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Wal-Mart Aims for Amazon's Achilles Heel

By Jeremy Bowman - Oct 8, 2017 at 9:02AM

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Wal-Mart appears to be on the verge of offering free same-day delivery. That could mark a dramatic shift in the retail wars. (AMZN -2.16%) has done a lot of things exceptionally well over its 22-year history. The company's whopping market value and constant growth are testaments to its strategy of customer obsession, breakneck innovation, and its "Day 1" philosophy.

But of all the strategic decisions the company has made in its history, none has had a bigger impact than Prime. Launched in 2005, the all-inclusive loyalty program offers members free video streaming, access to the Kindle Lending Library, music streaming, and several other ancillary benefits from $99/year. But the biggest one is clearly free, two-day shipping on millions of items.

With Prime, Amazon solved the two biggest obstacles to online shopping: it eliminated pesky shipping fees and long delivery times, which were often a week or longer in the early days of e-commerce. Over the years, Amazon has stuffed Prime with more and more benefits, making it a nexus of competitive advantages that no other company, retailer or otherwise, can match.

Prime's success is self-evident. According to Consumer Intelligence Research Partners, there are now 80 million Prime members in the U.S. and many millions more around the world. CIRP also found that Prime members spend an average of $1,300 a year, nearly double what non-Prime members spend on Amazon. Customer retention rates are better than 90%.

Prime is likely the biggest reason why Amazon's revenue has continued to grow by more than 20% in almost every quarter over the last decade, and the company has announced plans to make Prime the loyalty program at Whole Foods and offer discounts at the organic grocer to Prime members, a sign that Prime will remain central to Amazon's customer acquisition strategy.

The back of a Wal-Mart truck on a city street

Image source: Wal-Mart.

Wal-Mart answers back

Retailers across the board have been leveled by Amazon Prime, and Wal-Mart Stores, Inc. (WMT -0.24%), as the world's biggest retailer, has more to lose than any other.

For years, the retail giant has struggled to gain traction in e-commerce. That changed following its acquisition of last year, which brought e-commerce pioneer Marc Lore into the fold. Under Lore's guidance, Wal-Mart began offering free two-day shipping on orders over $35 earlier this year, and expanded its online inventory from 10 million items to at least 67 million.

But Lore's latest ambition could truly shake up the e-commerce pecking order. At an advertising conference last week, he said that is currently offering free same-day shipping in New York, and that Wal-Mart would soon do the same.  Wal-Mart also launched in ad campaign promoting delivery in New York, a surprising move since the company has no stores in New York City.

Free same-day delivery could be what Wal-Mart needs to turn the tables on Amazon, as that would be a better customer proposition than free two-day delivery. Amazon offers delivery in as little as an hour in some cities with Prime Now, but that comes an additional fee of $7.99.

Breaking Prime's grip on tens of millions of customers may not be easy, but if Wal-Mart can take free same-day shipping to cities across the country it would give the company a meaningful edge over Amazon and should certainly sway customers who have not already joined Prime.

With nearly 5,000 stores across the country, and one within ten miles of 90% of Americans, Wal-Mart's footprint is a unique asset, and one that Amazon can't match. If Wal-Mart can leverage it to provide customers with free same-day delivery it could take away Amazon's most important advantage and shift the momentum in e-commerce.

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