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Here's What Walmart's Latest Challenge to Amazon Prime Must Do to Succeed

By Adam Levy – Jul 9, 2020 at 9:42AM

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It won't be a sustainable business unless it can do this one thing.

Walmart (WMT -2.50%) is launching a new subscription service this month, reportedly called Walmart+.

It'll build on Walmart's Delivery Unlimited subscription offering and cost the same: $98 per year. Delivery Unlimited offers same-day delivery for Walmart's online grocery shoppers. Walmart+ could add benefits like discounts on fuel at Walmart gas stations and early access to product deals, according to a report from Recode.

The new service appears to be aimed squarely at Amazon (AMZN -3.01%), which has grown its global Prime memberships to over 150 million. The success of Prime has led Amazon to continue taking market share of e-commerce, despite already accounting for nearly 40% of online sales in the U.S. 

Prime members spend more than enough on Amazon to make up for the cost of shipping and other benefits Amazon offers as part of the membership. For Walmart+ to succeed, it'll need to create similarly loyal customers who buy things besides groceries and fuel.

A man accepting a bag of groceries at his front door.

Image source: Walmart.

Groceries and fuel sales are low-margin already

Walmart+ cannot turn a profit merely by incentivizing customers to order more grocery deliveries and buy more fuel at its gas stations. In fact, that's a surefire way to lose money.

Walmart's low fuel prices aren't just driven by scale, its profit margin at the pump is extremely thin. It aims to drive customers to its stores with its low gas prices. Offering Walmart+ subscribers a discount on their fuel could put it in the negative.

Meanwhile, the grocery business is notoriously low margin. When you add the cost of picking out each product in an order to prepare it for delivery and paying for a driver, Walmart won't be making any money on grocery delivery either.

Marc Lore, head of Walmart's U.S. e-commerce business, knows this. When asked at a Recode conference last September if Delivery Unlimited could be profitable, he responded, "We can do it at a lower cost than anyone else."

He went on to explain that making same-day grocery delivery profitable with a service like Delivery Unlimited or Walmart+ is about making the customer more loyal and reliant on Walmart. If customers have a reason to choose Walmart.com instead of Amazon or any other competitor, they'll be more likely to buy higher-margin items from Walmart, the reasoning goes.

Where Walmart will make money is in the "long-tail." These are items that aren't bought as frequently, but Walmart can sell at a much higher margin. Lore also expects to grow sales from third-party merchants, which pay a percentage of sales to Walmart. The company also offers fulfillment services and advertising, which can grow if Walmart.com sees increased traffic.

So Walmart+ is a big bet that customers will use their benefits to buy items from Walmart and Walmart.com well beyond groceries and fuel. And if they don't, the retailer will see its e-commerce losses climb.

Can it take on Amazon?

It won't be an easy task to convert Walmart grocery shoppers into general merchandise shoppers. Walmart's online grocery platform remains somewhat walled off from the rest of Walmart.com. 

The retailer shut down the dedicated Walmart Grocery app earlier this year, forcing customers to use the main Walmart app. Still, grocery orders remain separate from most other merchandise. Shoppers may think of Walmart when they want to buy groceries, but they don't necessarily think of Walmart when they're looking to buy new kitchen equipment with which to cook those groceries.

Amazon Prime, on the other hand, has driven shoppers to Amazon.com more and more frequently when they're looking for something online. About three in four Prime members begin their online product searches with Amazon, according to a recent CivicScience survey.

Overcoming the mindshare Amazon has built up over more than a decade is the real goal of Walmart+. That's what it has to do to succeed long term without merely piling up losses for the company's shareholders.

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 and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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