollout of pickup and delivery services across the US. Of the 4,700+ Walmart-branded US locations, it has 3,200 stores with curbside pickup and plans to expand to another 500 locations in 2020. 33% of online sales are projected to be fulfilled through curbside pickup this year. Walmart has also been deploying 1,700 in-store pickup towers that let shoppers pick up online orders without needing to interact with a human. 1,600 stores (covering more than half the US population) can also support same-day delivery, with plans to roll out to half of all stores in 2020.
  • Walmart leverages its customer volume and scale to offer pickup services for free, unlike other grocery retailers. It has found that pickup and delivery customers tend to spend more with Walmart. One analyst estimated $125 in average spend per grocery pickup vs. $50 for in-store shoppers. Spending also increases over time as a customer uses the service more. 40-60% of curbside pickup sales come from new Walmart customers, who might otherwise have sought to avoid crowds and hard-to-navigate supercenters. Pickup customers also tend to be more active advocates rather than just users.
  • In Oct 2019, Walmart launched InHome Delivery availability to 1M customers in Pittsburgh, Kansas City (Missouri/Kansas), and Vero Beach (Florida). For $49.95 upfront for installation of a smart lock or garage opener and a $19.95 monthly fee, tenured Walmart employees wearing body cameras will deliver groceries (with a $30 minimum) directly to customers’ fridges. The InHome program also offers customers the convenience of “no-box” deliveries and returns.
  • It has also been experimenting with autonomous vehicles in the hopes of bringing down the cost of delivery. It has a pilot with startup Gatik on middle-mile transport between stores/warehouses; and pilots with Nuro, Ford/Postmates, Udelv/Baidu, and Waymo for last-mile grocery delivery to customers.
  • Walmart has lately been expanding its distribution network by going both bigger and smaller. It is adding capacity at its stores, for forward-deployed inventory that can be delivered same-day as well as warehousing for 3rd-party merchants. Walmart is also testing a “micro-fulfillment center” concept in urban areas, near existing stores and customers. In Jul 2019, it opened a 40,000 sq. ft. Walmart Pickup Point outside Chicago. The location doesn’t allow customers to enter but rather focuses exclusively on fulfilling online orders and presenting them to customers for pickup. Walmart is also experimenting with a floor-to-ceiling robotic picking system called Alphabot to automate micro-fulfillment centers as well as store backrooms (see below).
Bringing together grocery and general merchandise for a higher-margin basket
  • Walmart is by far the leading grocery retailer, both online and offline, with grocery comprising 56% of its US revenue. It is well-positioned to capitalize on broader growth in online grocery – the fastest-growing ecommerce category, projected to reach $38B by 2023. Online grocery is expected to grow from 4% of all grocery spend to 20% by 2025, numbers that will likely be accelerated by the COVID-19 environment.
  • In its drive towards profitability, Walmart has lately been focused on a more profitable mix of products in the basket served from its stores. Grocery is complementary to Walmart’s larger retail business, with pickup and delivery customers spending more. Online grocery also helps attract younger higher-income shoppers, 65% of whom also have an Amazon Prime membership. Industry watchers expect this will have a ripple effect into higher-margin categories.
  • Walmart has been working to improve quality and assortment in grocery for the past few years, and is revamping produce aisles to become a draw for stores. It is making moves on the private-label front, where Walmart has had brands since 1983 (84% of shoppers buy private-label brands and it has 18 private-label brands each with $1B+ in sales). Walmart has been working to revamp its assortment with more premium products in categories like ice cream, home decor and fashion, as well as direct-to-consumer (DTC) brands like SmileDirect (Jan 2020). It has also opened meat and dairy plants to up its private-label quality.
Customer loyalty and the planned Walmart+ membership program
  • Walmart has recently been signaling a greater emphasis on customer loyalty. In Sep 2019, it launched a credit card and store card offering 5% back on online purchases (mirroring Amazon’s cards). Then, a recent report by Vox-owned Recode, later confirmed by RetailWire, revealed Walmart’s plans to begin testing a paid membership program called Walmart+ as soon as this month (Mar 2020). (This timeline may be delayed given the strain of the ongoing COVID-19 crisis on Walmart’s delivery infrastructure, which has caused it to put NextDay delivery on hold.)
  • Despite Walmart having 35+ years of experience with the Sam’s Club membership program, it has gone back and forth on the membership model on the Walmart-branded side:
    • 2017 – ShippingPass was discontinued in early 2017 in favor of a standard free 2-day delivery (without membership) with a $35 minimum.
