Wal-Mart (NYSE:WMT) is the largest retailer in the world with over 10,000 stores globally and close to $500 billion in annual revenues. Yet, its online business is a very small part of the whole, accounting for less than 3% of its overall sales. Since Wal-Mart is nearing saturation in the U.S., on account of its expansive presence, it is prioritizing its e-commerce business to ensure steady revenue growth in the coming years.
The retailer has deployed several omni-channel initiatives that are likely to drive significant web traffic and improve order conversion rates. Also, Wal-Mart is looking to augment its delivery efficiency to keep customers interested in its e-commerce channel. The company is planning to resurrect the online grocery business, which might pay off in the long run, if it can learn from Webvan’s failure and rectify its shortcomings.
Although we do not expect e-commerce to become a big business for Wal-Mart in the near term, these efforts are gradually pushing it in the right direction. Moreover, the optimistic outlook of the U.S. online retail industry somewhat ensures the retailer’s e-commerce growth. Therefore, we understand that the online channel can become a valuable growth driver for the company in the long run.
Our price estimate for Wal-Mart stands at $78, which is slightly ahead of the market price.
Developing Omni-Channel Platform
Although Internet has changed many aspects of people’s lives, including the way they shop, it has been unable to change the entire landscape of the U.S. retail industry. Even after so many years, e-commerce hasn’t turned into a big business for a number of retailers, including Wal-Mart, Target (NYSE:TGT), and Costco (NASDAQ:COST). As a result, the U.S. retail industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across channels. Retailers are now integrating their online and in-stores channel to leverage their vast customer reach and convenience of Internet shopping to boost their revenues.
Wal-Mart, which is the biggest retail chain in the U.S., is planning to utilize its vast physical presence across the country as an e-commerce fulfillment network. Through its ship-from-store service, the retailer uses the inventory of its nearest store to fulfill online orders. In addition, Wal-Mart offers the pay-with-cash facility wherein customers can order online from a wide range of merchandise and pay with cash at its stores. This allows the customers who do not own a credit or a debit card to buy online, thus boosting online traffic. Pay-with-cash is gaining significant acceptance among Wal-Mart customers and accounts for more than half of the retailer’s online sales. This service also increases the overall basket size since customers who visit stores to pick up their online orders often end up buying more. Going forward, we expect the company to come up with additional strategies aimed towards the development of its omni-channel platform.
Enhancing Delivery Efficiency
In addition to omni-channel efforts, Wal-Mart is working hard to refine its delivery process, which will help it improve its customer service. Wal-Mart initiated its same-day delivery program in the U.S. back in 2012. Although in test phase currently, it is expected to play a crucial role in the retailer’s online business in the future. According to a Boston Consulting Group survey, about 9% of U.S. consumers rated same-day delivery as the most important factor of their online shopping experience. Under the same-day delivery program, orders placed on Wal-Mart’s website are directly shipped from its stores and delivered on the same day. More than 5,000 items qualify for same-day delivery and the retailer uses its own trucks to deliver these products.
Furthermore, Wal-Mart is looking to reduce delivery time for most of its online orders to at most two days. It is also exploring the possibilities for crowd sourcing, wherein store customers are asked to make online deliveries. Since millions of customers visit Wal-Mart stores every week, some of them can sign up to drop off online orders on their way back home. For this service, they will be offered an additional discount on their purchases. The company’s management believes that crowd sourcing can become a reality in the near future. Although this is likely to face a number of legal obligations due to possibilities of thefts and frauds, success of this service would not only reduce transportation costs but also enhance delivery efficiency.
Adding Groceries Online
When Webvan tried selling groceries over the Internet, it went bankrupt within two years of its inception. U.S. buyers did not like the idea of shopping for groceries online mainly due to quality and freshness issues. While shopping for perishable items such as fruits and meats, a customer usually determines the freshness by checking the appearance and scent, which they cannot do over the Internet. Moreover, since groceries are a low-margin business, online prices are usually similar to store prices. Hence, there are minimal cost advantages of shopping for groceries online, unlike other categories.
However, Wal-Mart appears to be interested in reviving the online grocery business in the U.S. Last October, the retailer expanded its online grocery sales (order online and pick from stores) in Denver and received compelling customer response. More than 90% of the customers rated the service between average and outstanding. If Wal-Mart manages to sustain its online grocery sales while expanding this service throughout the U.S., its e-commerce sales will increase considerably given that groceries account for over 50% of the retailer’s revenues.
Is Amazon A Threat For Wal-Mart?
Although Wal-Mart is a relatively new player in the online segment, its wide scale and reach puts it in good position to provide better online services than Amazon (NASDAQ:AMZN). The retailer can easily leverage its strong presence in the U.S. to develop an efficient supply chain for online orders.
Currently, Wal-Mart ships directly from about 50 of its stores in the U.S., which is somewhat similar to Amazon’s distribution warehouse count. However, we believe that the retail giant can increase this figure much faster than Amazon as it has about 4,000 stores in the U.S. that it can utilize as distribution centers. Moreover, being a pure play online retailer, Amazon cannot provide pay-with-cash service or take advantage of crowd sourcing, which gives Wal-Mart an edge over Amazon.
Disclosure: No positions