Wal-Mart Stores (NYSE:WMT) has seen tremendous growth in its e-commerce sales so far in 2017. Its first-quarter e-commerce sales grew 63%, followed by 60% year-over-year growth in the second quarter. Gross merchandise volume is growing even faster as Wal-Mart brings in more third-party merchants to its online marketplace.
But Amazon (NASDAQ:AMZN) continues to dominate online commerce. A new report from eMarketer indicates Amazon could take 43.5% of the U.S. e-commerce market this year, up from 38.1% last year, as reported by Recode. Meanwhile, eMarketer expects Wal-Mart's market share to grow from 2.8% to 3.6%.
Despite Wal-Mart's efforts and expectations for continued rapid growth in e-commerce sales, the gap between it and Amazon will likely continue to expand for the foreseeable future.
Wal-Mart is working off a (relatively) small base
Wal-Mart doesn't give out exact figures for its e-commerce sales, but eMarketer estimates the company's online gross merchandise volume in the U.S. totaled around $11 billion last year and will grow to a bit over $16 billion this year. By comparison, it expects Amazon's sales to reach nearly $200 billion this year.
So, if Amazon grows sales volume a measly 8% next year, it's basically adding Wal-Mart's entire online operation. Of course, Amazon is growing much faster than 8%. Analysts expect the company's overall revenue to grow about 28% next year. That number isn't a perfect comparison, as it includes Amazon's cloud computing sales, but only includes fees charged to third-party sellers instead of gross merchandise volume. Comparatively, Wal-Mart recently forecast 40% growth in online sales for next year.
Even if Wal-Mart's growth outpaces Amazon's next year 40% to 28%, Amazon will continue to widen the market share gap between itself and Wal-Mart (and everyone else, for that matter). It will take a long time for Wal-Mart's faster growth rate to overcome Amazon's commanding size, and it's not clear Wal-Mart can keep up its torrid pace.
What's driving Wal-Mart's online sales growth?
Management is keen to note the majority of Wal-Mart's online sales growth comes from Walmart.com, not its string of e-commerce acquisitions following its Jet.com purchase last year.
There have been two big drivers for the growth of Wal-Mart's online sales.
The expansion of online grocery ordering and in-store pickup is the first major growth driver. Online grocery ordering is available at 900 Walmart locations as of the end of the second quarter, and management expects to add another 1,000 next year.
By 2019, however, more than half of Walmart store locations will support online grocery ordering and pickup. As such, the growth from the new service should slowdown.
At the same time, Amazon could ramp up its own online grocery ordering operations following the acquisition of Whole Foods Market. That could present a major challenge to Wal-Mart in metropolitan areas with Whole Foods locations. Walmart stores still outnumber Whole Foods nearly 10-to-1, though.
The second big growth driver is the increase in third-party merchants on Walmart.com. As Amazon is able to attract more third-party retailers to its site, it's getting harder for smaller merchants to stand out, especially if they don't opt to use Amazon's advertising services. As such, they're looking for alternatives, and Wal-Mart's less-crowded marketplace presents a great opportunity for smaller merchants.
But Wal-Mart's third-party marketplace is severely lacking compared to Amazon. Amazon's Fulfillment by Amazon service makes selling on the marketplace easy. Amazon is also better about combining listings from multiple sellers for the same product. Overall, Amazon presents a better experience for the seller and the buyer, which means Wal-Mart will continue to be second choice for third-party merchants.
While Wal-Mart's growth is impressive, it's not clear how long it can sustain it. Even so, it's not growing fast enough to make up the gap between itself and Amazon when it comes to online sales.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.