    • May 2019 – Walmart began upgrading its standard free 2-day delivery to free NextDay service with an order minimum (rollout across the US is ongoing).
    • Jun 2019 – Last year, it launched a grocery-delivery membership called Delivery Unlimited for $98/year or $12.95/month (grocery delivery is otherwise $7.95-$9.95/order with a minimum).
  • The intent of Walmart+ is reportedly to bring a differentiated offering to market with perks that Amazon Prime would find difficult to match, with ties to Walmart’s in-store experience. Other membership benefits could include placing orders via text message, discounts on prescription drugs and fuel, and in-store “Scan & Go” checkout (a feature previously discontinued due to low participation).
Doubling down on its 3rd-party marketplace
  • Walmart has operated the Walmart Marketplace for 3rd-party sellers since 2009. It had 35,000+ sellers at the end of 2019 – up 2.5x over the past 3 years, though far fewer than the 2M+ active sellers on Amazon Marketplace (see our Nov 11 2019 brief for more on Amazon’s marketplace). Of the 80M SKUs in Walmart’s online catalog, the vast majority are from 3rd-party sellers.
  • Earlier this month, Walmart began rolling out Walmart Fulfillment Services (WFS), a service for 3rd-party vendors similar to Fulfillment by Amazon. (Seller services alone generate $54B for Amazon.) For a fee, Walmart will handle storage, picking, packing, 2-day delivery (eventually next-day), returns and customer service for items from 3rd-party vendors on Walmart’s ecommerce platform. WFS leverages Walmart’s massive existing delivery infrastructure of stores and warehouses, and also allows it to gain efficiencies by allowing to commingle its own 1st-party inventory with 3rd-party inventory in the same box.
  • The WFS program is part of Walmart’s strategy to lure more merchants to its platform, especially those without fulfillment capabilities, and grow its assortment online. The pricing of the program, which has no monthly membership fee, is set to be “one of the lowest-priced services on the market” to help with seller profitability. Merchants will be charged a fixed monthly storage fee and fulfillment fee based only on shipping weight. WFS also offers sellers better visibility into inventory, more control over item page content, and enhanced support from Walmart.
  • Walmart has been aggressive in subsidizing lower prices on items from select 3rd-party sellers, through a “Competitive Price Adjustment” program designed to make it competitive with Amazon.
After successful early pilots, Walmart has been rolling out automated equipment to its stores in stages in an effort to gain efficiencies:
  • FAST unloaderconveyor belts that automatically scan and sort items off delivery trucks, reducing the number of workers needed to unload from 8 to 4, and number of hours to load from 3.5 to 2; expected to be in 2,000+ stores this year
  • Auto-S inventory scanners (Bossa Nova Robotics) that scan store shelves for out-of-stock and out-of-place inventory; expected to be in 1,000+ stores this year
  • Alphabot (Alert Innovation) floor-to-ceiling robotic system in a store’s backroom that can collect 800 products an hour (10x what a human worker can collect), enabling greater throughput to delivery and pickup vehicles; the system is being tested and will be in 4 stores by the end of this year
  • Ask Sam voice-activated digital-assistant app for Sam’s Club associates, allowing them to ask questions such as inventory availability/location and work schedules, and also take actions like printing the sign for broccoli; it had answered 1.5M questions as of Jun 2019
  • AI-powered camera systems (Everseen) with image recognition, deployed at 1,000+ stores to detect checkout scanning errors and theft
Health centers & other in-store experiences
  • Walmart has long offered services to draw customers into its stores such as restaurants, pharmacies, vision centers, Care Clinics, hair and nail salons, auto care, photos, shipping, wireless services, tax prep, money transfer, check cashing and other financial services. Many of these services are offered through 3rd-party providers, who rent space on store property.
  • One of its most ambitious efforts of late is the Walmart Health Center – a much larger in-store footprint dedicated to healthcare (10,000 sq. ft. vs. 1,500 sq. ft. in a typical Care Clinic). A Walmart Health Center – there are two centers in Georgia so far – offers primary and urgent care, lab testing, X-rays, and diagnostics, EKG, counseling, dental, optical and hearing services (stores also have a pharmacy on-site). These services are available at low fixed fees – e.g. annual check-up for $30, eye exam for $45, lab tests starting at $10, teeth-cleaning for $25, therapy for $1/minute – without insurance needed. (Walmart also recently opened two drive-thru COVID-19 testing sites in store parking lots, in conjunction with the US Department of Health and Human Services.)
