Why Wal-Mart is losing the e-commerce game

On first glance, it seems that Wal-Mart must do more to catch up. But how much does e-commerce matter to this retail juggernaut?

Wal-Mart is in the midst of a push to find a path to growth. It's closing underperforming stores, and beefing up training and pay for store employees. Those efforts to provide improved wages, working environments, training and paths for advancement will cost the retailer more than $1 billion, according to its own estimation.

Wal-Mart is also spending at least that much to boost its digital efforts. It's among the companies looking hardest for top tech talent, and its recent fourth-quarter earnings report pointed to its investments in e-commerce.

But in that quarter, which included the holiday season, Wal-Mart reported just 8% growth in online sales. It’s not quite copacetic to compare Wal-Martthe largest retailer not just in the U.S. but in the worldto rivals Amazon or Target, which pale in comparison by several measures, but Amazon saw Q4 growth of 22% and Target boosted its online sales by 34% in the same period, helped by its holiday-time free shipping policy

“Wal-Mart's e-commerce business is among the more complex in the world, and it's still a tiny fraction of their vastly complex brick-and-mortar business,” Keith Anderson, VP of strategy and insight at e-commerce analytics firm Profitero, told Retail Dive in an email. “They sell food and non-food; run an online marketplace and a traditional e-commerce business; offer delivery and click-and-collect; and they attempt to operate across four continents with enough freedom to be locally relevant and enough standardization to be centrally manageable.”

On the face of it, it seems obvious that Wal-Mart must do more to catch up. But how much does e-commerce matter to this retail juggernaut?

“If you look at the U.S. market in 2015, e-commerce grew at 14.6% year on year,” retail futurist Doug Stephens told Retail Dive. “If Wal-Mart grew at 8%, they were on the losing end, and somebody else was on the winning end, if you look at it from that very binary standpoint, because if you’re not at least growing with the market you’re falling behind. It is important because in the long term we have to account for the fact that the consumer lives with this pervasive belief that they can get what they want, whenever they want it, wherever they are. If [Wal-Mart is] not at least keeping pace with the marketplace, they’re only going to look more inconvenient over time.”

A fork in the road

Experts we spoke with all painted a picture of Wal-Mart as a company caught on the horns of a dilemma (if not a few dilemmas). Some of the decisions it faces are definite either/or considerations that force the organization to possibly forsake its roots—and the roots of its success—as a low-price leader in brick-and-mortar retail. (Wal-Mart did not return requests for comment for this story, except to point to general company news.)

“The uncertainty they face is that there are two paths that, over the long-term, are likely mutually exclusive—and Wal-Mart hasn't yet clearly chosen one,” Anderson said. “One: Try to out-Amazon Amazon on the fundamentals of Amazon's growth engine: price, selection, convenience and experience. (This strategy might work in the handful of emerging e-commerce markets where neither Amazon nor a local player like Alibaba is dominant, but it's a long shot.) Or two: Leverage Wal-Mart's unique capabilities and assets to build a world-class ‘omni-channel’ operation.”

But Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive that it would be a mistake for Wal-Mart to move too far from its brick-and-mortar stronghold for the sake of e-commerce growth. Especially, Egelanian says, when you consider that even after two decades of market disruption from Amazon (a company that he says is not quite profitable in its own retail endeavors), e-commerce remains at most about 8% of all retail industry sales.

“Wal-Mart is the biggest retailer in the world, and their system is selling through bricks and mortar,” Egelanian said. “And they’re efficient. We know that Wal-Mart has the most efficient system in the world. We know that they break that product down and put it on the shelves, and they do that very efficiently also, and then they’re done. And selling on the Internet is not efficient. The whole methodology of selling on the Internet is completely foreign to what it’s like selling at a Wal-Mart.”

As Stephens put it, brick-and-mortar is in Wal-Mart’s DNA.

“They’re in a tight spot because their customer doesn’t index well to e-commerce,” he said. “In order to [significantly grow online sales] they really have to change their brand and value proposition, and that could disenfranchise their core customer.”

Where e-commerce does fit

Wal-Mart is under enormous pressure from investors to show growth—a notion that is itself misplaced, Egelanian told Retail Dive—and it's leading many peeling back the numbers and seeing that feeble 8% e-commerce growth to identify a potential lifeline. But that perspective underestimates Wal-Mart’s hulking place in retail, he said.

“While their sales might not be growing, they’re still by far the largest retailer in the world,” Egelanian said. “Target is a fraction of the size. Amazon is a fraction of the size. So it’s hard to imagine that [e-commerce] is the salvation of Wal-Mart.”

Still, experts (including Egelanian) say e-commerce is necessary for Wal-Mart or any retailer of any size, just because the industry’s center of gravity has shifted to omni-channel, that "pervasive consumer belief"  noted by Stephens that goods should be available when and how they want to buy them.

“You better be able to do it either way,” Egelanian said. “If you have brick and mortar, you have to be able fulfill by mail. You have to be able to do it all the ways in which customer wants."

Other paths to growth

Anderson believes that the solution to at least part of Wal-Mart’s e-commerce conundrum might be found in other companies. 

“The next few years will be critical for Wal-Mart, which will likely need to sharpen its focus and double down on the e-commerce markets and segments best positioned for market-beating growth,” he said. “As this pressure to accelerate growth intensifies, there may be calls for Wal-Mart to consider more acquisitions in this space.”

Egelanian added that the retailer, rather than chasing an area so alien to its core success, might actually find a more clear path to growth by tweaking its brick and mortar model. Wal-Mart recently abandoned plans for a Washington, D.C.-area store because the costs wouldn’t allow it to stay true to its “always low prices” mantra. But considering the demographic and what Egelanian said is an untapped market, the retailer may have been wiser to boost prices in order to make it work.

“Maybe you can’t charge less when your cost structure is higher,” he said. “But you can still be the lower price leader in that area. There are many ways to work that formula on the cost and price sides, and there are many areas not being exploited by these guys.”

It seems that Wal-Mart faces existential questions for many of its strategic considerations... not just in e-commerce.

"The elephant in the room for Wal-Mart is that, in order for them to successfully move forward into the future, some very significant changes need to take place, and it goes to every element of what they do," Stephens said. "Their relationship with vendors, their relationship with their communities, with employees, the environments in their stores, the merchandizing, branding—everything really needs a cataclysmic change. The delicate dance is always that, when sales are not good you don’t want to make changes that make them worse. But then, how many quarters of flat sales do you accept? It's complex, and goes to the very heart of what Wal-Mart is all about."

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