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Walmart's Still Trying to Figure Out How to Compete With Amazon Prime

By Adam Levy - Mar 1, 2020 at 4:18PM

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It'll start testing a new subscription service focused on grocery delivery next month.

Amazon (AMZN 3.15%) Prime turns 15 years old this year, and Walmart (WMT 0.86%) has some catching up to do if it wants to compete. While it's tried to match Amazon's offer of unlimited two-day (now one-day) shipping -- first with a subscription and then without -- the big-box retailer has never been able to match Amazon's product selection. 

Indeed, any effort to match Prime's benefits on a like-for-like basis will almost certainly fall flat for Walmart's most valuable shoppers. More than half of Walmart's top-spending families are already Prime members, according to Recode's Jason Del Rey.

So, Walmart's next effort to compete with Prime will focus on areas where it can differentiate itself from Amazon. Del Rey reports Walmart's working on a rebranding and expansion of the Delivery Unlimited program the company launched last year. The new service will be called Walmart+ and still include unlimited same-day delivery on fresh and frozen groceries. Additionally, Walmart+ could include discounts on drug prescriptions and gas, text-based ordering, and the ability to check out in stores through scan-and-go technology instead of waiting in line. 

Expanding the benefits and product selection of Delivery Unlimited will be necessary if Walmart expects the $98 subscription service to attract enough profitable consumers to compete with Amazon.

A man with a child on his back receiving a bag of groceries at his door.

Image source: Walmart.

Fighting to stay ahead of Amazon

The biggest strength of Walmart's e-commerce business is its online grocery ordering platform. Grocery is the key driver behind the company's 37% growth in U.S. digital sales last year, and management expects it to continue to fuel growth next year. It forecasted 30% growth in U.S. e-commerce in fiscal 2021.

Walmart's new subscription service will focus primarily on same-day grocery delivery. But that's an area where Amazon's also investing. It's expanded Prime Now deliveries to include more Whole Foods locations. It dropped the additional subscription price for AmazonFresh, as it expands the grocery service to more metro areas. Additionally, Amazon's building a new grocery chain this year that will likely put a big focus on online ordering.

Walmart+ will seek to capitalize on Walmart's strength in online grocery in order to attract consumers to Walmart and lock them into its ecosystem. The goal seems to be to win over customers before they switch more of their grocery shopping to Amazon.

This is more than just winning online sales, too. While grocery is certainly driving Walmart's online sales, more than half of the retailer's overall sales are grocery items. As more grocery shopping shifts online, Walmart's merely fighting not to lose sales, where Amazon is fighting to win. That gives Walmart additional impetus to make Walmart+ a success as Amazon gets more aggressive in the grocery space.

It's getting harder to differentiate Walmart

It's hard to find something where Amazon isn't competitive.

Walmart's reportedly considering discounts on pharmacy prescriptions to lock people into Walmart+. Amazon has its own prescription drug service, PillPack, though, and it could easily include some benefit to using PillPack as a Prime member. And while PillPack primarily appeals to those with chronic medication needs instead of one-off patients, those are the consumers who would value the benefit most highly.

Walmart's also considering adopting the text-based ordering it previously featured in its concierge service, JetBlack. If consumers truly valued text-based ordering, however, the feature is easily replicable. Amazon's already developed strong natural language processing skills through voice ordering on Alexa devices. Moving that same technology to a text-based platform shouldn't be too difficult.

Another consideration is enabling scan-and-go technology for Walmart+ members. Walmart previously experimented with the technology, which allows users to scan items in an app, enter their credit card information, and just walk out of the store. But customers interested in a service that offers unlimited same-day delivery probably aren't also interested in going to Walmart stores. Also, Amazon does it better.

Finding a way to differentiate Walmart+ from Amazon Prime is still a difficult problem to solve.

Can this even be profitable for Walmart?

The focus of the delivery program on groceries means the margins on the service are going to be very thin. Groceries are already a low-profit business, but add in unlimited delivery and it's practically impossible to profit. In fact, head of U.S. e-commerce Marc Lore said he doesn't expect grocery delivery to be profitable at all. Instead, he thinks Walmart can lose less money than anyone else trying to do home grocery delivery.

"All the money is made on the long-tail," Lore said at a conference last year. In other words, Walmart+ will have to increase sales of higher-margin general merchandise in order to make the service profitable for Walmart. Amazon Prime certainly seems to accomplish that goal, as Prime members consistently spend more on than non-members even as membership has scaled to 150 million globally.

But Walmart will need to win over general merchandise sales from Amazon, which is a pretty difficult task. As mentioned, more than half of Walmart's top customers are already Prime members, and they can get practically anything they want delivered to their door by tomorrow. Matching that core capability -- the thing that makes Prime a profitable endeavor -- is something Walmart's failed to do for 15 years. There's no sign of that changing.

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