The past year was particularly busy for Walmart (NYSE:WMT). The world's largest retailer sought to build on its long-term effort to reposition itself as a high-tech omnichannel business, departing from its traditional strategy of blanketing the country with superstores.
To compete with the juggernaut that is Amazon.com (NASDAQ:AMZN), Walmart is leading with its strengths, leveraging its nationwide store footprint with programs such as in-store pickup of online grocery orders, grocery delivery, and pickup towers that allow customers to easily retrieve items ordered online.
Walmart also made big moves outside the United States. In May, the company made the biggest acquisition in its history, taking a 77% stake in Flipkart, the biggest online retailer in India, for $16 billion, outbidding Amazon. Elsewhere, among other merger and acquisition deals, the company consolidated its U.K. business, lowering its profile in a market in which it had struggled.
Those decisions have brought encouraging results as comparable-store sales and e-commerce sales in the U.S. surged this year, and its international segment showed improvements as well. Let's look at what changed at Walmart in 2018.
Flexing its muscles at home
E-commerce growth at Walmart's U.S. stores is on track to rise an impressive 40% this year. That growth has been led by the expansion of Walmart's online grocery pickup program. As of its third-quarter earnings report in November, Walmart had nearly 2,100 grocery pickup locations, up by about 1,000 from a year ago. In addition to its pickup program, Walmart has sought to expand grocery delivery with plans to make it available from 800 stores serving 40% of the U.S. population by the end of the year. As a result of those efforts, the company is set to top Amazon as the biggest online grocer in the U.S. even after the e-commerce giant acquired Whole Foods last year.
Meanwhile, Walmart continues to acquire digitally native, vertical brands, following its acquisitions in recent years of Jet.com, Moosejaw, and ModCloth, among others. In 2018, Walmart added lingerie brand Bare Necessities and plus-size fashion brand ELOQUII. Such moves helped Walmart beef up its online selections on both Jet.com and its own site, while bringing in new entrepreneurial talent.
The company struck a similar partnership with department store chain Lord & Taylor, which said it would open a flagship store on Walmart.com, selling more than 125 premium brands, as the company works to build out its online fashion presence.
The growth in online sales and comparable sales, the latter of which is tracking toward at least a 3% rise for the year, suggests that Walmart's moves have positioned it well in the digital-retail age. As weaker retailers are shutting stores and even going bankrupt, Walmart's strategy is propelling it forward.
A changing international approach
The company's largest move of the year was its $16 billion investment in Flipkart. The move fits with its pattern under CEO Doug McMillon of investing in growth markets in order to keep pace with Amazon and adapt to market changes. Amazon has already invested billions of dollars in the growing Indian market, but Walmart handed Amazon a setback in claiming a top e-commerce prize. India's economy is expected outpace the U.S. economy by 2040, and Flipkart, which generated $3.8 billion in revenue last fiscal year, could eventually be a huge business if Walmart manages it correctly.
The Flipkart acquisition was far from Walmart's only major move abroad. It merged its U.K business, Asda, with Sainsbury, giving the company a 42% share in the combined business and a $4 billion payout. The move freed up Walmart to focus its attention and money elsewhere as it had struggled in the highly competitive, slow-growth British market. Similarly, Walmart said it would sell an 80% stake in its Brazilian business to Advent International, a private equity market, allowing it to move away from a market that has been roiled by recession and steep inflation over the last decade.
Walmart increased its presence in other markets. It formed a strategic alliance with Japanese e-commerce operator Rakuten to offer online grocery delivery there. In China, it invested $320 million in Dada-JD Daojia, China's leading on-demand logistics platform, which follows a $50 million investment in the platform in 2016. Walmart forged a strategic partnership with JD.com (NASDAQ:JD) as well, selling its Chinese e-commerce site in exchange for a 5% stake in JD. The company later increased its stake in JD to 12%.
While many of these investments are geared for the long term, Walmart's international results have been solid so far this year with operating income up 1% in constant currency and positive comps in nine of 10 international markets in the most recent quarter, including Mexico, where comps jumped 5.4%.
The long game continues
Under McMillon, who took over as CEO in 2014, Walmart has invested in improving its store base and enhancing its e-commerce capabilities rather than adding new stores. Internationally, McMillon sought to pivot the company toward growth markets, leaving behind slow-growth countries where the company has struggled. He has been willing to sacrifice short-term profits by investing for the long term, via initiatives including wage hikes and better employee training, along with more robust e-commerce offerings.
The past year saw the company continue down that strategic path. The Flipkart acquisition will weigh on the bottom line initially but should pay off over the long run. Similarly, the aggressive expansion of online grocery pickup and delivery is expensive, but necessary to keep up with Amazon and grow sales, as grocery is one of Walmart's core strengths. With operating income down 0.5% to $15.9 billion through the first three quarters, those initiatives haven't come cheap, but the sales numbers show they're worth it.
Next year, Walmart investors should expect more of the same as the company plans to expand to 3,100 online grocery pickup locations and 1,600 delivery locations, which is projected to drive growth in comps and online sales similar to 2018 gains. Investors will have to be patient as the company battles Amazon, but the retail giant is making smart moves. Today, it's in a better position than it was a year ago.
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 Amazon and JD.com. The Motley Fool owns shares of and recommends Amazon and JD.com. The Motley Fool has a disclosure policy.