How Can ShippingPass Impact Walmart’s Profitability?

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Last year Walmart (NYSE:WMT) started testing a three-day delivery subscription service, ShippingPass, to take on Amazon‘s (NASDAQ:AMZN) Prime service and improve its e-commerce sales. It was priced at $49 a year compared to Amazon’s two-day delivery service priced at $99 a year, amounting to about half the cost for one extra day to deliver. However, in May of this year, Walmart announced that its three-day delivery service would become a two-day delivery guarantee at the same price of $49 a year.

Walmart’s aggressive entry into the premium/fast-delivery e-commerce domain against Amazon raises the question: Is Walmart’s ShippingPass aimed at increasing sales or improving profitability (or both)? Looking at Amazon and Walmart’s operational efficiency in the last four years, as shown below, it is fair to conclude that operating an online marketplace based on discounted deliveries is more expensive than a brick-and-mortar business of Walmart’s scale. Therefore, ShoppingPass seems likely to improve Walmart’s share and sales in the $340 billion (2015) U.S. e-commerce market, but could adversely impact its profitability in the near term. However, considering the huge scale and size of Walmart’s business – sales of $482 billion, operating income of $24 billion in 2015 – this impact is likely to be negligible for Walmart as a whole in the near term.amzn-46

In 2012, for every dollar spent in operating expenses (selling, general and administrative expenses adjusted for depreciation and operating leases), Amazon generated just $0.26 in gross profit compared to Walmart’s $1.61, implying a greater degree of operating efficiency for Walmart’s brick-and-mortar retail business. We refer to the [gross profit/operating expenses] metric instead of [revenue/operating expenses] to ensure an apples-to-apples comparison. This is because Walmart engages in only first party sales, versus Amazon’s both first-party and third-party sales.

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Walmart’s higher operational efficiency compared to Amazon is driven by greater economies of scale as well as the absence of packaging and delivery costs (which Amazon has to bear in some measure for every item sold). However, we expect Walmart’s packaging and delivery costs to slightly increase in the near term, which is likely to marginally impact its gross profit/operating expenses by 2018. Going forward, Amazon’s operational efficiency is expected to improve driven by growing economies of scale, improved delivery capabilities and the company transferring a greater part of shipping costs to consumers.

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