The world’s largest retailer Wal-Mart (NYSE:WMT) is giving stiff competition to Amazon (NASDAQ:AMZN) in the online segment. In addition to its same day delivery program and pay with cash service, Wal-Mart is looking to utilize its store customers to deliver online orders. This idea seems lucrative as the retailer has an enormous store base, which it can use as distribution centers. As interesting as it sounds, an effective execution of this strategy will not be easy due to a number of legal and regulatory obstacles.
Although online retail sales account for a small portion of Wal-Mart’s revenues, the above steps are necessary. They will not only allow the retailer to compete with Amazon on the latter’s turf, but will also help it tap the growth opportunity in online retail.
- Is Wal-Mart Exiting China With The Yihaodian Sale?
- How Much is Wal-Mart’s Gross Profit Expected To Change In The Next Five Years?
- What Will Wal-Mart’s EBITDA Look Like In 5 Years?
- Why We Lowered Our Price Estimate For Wal-Mart by 10%
- What is Wal-Mart’s Fundamental Value Based On Expected 2016 Results?
- How Is Wal-Mart’s Revenue Composition Trending?
Why Wal-Mart Can Provide Competitive Online Service?
Although Wal-Mart is a relatively new player in the online segment, its wide scale reach puts it in good position to provide better online services than Amazon. The retailer will look to leverage its strong presence in the U.S. to develop an efficient supply chain for online orders. Shipping orders directly from the stores can help Wal-Mart gain a competitive advantage over Amazon. 
Currently, Wal-Mart ships directly from 25 of its stores in the U.S. and plans to double this figure by the end of 2013.  In comparison, Amazon only operates 40 distribution warehouses in the U.S. and has plans to open 20 new warehouses globally.  We believe that Wal-Mart 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.
Same Day Delivery And Pay With Cash
Last year, Wal-Mart initiated its same day delivery program in the U.S., which is currently in test phase in five metro areas.  Under this 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.   Same day delivery is beginning to gain popularity in the U.S. and players such as Wal-Mart, eBay (NASDAQ:EBAY) and even Google (NASDAQ:GOOG) are testing this service. According to a Boston Consulting Group survey, about 9% of U.S. consumers felt that same day delivery was the most important factor of their online shopping experience.  Amazon has been offering the same day delivery service since 2009, but it’s only available in 10 U.S. markets.  We believe that with time Wal-Mart can surpass Amazon on this front.
Wal-Mart also offers the ‘pay with cash’ facility wherein customers can order online from a wider 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 it accounts for more than 50% of Wal-Mart’s online sales.  On the other hand, being a pure play online retailer, Amazon does not provide any such service.
Crowd Sourcing: Utilizing Customers To Deliver Products
Wal-Mart is looking to utilize its store customers to make online order deliveries, a phenomenon referred to as “crowd sourcing”.  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.  Although this service is still in planning, Wal-Mart’s management believes that it could become a reality in the next two years. Nonetheless, this strategy is likely to face a number of legal obligations as Wal-Mart cannot account for the actions of its customers delivering products.  There are chances of thefts and frauds in such a service and other risks.  Crowd sourcing player Zipments undertakes a thorough screening process to hire drivers and insures its cargo to prevent any issues.  Nevertheless, if this service kicks off, not only can Wal-Mart save on its transportation costs but also make its delivery process more efficient. Furthermore, it will help Wal-Mart gain a healthy competitive edge over Amazon, which cannot provide such a service being an online retailer.
What Is The Significance Of These Initiatives?
Online sales accounts for just about 1% of Wal-Mart’s overall revenues (estimated by Internet Retailer).  Hence, there might not be any visible impact due to these initiatives. However, Wal-Mart’s approach on this front is clearly directed towards competing with Amazon. Over the last three years, Amazon’s revenues have grown in excess of 30% annually.  The fast growth of Amazon can be a potential threat to Wal-Mart in the future and thus, the latter seems to be taking the above steps to ensure revenue growth.
Online retail sales in the U.S. have been increasing at a rapid pace over the past few years, which is likely to continue with growing Internet usage. Forrester forecasts U.S. online retail sales will amount to $262 billion in 2013 (an increase of 13% over 2012) and reach $370 billion by 2017.  Due to a substantial presence in the U.S., Wal-Mart’s scope of expansion is limited. Hence, the retailer would not want to miss any growth opportunity that the industry presents.
Our price estimate for Wal-Mart stands at $80, implying a premium of about 5% to the market price.Notes:
- Same-Day Delivery Test At Wal-Mart, The New York Times, Oct 9 2012 [↩] [↩]
- Wal-Mart may get customers deliver packages to online buyers, Reuters, March 28 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Wal-May May Tap Customers To Deliver Online Orders, CNBC, March 28 2013 [↩]
- Wal-Mart Delivery Service Says To Amazon: ‘Bring It’, The Wall Street Journal, Oct 9 2012 [↩] [↩]
- Same Day Delivery: Do Consumers Want It All and Want It Now?, Yahoo Finance, April 9 2013 [↩]
- Order It Online And Voila, The Wall Street Journal, Dec 3 2012 [↩]
- Wal-Mart Announces “Pay With Cash” For Online Purchases, Walmart, April 26 2012 [↩]
- Wal-Mart’s Evolution From Big Box Giant To E-Commerce Innovator, Fast Company, Nov 26 2012 [↩]
- Amazon’s SEC filings [↩]
- U.S. Online Retail Sales To Reach $370B by 2017, Forbes, Mar 14 2013 [↩]