The company that has long guaranteed customers "everyday low prices" may soon deliver sticker shock instead.
Walmart (NYSE:WMT) said this week that it will begin offering grocery delivery from more than 800 of its stores, partnering with services like Uber and Deliv to cover 40% of American households. But there's a big catch: The retail giant is charging customers $9.95 per delivery, more than virtually all of its competitors, with a minimum order of $30.
Where's the value?
Walmart understands the need to update its grocery business to fend off competition from Amazon.com (NASDAQ:AMZN), Kroger, new entrants such as Aldi and Lidl, and others. The retail giant has already opened 1,200 grocery pickup stations at stores across the country, and expects to add another 1,000 this year. Those locations give customers the opportunity to place orders online and retrieve them later that day by pulling into a designated parking area, where store employees simply load the order into their car. There is no additional charge for pickup.
The program has clearly been popular, as the company is rapidly expanding it and considers it to be the biggest driver of its 44% growth in e-commerce last year.
However, its delivery strategy is more questionable. Walmart appears to have mastered the ability to put together orders efficiently (seeing as there is no charge for the online pickup service), so the delivery fee would seem to go entirely to the cost of transportation. Compared to Walmart's rivals, a $9.95 charge simply isn't competitive.
Amazon just said it would make free two-hour delivery available for Prime members from all Whole Foods locations by the end of the year. Instacart, the popular grocery delivery service, charges $5.99 for regular delivery on orders above $35, and $7.99 for one-hour delivery. With Instacart Express, customers can get unlimited regular deliveries for $149 a year. Target (NYSE: TGT), which bought Shipt late last year to step up its delivery game, offers free same-day delivery of groceries with an annual fee of $99.
Considering the lower-priced offers from its competitors and its own free pickup service, Walmart's new delivery service raises the question of which audience it is aimed at. Given that Walmart normally targets a lower-income customer, the upfront fee seems like a mistake and one that's likely to drive customers away.
Walmart points out that other delivery services like Instacart sometimes charge higher prices on the actual items that are delivered, but that may be a better strategy, as that would at least allow shoppers to see what they would save by visiting the store. It's worth noting that Walmart could partner with Instacart if it wanted to but it seems to want to retain control over the packaging even if it costs customers more.
Playing catch-up again
Above all, this move seems like another attempt by Walmart to play catch-up with Amazon's Whole Foods delivery initiative. While Walmart and Whole Foods generally cater to opposite ends of the grocery spectrum, the two supermarket chains increasingly seem to be on a collision course: Amazon is seeking to lower prices and reach new customers, and Walmart is moving into organics and seeking a higher-end customers through Jet.com and its other new online brands. Offering delivery expands the geographic markets for both.
With an estimated 80 million American households already signed up for Prime, however, Amazon has the clear advantage. It can offer free two-hour delivery from Whole Foods, a well-respected brand -- and that service may persuade even more shoppers to join Prime. Walmart, on the other hand, is charging its normally thrifty customers a premium for delivery in as little as four hours. The Bentonville behemoth seems not to understand that grocery delivery is a loss leader -- table stakes to compete for a customer who'd rather not visit a store.
Walmart may want to find a way to make its delivery fee more competitive with its peers, if it wants the program to gain traction. Or it may want to consider scrapping the initiative altogether. As it stands, the considerable charge undermines the company's low-price reputation.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Kroger. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.