  • Similarly, Walmart has also been undertaking an expansion of in-store veterinary clinics, with plans to reach 130 by mid-2020. It claims owners can pay 40-60% less for exams, vaccines and treatments. In parallel, Walmart is offering a pet-prescription delivery service through in-store pharmacies.
Alternative revenue streams: Advertising, data and computing
  • Walmart has long sold advertising in its stores and web properties, with the digital advertising sold through a unit of WPP (Triad). Over the past couple years, it has brought its digital ad business in-house under Walmart Media Group, with the intent of bringing together its store- and digital-advertising teams. It is looking to build a larger advertising business in competition with Amazon for suppliers’ marketing dollars, with more integrated campaigns in stores and on digital properties. (Amazon currently captures an estimated 70-90% of shopper-marketing dollars and most of its $14B “Other” line is advertising.)
  • Walmart plans to leverage its trove of data from millions of online and credit-card customers (275M+ customers visit Walmart stores and ecommerce sites each week; 15% of store customers pay by credit card). The anonymized shopping data will be used by advertisers for targeting. Before this, customer data had long been kept in-house. Because 87% of sales still happen in brick-and-mortar stores and Walmart has access to both offline and online customers, it can do better attribution across channels than its competitors (35% of in-store customers visit before going to the store).
  • Walmart is also reportedly exploring the possibility of selling computing power situated at retail locations to drones and autonomous vehicles in need of nearby processing capability. (Walmart needs computing power in-store to process data from robots, sensors, and camera systems; even the smaller Neighborhood Market format might have 100 servers, 10 cooling towers, and 400 GPUs.)
  • It is reportedly in discussions with telecom companies (including Verizon) to install 5G antennas on store roofs. In addition to the computing opportunity, 5G’s faster speeds, reduced latency and network security could also help support other digital services – such as telemedicine services from remote physicians through Walmart Health Centers.
Data science & blockchain
  • In fulfillment and supply chain, data scientists are using AI across the full lifecycle – including shrink reduction, order sourcing (e.g. fulfillment center selection, estimated delivery dates), order/shipment preparation (e.g. picking & packing optimization, “Smart Substitutions” in case of stockouts), transport (e.g. “lane” planning, routing, load optimization), last-mile routing and scheduling, and last-mile order pickup (e.g. wait-time estimates).
  • Walmart is also experimenting with blockchain for food and drug traceability and freight-tracking. In Nov 2019, Walmart Canada launched a blockchain-based offering with automated freight-tracking and payment-processing for 70 trucking companies.
International markets
Amazon is not standing still
  • Amazon is also launching micro-fulfillment centers one-tenth the size of regular fulfillment centers close to US cities to facilitate same-day delivery. These smaller centers are equipped with the same automated inventory robots that Amazon has already deployed 200K+ of across 50 fulfillment centers globally. In Nov 2019, Amazon announced it was building a $40M robotics innovation hub that would work on technologies to improve ecommerce delivery speeds, with plans to open in 2021.
  • Amazon is also growing its efforts in physical retail, where it operates a footprint of 600+ locations (mostly Whole Foods), to include partner retailers in a program called Amazon Hub. In Oct 2019, Amazon announced it was expanding Amazon Counter, which allows customers to pick up ecommerce orders at partner retailers such as Rite Aid and GNC. It also has hundreds of Amazon Lockers installed in partner locations where orders can be picked up, and a deal with Kohl’s to handle Amazon returns at its 1,100+ locations.
  • As Walmart has sought to go upmarket, Amazon has been making moves downmarket to bring more users onto Prime – adding a monthly payment option for fees, discounting fees for those on government assistance, and offering ways for customers to pay in cash (see our Dec 13 2019 edition for more on Amazon’s financial services for the unbanked and underbanked).
What It Means
The story of Walmart is well-known but not necessarily well-understood. For a time, the outcome of the Walmart vs. Amazon clash of the titans seemed a foregone conclusion – the nimbler big-tech firm would eventually overtake the lumbering incumbent. This perception was exacerbated by Walmart’s siloed culture and fiefdoms, which were known to be a challenge for the organization even as it invested heavily in digital transformation – from Walmart Labs to its torrent of acquisitions. The continued question was: “How can Walmart catch up to Amazon on the digital front?”
Fast-forward to today, and we find that the question was the wrong one. Walmart may never catch up to Amazon on the digital front, but it might not need to. The market environment has evolved and turned many digital capabilities – from cloud computing to robotics – into commodities that Walmart can purchase or partner for, and it can hire on the open market from deep talent pools in areas like data science and adtech.
