IN THEORY THIS It should be a good time to be Walmart, the doyen of American retailers who grew up in the 1970s stagflation period. Inflation is back, but no one knows better than the beast of Bentonville how to use the power of growl to move suppliers to lower prices. Supply chains are collapsing, but Walmart carries so much weight that it chartered ships and bypassed rail services earlier this year to deliver Halloween and Christmas goods. Labor is scarce, but it has managed to add 200,000 jobs to the 2.3 million global payroll in the three months ended September. “There’s a certain amount of excitement in the air, you can feel it,” enthused Doug McMillon, CEO, as Walmart raised its year-end revenue and profit targets on November 16 after solid third-quarter results.
There is a mystery, however. Investors aren’t buying it. Last year, Walmart’s share price lagged not only e-commerce giant Amazon, but other major American retailers like Target and Home Depot as well. On November 16, its shares fell another 3% as investors resented the slightly “spongy” profit margins described by Morgan Stanley’s Simeon Gutman. Does the stock exchange, so enthusiastic about everything new, miss the turnaround of the decade? Or is there something else to fear, namely Amazon’s hot breath on Walmart’s neck?
There are few more committed proponents of the turning point than Felix Oberholzer-Gee from Harvard Business School, who, along with two of his professor colleagues, hosts a weekly podcast entitled “After Hours” – a “Seinfeld” -like dose of bonhomie for business enthusiasts. The trio, which exchanges high-profile discussions about companies on topics from Scandinavian crime drama to cocktail making, may not be regulars in the aisles of Walmart. But they’re cheerleaders. “Walmart is on fire,” exclaimed Mr. Oberholzer-Gee in a recent episode. He admits that investors have not yet prevailed. But that could only be because their mindset is hardened about old retailers, he argues.
The turnaround story consists of two parts. First and foremost is the customer. Since the lockdowns ended, shoppers have returned to Walmart’s stores, albeit not in sufficient numbers to prove that nearly 800 square feet of American retail space – more than the size of Manhattan – is worth appreciating. That’s what the company claims. Having stores within ten miles of 90% of Americans is said to be essential to an “omnichannel” strategy that encourages shoppers to buy in-store, online, or a combination of both.
However, with footfall still below average, the challenge is to attract online shoppers without cannibalizing those who visit the stores. It has some success. Surveys suggest that its new Walmart + subscription service – a low-cost rival to Amazon Prime – attracts young, urban, and affluent online shoppers who may not be seen dead in a Walmart store (a partnership with American Express’ platinum card strengthens the impression of upward mobility). According to Mr. Oberholzer-Gee, Walmart.com has also started displaying “quirky” brands like Ray-Ban that typically eschew Walmart’s physical stores, which further appeals to this cohort. In addition, Walmart is rolling out Uber Eats-style home delivery to 900 cities through its Spark network of gig economy drivers. It makes for a fascinating move. Walmart, the suburb’s landmark, is reluctantly moving into the heartland of the Amazon.
The second part of the story is the win. Unlike Amazon, whose ecommerce business doesn’t make a huge contribution to revenue, Walmart has to justify the returns on everything it does. That encourages lateral thinking, because the online profit margins are poor. As a result, it is trying to cover the cost of its e-commerce distribution network by attracting third-party suppliers rather than just selling Walmart items. It is building a fast growing advertising business called Connect, which Mr. Gutman estimates will have an operating profit of $ 2 billion in operating income by 2025 in services ranging from bill payment to cryptocurrencies. All of this could improve the bottom line without affecting brick and mortar sales.
The turning point in the story, however, says Marc Wulfraat von MWPV, a logistics consultancy, is Amazon. As Walmart penetrates its urban territory, Amazon is counterattacking in the suburban hinterland. Its weapons are distribution hubs, the huge warehouses from which retailers ship goods across the country. According to Wulfraat, the size of Amazon’s distribution network in America in 2018 overtook Walmart’s. Since then, Amazon has tried to double it again and, according to Wulfraat, built another 140 square meters of distribution centers – as much as Walmart has built in its entire 59-year history in America.
It’s a daunting operation. Mr Wulfraat says Amazon builds every week what some retailers build in a decade. “It’s almost like going to war,” says Ken Murphy of abrdn, an asset manager who invests in Amazon. He says the logistics blitzkrieg is part of Amazon’s effort to cut delivery times so much that people have little incentive to go to stores. That makes Walmart, with its huge network of branches in America, vulnerable.
Defeat is not inevitable. More than half of Walmart’s domestic sales are groceries that people are still reluctant to buy online. That gives him some protection from the Amazon attack. So far, Amazon’s ownership of Whole Foods, an upscale grocery chain that bought it in 2017, and its Fresh supermarket formats have been half-hearted attempts to take on its Bentonville rival.
But if Amazon masters the art of cashless shopping as it tries, it could transform grocery shopping as it has everything else from bookstores to cloud computing. So far, Walmart can pride itself on keeping Amazon in check while reinventing itself for an omnichannel world. Yet the food wars have only just begun. And the size of Amazon’s arsenal is growing. ■
This article appeared in the business section of the print edition under the heading “Walmart is getting its bite back”