Wal-Mart's Revolutionary Delivery Service

| About: Wal-Mart Stores, (WMT)

Summary

Grocery Pickup was a great program that showed how much customers like the convenience of having groceries brought to the car.

The next step was getting orders brought to the customer’s house.

By partnering with ride-sharing services, Wal-Mart gained access to a fleet of drivers.

Customers already paying for delivery from Wal-Mart might as well add other items to their orders.

Less efficient retailers could be destroyed by a change in which services customers require.

Wal-Mart (NYSE:WMT) announced a brilliant new initiative earlier in June. This is one that got limited coverage and I think many investors don't realize just how powerful this initiative could be. On the Wal-Mart blog there was a post by the COO of Wal-Mart's Global eCommerce segment. He explained that Wal-Mart started a new program with Uber (Private:UBER), Lyft (Private:LYFT), and Deliv.

Grocery Pickup

It wasn't too long ago that Wal-Mart announced their introduction of "grocery pickup". This program allowed customers to buy their goods from Wal-Mart's website and then schedule a time to drive into the parking lot so their groceries could be loaded into the car. This was an incredible service for parents that didn't want to drag multiple kids through the store. The program was free to customers and allowed Wal-Mart to encourage more customers to learn to use their website. As I demonstrated recently, their website is designed well.

Revolutionizing the Experience

The big challenge for home delivery has been the concept of "the last mile". Shipping to a location near a customer wasn't a major problem, it was getting the goods to actually reach the customer. Wal-Mart and Target (NYSE:TGT) have an incredible infrastructure for getting products near the customers, but the retail giants were threatened by the possibility of Amazon (NASDAQ:AMZN) getting clearance to use drones to do delivery. In theory those drones would be a very efficient way to cover the last mile, but that is still a work in progress and I believe WMT and TGT would be quick to implement drones if Amazon is able to create the legal framework.

While Amazon deals with that challenge, Wal-Mart looked at a way to capitalize on the already existing technology. Companies like Uber have done an incredible job of mobilizing drivers to create a dramatic improvement to the old taxi system. Wal-Mart is able to utilize that now by bringing in drivers to deliver orders from the website. In this scenario Wal-Mart acts as the customer to the other companies and pays the drivers. Wal-Mart shoppers would be responsible for paying Wal-Mart a charge in the range of $7 to $10 and Wal-Mart would take it from there.

The reason this is huge is because Wal-Mart is able to do it well before drones become a big thing. This provides a huge incentive for customers to learn to use Wal-Mart's site and set up an account there. It also allows Wal-Mart to offer same day deliveries in cities where Amazon can't offer it. Further, it allows Wal-Mart to benefit from huge economies of scale on the delivery. Using drones is a great concept, but using them to deliver 50 pounds of cold groceries is a logistical nightmare. If a customer is already buying their groceries from Wal-Mart and paying the delivery charge, they might as well add on other items they want delivered at the same time.

Implications for Sales

The popular commentary is that "retail is dead". While I do believe many retail stores are facing very serious risk of going under, I believe Wal-Mart may kill more of them than Amazon. Wal-Mart is redesigning the rules of competing in retail by introducing concepts like "grocery pickup" and "have it delivered by an Uber driver" that small retailers won't be able to match. I expect Target and Costco (NASDAQ:COST) to announce their versions of the program within the year.

While the market capitalization of the retail sector may shrink as less efficient companies go under and as Target and Wal-Mart buyback shares at a rapid pace, the market capitalization of the retail sector shouldn't be the measure of what investors should hold in their portfolio.

Conclusion

Wal-Mart announced a solution to "the last mile". Their use of existing technologies to solve the problem represents an innovation in the way retail companies compete. The strategy should drive small and inefficient companies out of business, but it should also protect Wal-Mart, Target, and Costco from the threat of Amazon coming in to take their lunch.

Depending on how Wal-Mart accounts for these sales, it could distort their "same store sales" figures with their "online" sales.

Disclosure: I am/we are long WMT, TGT.

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.

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