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Wal-Mart's Online Sales Just Exploded

By Adam Levy – Updated May 25, 2017 at 3:55PM

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Online sales grew 63% in the first quarter, mostly from Walmart.com.

Wal-Mart (WMT 1.65%) saw its online sales growth fall into single digits last year before it decided to actually do something about it. When Wal-Mart reported just 7% growth in e-commerce sales in the first quarter of fiscal 2017, the backlash may have been the impetus it needed to start making major e-commerce acquisitions like Jet.com. That move brought on Marc Lore, a serial digital entrepreneur, to head up Wal-Mart's e-commerce business.

It seems the moves are starting to pay off. Lore has made several major moves, and Wal-Mart's e-commerce sales grew a whopping 63% in the first quarter of 2018. What's more, CEO Doug McMillon says that most of that sales growth stems from Walmart.com, not the string of acquisitions it's made over the last year or so.

Wal-Mart boxes coming down a conveyor belt.

Image source: Wal-Mart.

Two major changes that paid off

Wal-Mart made an aggressive move at the beginning of the year, offering free two-day shipping on select items for orders over $35. The company did away with its previous shipping program, ShippingPass, which competed directly with Amazon (AMZN 3.15%) Prime.

Wal-Mart's free shipping is available on over 2 million items. That's well short of Amazon's 50 million Prime-eligible items. Still, Wal-Mart is betting that it has a wide enough selection to fulfill most customers' needs.

The second move Wal-Mart made was to offer discounts on certain items shipped to a nearby store. If Wal-Mart wants to successfully compete with Amazon it needs to use its physical stores. That strategy could be particularly valuable for big-ticket items where shipping the last mile is often costly due to weight, and customers can save a noticeable amount of money.

Wal-Mart's growing third-party marketplace

The selection of items on Walmart.com has grown from 10 million at this time last year to 50 million today. The growth stems largely from third-party sellers on Wal-Mart's platform.

Third-party sales account for the difference in gross merchandise value(GMV)  growth and sales. Last quarter, GMV grew 69% and sales grew just 63%. Those numbers indicate third-party sales continue to increase their share of sales on Walmart.com. Third-party sales don't generate as much revenue, but Wal-Mart could generate higher profit margins from each sale since it doesn't have to handle inventory or shipping.

Amazon, likewise, has seen a lot of growth from third-party merchants recently. Its Fulfillment by Amazon service takes the traditional marketplace one step further by allowing merchants to store products at Amazon's warehouses and take advantage of Amazon's shipping. That's how Amazon quickly grew the number of Prime-eligible items to 50 million. Considering Wal-Mart also has a large fulfillment network, it may consider copying Amazon's strategy.

But why make acquisitions?

As mentioned above, McMillon said the majority of Wal-Mart's e-commerce growth is organic. Moreover, he said the "plan in e-commerce is not to buy our way to success." So, if Walmart.com is growing fine on its own, why does it need to make so many acquisitions?

McMillon stated, "The acquisitions are helping us speed some things up." Acquisitions like Modcloth and Moosejaw give Walmart immediate expertise in some high-margin categories. Wal-Mart is historically associated with low quality and low margins. Snatching up some high-end properties could help it sell higher-quality products with higher margins.

That said, all of its acquisitions follow a similar pattern: It's buying up young brands at a discount after they've struggled to raise more funding due to slowing sales. By their nature, Wal-Mart shouldn't expect significant growth to come from the acquisitions after they've been incorporated into its e-commerce revenue. Considering the size of Walmart.com, they'll hardly move the needle for Wal-Mart, and Wal-Mart's brand may still hold it back from incorporating higher-priced and higher-margin items on its main website.

So, if Walmart.com is growing so well, why bother spending investors' money on e-commerce acquisitions? Overall, it was a great quarter for Wal-Mart's online business, but the company's acquisition strategy is still puzzling.

Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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