Wal-Mart’s comparable sales growth has been negative for the past five quarters due to the sluggish economic environment in the U.S.
However, the company’s e-commerce revenues have grown at a robust pace driven by several initiatives deployed over the last few years.
Wal-Mart believes that it can deliver 30% e-commerce revenue growth this year.
The world’s largest retailer, Wal-Mart (NYSE:WMT), operates close to 4,000 stores in the U.S., which leaves minimal room for its store expansion. As a result, the retailer relies on increases in same-store sales and growth in e-commerce business for a big portion of its revenue growth. However, Wal-Mart’s comparable sales growth has been negative for the past five quarters due to the sluggish economic environment in the U.S. On the other hand, the company’s e-commerce revenues have grown at a robust pace driven by several initiatives deployed over the last few years.
Despite this hefty growth, the e-commerce channel hasn’t had a noticeable impact on the retailer’s results, as it accounts for less than 3% of Wal-Mart’s overall sales. Even as the retailer witnessed double-digit growth in e-commerce revenues in Q1 fiscal 2015, the channel contributed just 30 basis points to its U.S. comparable sales. Nevertheless, e-commerce is one of the two most important growth channels (other being smaller format stores) for the company that are likely to play a crucial role in the long run. In a recent shareholder meeting, Wal-Mart stated that its e-commerce revenues are likely to increase to $13 billion this year from $10 billion in fiscal 2014. Even though e-commerce business doesn’t look significant at the moment, it is worthwhile to discuss the future of this channel given the tremendous potential it holds.
According to Forrester Research, U.S. online retail sales grew 9% in 2013 and are expected to grow at a compound annual growth rate (CAGR) of 9.5% through to 2018. Wal-Mart believes that it can deliver 30% e-commerce revenue growth this year driven by the industry growth, its omni-channel initiatives, enhanced product variety over the Internet, and better delivery efficiency. Moreover, the retailer can effectively leverage its vast presence to sustain a competitive advantage over the online giant Amazon (NASDAQ:AMZN). Wal-Mart witnessed 27% growth in its online revenues in the first quarter of fiscal 2015, which suggests that it is on course to deliver on its promise. 
Our price estimate for Wal-Mart stands at $79.30, which is less than 5% ahead of the market price.
Omni-Channel Platform To Integrate Wal-Mart’s Small Online Channel To Its Vast Store Network
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 major 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 store channels 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 a still small but growing portion 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. During the recent shareholder meeting, this service received tremendous attention from speakers, which indicates its growing popularity. Going forward, we expect the company to come up with additional strategies aimed towards the development of its omni-channel platform.
Emphasis On Same-Day Delivery To Enhance Delivery Efficiency
Apart from its 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 a 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. More than 5,000 items qualify for same-day delivery and the retailer uses its own trucks to deliver these products. Considering that Wal-Mart has close to 4,000 stores spread across the U.S. and a gigantic fleet of trucks, same-day delivery should be easy for the company. Wal-Mart is looking to reduce delivery time for most of its online orders to at most two days.
Wal-Mart is exploring a unique strategy of crowdsourcing its deliveries, wherein store customers are asked to make deliveries for online customers. For this service, they will be offered an additional discount on their purchases. Since millions of customers visit Wal-Mart stores every week, some of them can sign up to drop off online orders. The company’s management believes that crowdsourcing 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. Moreover, additional discounts involved in this service can encourage customers to shop more frequently at Wal-Mart.
Selling Groceries On The Internet To Add Significant Revenues
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.
Amazon May Not Be A Big 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. 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 50-100 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 may give Wal-Mart an edge over Amazon.
Disclosure: No positions.