Walmart (NYSE:WMT) is making some big changes to its e-commerce strategy. When Walmart's head of U.S. e-commerce Marc Lore joined the retailer after it bought Jet.com, he made a series of acquisitions. Lore's shopping spree was focused on digitally native brands including Bonobos, ModCloth, and Eloquii.

And while Lore's hit a home run with Walmart's online grocery platform, the other side of Walmart's online business hasn't fared as well. Grocery has largely masked the duds, propelling overall digital sales 37% higher in the second quarter. But losses are piling up as Walmart's acquired brands remain largely unprofitable. The e-commerce operations are set to lose $1 billion this year alone.

The losses were enough for management to take a hard look at its portfolio and try to cut some fat. It sold online store ModCloth earlier this month, likely for less than what it paid two years ago. Then it laid off dozens of employees from Bonobos in an effort to boost profitability for the men's clothing brand. It's also reportedly explored the sale of Jetblack, a private-shopper service that loses about $15,000 annually per member.

Image source: Walmart.

Walmart's online grocery platform is close to covering the entire market. Management expects 80% of Americans to be able to order items for curbside pickup by the end of the year. Time is running out for Walmart's digital brands to grow sales the way Lore originally thought they would. The consumer staples company is hitting the reset button and changing course -- something it should've done a while ago.

Private labels work better than brand acquisitions

Walmart is switching from acquiring new brands to creating its own private labels. Private labels have been a source of considerable growth for Target (NYSE:TGT) over the last few years. Target develops new brands based on its sales data, and it can provide better shelf-space -- both physical and digital -- for those brands to get them in front of shoppers after they launch. Their success has been a significant contributor to Target's digital sales growth over the last few years. In fact, Target's online sales have nearly kept pace with Walmart's despite a much smaller investment in digital grocery sales.

By comparison, Walmart's strategy of acquiring digitally native brands is based entirely on the past success of those brands. Walmart didn't have much to offer in terms of growing those brands, as most of their products never showed up on Walmart.com or its store shelves. It merely hoped to glean expertise about those product categories in order to fill in the gaps of Walmart.com.

Walmart has finally realized that it can launch private-label brands that perform better for it than do existing brands it acquires. That's something that should've been obvious over a year ago when it was still making brand acquisitions. Better late than never.

Lore admitted the fact in a recent interview with Recode while he discussed the success of Walmart's mattress brand, Allswell. "This was like an 'aha' for us," he said. "This is super interesting. We can create these ourselves." Importantly, Lore says brands like Allswell, unlike Bonobos or ModCloth, can be sold on Walmart.com and in its stores. "And so our focus is now shifting where we're incubating a bunch of these brands." The sale of ModCloth and layoffs at Bonobos cement that sentiment.

What investors should expect

Building a portfolio of natively incubated private brands should be a lot cheaper than acquiring established brands. And while not every brand will be a success like Allswell, the amount at risk is only a few million dollars at most -- not tens of millions. Moreover, when Walmart does launch a successful brand, the potential is far greater if it can sell the brand in stores and online, attracting new customers to its sales channels. That's an opportunity its acquired brands don't offer.

In the meantime, however, losses on its e-commerce business are unlikely to improve much. It's still straddled with several unprofitable acquisitions, and it'll need to make some significant changes to get them into the black. It's starting to do that with layoffs at Bonobos and the sale of ModCloth, but there's a lot of work to do.

The reset won't come quickly. It's taken years for Target to build its sprawling portfolio of successful private labels and exclusive brands, which now total over 50. But the hope is that Walmart can establish a compelling portfolio of brands like Allswell before it saturates its potential with online grocery and the competition catches up.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.