Why Wal-Mart's Recent Initiatives Will Fail Miserably

| About: Wal-Mart Stores, (WMT)

Summary

Last week Wal-Mart revealed that it will partner with Uber and Lyft to provide last mile delivery from its stores.

It has tried other initiatives like curbside delivery to provide added convenience to shoppers and beat the challenge from Amazon.

These initiatives will eventually fail due to unit economics where the cost far exceeds the delivery charge obtained from customers.

It does not have a first-mover advantage with this program and Amazon is still light years ahead in creating a better delivery infrastructure.

Wal-Mart (NYSE:WMT) recently revealed that it is piloting last mile delivery with Uber (PRIVATE: UBER) and Lyft (PRIVATE: LYFT). Wal-Mart is pulling out all stops to ensure it can meet the challenge posed by Amazon (NASDAQ:AMZN) and the primary instrument it is using is providing the customers with added convenience. However these are still baby steps when it needs to take giant leaps before the market and customer preferences change irrevocably.

Curbside delivery

Wal-Mart is looking to expand its curbside delivery program to over 200 stores and 30 cities by the end of this year. This program has been touted as a major convenience boost for customers as they do not need to step out of their cars while shopping at the stores. A "personal shopper" picks up the items ordered by the customer, bills them and delivers the items to the customer's parked location. However a fundamental flaw in the entire program is the higher labor cost required for completing the task for every customer.

Similar programs have been used by Kroger (NYSE:KR) and Target (NYSE:TGT). Target had partnered with startup Curbside to provide similar features to its customers. The program was started in August 2014 and expanded further in October 2015 to 121 stores. However, Target recently announced that it is planning to discontinue this program by 15 June 2016. The statement said "at this time, Target is focused on making sure we deliver and execute on retail fundamentals".

It is difficult or near impossible to reverse a retail trend which is seeing tens of billions of dollars flowing into online sales by these tiny steps. Target's chief digital officer, Jason Goldberger, recently said that there would not be any dramatic increase of partnership with other delivery startups like Instacart. This shows that TGT's management has seen the futility of these small, non-scalable models in building a definitive competitive advantage.

The main reason behind the move to reduce emphasis on curbside delivery and home delivery by Target seems to be unit economics. At a time when we are seeing wage inflation in the general market and also vigorous movement to increase minimum wage, these labor intensive options will only make a bad situation worse.

We should see similar reversal in the programs by Wal-Mart in the near future as it sees enormous labor resources getting diverted towards it and the benefits obtained do not justify the high costs in running it.

Partnership with Uber and Lyft

Wal-Mart is testing this program with Uber in Phoenix and Lyft in Denver. Customers would need to fork out additional $7-$10 for delivery. On the face of it, this seems revolutionary where the extra space in these cars can be used for delivery. However, this feature is doomed to massive failure due to the same reason curbside delivery is being stopped by Target. The final unit economics of each delivery will never justify this program.

This program includes all the features of curbside delivery and in addition to this requires further time of the drivers to wait at the stores, incremental change of directions to reach the stores, for delivery and final handover of items to customers, all this for a net gain of $7-$10. Even at minimum wage the incremental labor cost would be much higher than the delivery charge obtained from customers.

A much simpler option would be if Wal-Mart were to build the requisite last-mile delivery infrastructure itself from ground up without depending on any third parties. Although this would initially require heavy investment, the management will be able to know exact cost involved in each step. Having own company's fleet of last-mile delivery trucks will also lower per-unit cost of delivery than any other ad-hoc arrangement can have.

The management will also have to wait another 18-24 months before Lyft-Uber program is rolled out in other cities and to find if there is possibility of cost savings within the program and how to scale it. An in-house last-mile delivery program should reduce this time frame significantly giving in-depth information and better perspective on the cost and benefits of the program.

Not a first-mover advantage over Amazon

This program is still following Amazon's footsteps, which has used similar approach for last-mile delivery in specific locations. The plan called Amazon Flex allows drivers to schedule their shifts and is meant to reduce the dependence on regional courier services. These drivers are paid between $18 and $25 an hour according to Amazon, although the drivers have to pay for gas and insurance.

Amazon is already increasing investment to build better logistics and more efficient supply chain. Wal-Mart will need to be more aggressive while dealing with the current challenges it faces and need to hit home runs when it comes to effectively leveraging its vast store network.

Conclusion

Wal-Mart has recently partnered with Uber and Lyft to provide last mile delivery options to customers in Phoenix and Denver. This program will end up requiring heavy labor resources and would not have the ability to create cost effective last mile delivery option. Over 70% of Americans live within 5 mile of a Wal-Mart store and the management would need to be more aggressive in utilizing this leverage over other retailers and building a wider moat against competitors. There are still a lot of things left to be done before it can be said that this massive ship has turned around. Even with a dividend yield of 2.8%, this stock does not justify an investment at this point due to the numerous challenges faced by the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.