Walmart is riding on existing waves and learning from others rather than breaking new ground – from one-day and same-day shipping (Amazon) to crowdsourced delivery drivers (Uber, Amazon), robotic automation (Amazon, Lowes, Kroger), adapted retail spaces for ecommerce (Whole Foods, Alibaba’s Hema), retailer advertising (Amazon, Target, Kroger), and “neighborhood health destinations” (Walgreens, CVS). What could be new is the scale at which Walmart can roll initiatives out – e.g. curbside pickup across its stores.
In many ways, Walmart is coming into its own. It’s an odd statement to make about a retail giant with $524B in revenue. However, for a number of years, Walmart’s digital initiatives were fragmented without much apparent coherence or internal alignment – a stark contrast to Amazon’s incisive clarity on direction. It often seemed like Walmart, despite its incredible assets, was getting in its own way. The integration of ecommerce and store, for instance, was a long time coming. Lately, Walmart has been coalescing around an approach that at least plays to its strengths, rather than trying to become Amazon.
The right question, one that it has been triangulating on, is what is the strategic flywheel and value proposition distinctive to Walmart. It is Walmart’s scale and size of its footprint that have always been unique to it – this is what enables lower costs and the lower prices that are its hallmark, allowing it to serve the large proportion of the population in suburban and rural areas. Despite Amazon’s significant forays into brick-and-mortar retail, it currently lacks Walmart’s ability to forward-deploy 100,000+ SKUs within a few miles of 90% of American consumers (though this may change – see above).
With its footprint, Walmart can offer a wider assortment of products available same-day from its stores (pickup or delivery), and likely at a lower price. It also has the advantage of being the leading grocer in the US and around the world, which means it can use grocery to build buying habits. For instance, Walmart sees significantly higher customer retention after 3 online-grocery purchases. Grocery has also demonstrated the ability to attract higher-income customers who value convenience, generate higher-margin baskets that include non-grocery items, and foster engaged brand advocates.
Walmart’s superstore footprint also means it can draw in customers with services hard for Amazon to match – such as prescription drugs, fuel and on-site healthcare. It’s a strategy that recognizes that, even while foot traffic to stores is declining, there are some things that people still expect to visit a physical location for. Walmart’s superstore approach seeks to offer them the least inconvenient – and ideally most enjoyable – experience while doing so. It’s not a coincidence that discounts on drugs and fuel are being considered for the Walmart+ program. Fuel discounts, in particular, are known to be among the most popular features of retail loyalty programs.
All of this cuts to the heart of Amazon’s retail model, which we can recall was originally accelerated because of the distinctive convenience of 2-day shipping. At the time, the ability to receive what you ordered online in your hands within two days was nothing short of magical. Delivery continues to grow in importance for shoppers and their stickiness – in one 2020 consumer survey, the #1 reason (selected by 80% of respondents) that Amazon Prime members shop with Amazon is its free two-day shipping, despite all the other benefits attached.
In 2008, Amazon’s Letter to Shareholders declared: “In our retail business, we have strong conviction that customers value low prices, vast selection, and fast, convenient delivery and that these needs will remain stable over time. It is difficult for us to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery.” Walmart is now pressing on all these fronts, with lower prices and wider same-day selection.
That said, it’s unlikely that Walmart+ will wholly replace Amazon Prime, which has 150M+ subscribers globally and captured 70-80% of US households. Walmart+ may, however, help erode Amazon’s share of ecommerce by capturing more share in certain segments (e.g. existing Walmart shoppers, price-sensitive individuals, rural populations underserved by other delivery services, parents, people with an aversion to Amazon).
Walmart+ could perhaps become a second subscription for Prime members. That alone would be success for Walmart, which has just 4-5% of the US ecommerce market, compared to Amazon’s 38%. (Globally, its ecommerce business is 1/5 of the size of Amazon’s). A second-rung position could at least give it a foothold to demonstrate its value proposition and start chipping away at customers’ loyalty to Amazon.
Walmart has to address its weaknesses on the ecommerce front. Its broader ecommerce selection outside of store inventory still pales next to Amazon’s estimated 600M SKUs, 100M+ of which are available through Amazon Prime. Walmart ecommerce is also still losing money – reportedly projecting $1B in losses in mid-2019. It’s not obvious yet that the business model it’s targeting works. Despite its forays into automation, the current same-day model is still heavily reliant on human labor to pick, pack and present/deliver orders to customers. (Walmart is not charging a fee for pickup.)
Automation in a retail environment is not easy either, likely one of the reasons why the rollout of the Alphabot has been slow. There are tradeoffs between a dedicated space with a limited number of SKUs (akin to a micro-fulfillment center) where you can install an automated system; and drawing from the full value of the 100,000+ forward-deployed SKUs on store shelves, which are much harder to pick using robotics without impinging on the in-store experience of human customers. While the technology and market may eventually get there to do the latter, it won’t happen anytime soon.
Delivery density is also critical to making the economics of same-day delivery work. Walmart has not yet achieved the ecommerce scale needed to make it profitable, especially with its expansive geographic coverage and lower presence in urban areas. 90% of Americans live within 10 miles of a Walmart but not necessarily within, say, 3 miles. Amazon’s Whole Foods, for instance, has less coverage – it’s within 10 miles of perhaps 80% of the population – but is situated in urban areas within 3 miles of 75M Americans, many higher-income.
Several 3rd-party delivery partners have already cut ties with Walmart after losing money. The need for delivery density is likely one of the reasons why Walmart’s Spark Delivery platform for crowdsourced drivers was designed as multi-tenant. Until it can build ecommerce scale – perhaps with the Walmart+ program – or make autonomous delivery workable (see below), curbside pickup is a more viable model for Walmart (and is being rolled out faster than same-day delivery).
While Walmart’s moves to reorganize will help, it will likely continue to experience culture clashes that slow it down. It will need to demonstrate design leadership in its products and services and execute to the modern digital standards expected by consumers. It’s also not clear whether the organization is fully committed to the investments needed to get the ecommerce business to scale. As Walmart seeks to move upmarket, it might run into internal clashes between “Everyday Low Price” constituents and advocates for quality and higher-margin baskets.
Walmart is on the hunt for new revenue streams that can drive profitability, like the cloud and more recently advertising have become for Amazon. It should recall, however, that it took Amazon 21 years to be consistently profitable – it takes time to achieve scale in a new business. Advertising is the most likely opportunity for Walmart, given its incredible customer traffic and data assets. Brands are looking to diversify from Amazon and access the enhanced attribution stemming from Walmart’s online and store channels.
Autonomous last-mile delivery will change the game for Walmart, Amazon and other retailers, as well as delivery providers such as UPS and Postmates. We are inching closer to autonomous delivery being a reality, with California recently approving testing of driverless delivery vehicles without a safety driver on public roads. When it happens, it will lower the cost of same-day delivery and make the gap between 10 miles and 3 miles less meaningful. In urban areas, delivery times will come down to under 30 minutes (similar to Meituan and Alibaba’s Hema in China). Consumers will come to expect ultra-reliable delivery and live tracking.
As per-delivery costs plummet, the fee models will change to offer lower-priced subscription/memberships and/or free delivery with some order minimum. Retailers will be able charge more for “private” delivery vehicles – effectively courier services that can shave minutes off of delivery time. Delivery density will still be important to maximize asset utilization but less so.
Consumer behaviors will evolve to capitalize on lower costs and added convenience, taking current Prime-member behaviors even further. Consumers will buy more frequently, though perhaps in smaller baskets. Impulse buys will be more viable, changing how some brands market to consumers (e.g. app notifications, text messages) with greater emphasis on location and context. Customers will order higher-urgency items they might otherwise still run to the store for, such as printer ink, prescription medicine, toilet paper, milk for kids, ingredients for dinner, and last-minute gifts.
Autonomous middle-mile delivery will also have an impact, allowing for more frequent replenishment of stores and micro-fulfillment centers, less inventory per SKU, and a larger SKU assortment. Looking ahead, it sets up the possibility for direct transfer between larger middle-mile and smaller last-mile autonomous delivery vehicles, without bringing the inventory into a store.
There are limits to how fast delivery can be and how much more value slightly faster delivery can offer. At some point, there will also be diminishing returns to adding another million SKUs. In the long run, the basis of competition will shift back to convenience and lower prices. Convenience continues to be valued by consumers and can take many forms – from integration of the online-offline experience, to more personalization powered by AI, to voice-activated interfaces across any device. For consumers, having a real competitor to Amazon in ecommerce is a good thing. At the very least, it will keep driving prices down, provide ongoing incentive for customer obsession and trustworthiness, and unlock greater innovation.
Disclosure: Amazon is a vendor of 6Pages.
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