Walmart (NYSE:WMT) shares were surging on Tuesday after the retail giant unveiled its highly anticipated challenger to Amazon (NASDAQ:AMZN) Prime: Walmart+.

For an annual membership fee of $98 or $12.95/month, the service, which officially starts Sept. 15, will offer three key benefits:

  • As fast as same-day delivery on more than 160,000 items from tech to toys to household essentials and groceries.
  • Scan & Go functionality on the Walmart app, allowing members to pay as they shop in the store, avoiding checkout lines.
  • Savings of up to $0.05 per gallon of gas at nearly 2,000 Walmart stores, as well as Murphy's USA and Murphy's Express stores. Sam's Club stores will soon to be added to the list.

However, there's a big catch to the new membership service. Free same-day delivery won't come with just any purchase. Members still have to spend at least $35 on each order to qualify, making it not much different from the retailer's current programs, like Next Day Delivery and its current membership program, Delivery Unlimited, which Walmart+ will replace. However, Walmart's strength in groceries should help make it easy for shoppers to meet the $35 minimum threshold.

A scene at the checkout area of a Walmart store.

Image source: Walmart.

How does it compare to Amazon Prime?

As Walmart amps up its e-commerce offerings, it clearly has Amazon in its sights. Under the guidance of U.S. e-commerce chief Marc Lore, who came to the company with the Jet.com acquisition, Walmart has been aggressively pushing into e-commerce, expanding its inventory, building out its third-party marketplace, and accelerating delivery speeds. However, investors hoping that Walmart+ would be a potential Prime killer are likely to be disappointed.

Walmart+ does have one key advantage over Prime: its ability to fulfill orders in the same day, thanks to Walmart's massive store base, compared to Prime's promise of free one-day shipping. Walmart says that same-day delivery will be available from 2,700 of its 4,700 stores, and membership is also a bit cheaper than Amazon Prime at $98, compared to $119 for Prime. 

However, Amazon Prime has tens of millions of individual products available for order with no order minimum, compared to just around 160,000 on Walmart+ with a minimum. Prime also offers members a slew of other benefits, including free video streaming, free borrowing from the Kindle Lending Library, and free same-day delivery from Whole Foods. The only substantial benefit to Walmart+ as of now appears to be the gas savings.

Given the contrasts and Amazon's advantages, Walmart+ seems unlikely to convert a significant number of Prime members other than those who were already shopping at Walmart.

Incremental at best

Walmart was already offering its customers a number of appealing e-commerce options, including free online grocery pickup, online grocery delivery with a fee, Delivery Unlimited, and free one-day delivery with a $35 minimum. Most of what Walmart+ offers is already available in one of those other services, making the new program incremental at best. The main difference between Walmart+ and Delivery Unlimited appears to be the gas savings and the option to do Scan & Go, as well as the availability of general merchandise, as Delivery Unlimited was only for groceries.

However, Scan & Go seems less like a perk for paying members and more likely something the company should make available for all of its shoppers, as it can both save the company on labor in its checkout lines and add convenience for customers willing to do the scanning. Walmart had tried Scan & Go previously but killed the experiment due to poor customer feedback. Presumably, the technology has since improved.

Walmart says the list of benefits will grow over time, and it will need to add to it if it wants to generate an Amazon Prime-like membership base, which now has more than 150 million subscribers around the world.

Why it could still work

Walmart's biggest strengths and its two major advantages over Amazon are the size of its grocery business, which is the biggest in the U.S. and also the source of more than half of its domestic revenue, and its store base, which gives it locations within 10 miles of 90% of the U.S. population, helping to enable same-day delivery. Notably, the products available through Walmart+ seem to be only those stocked at stores.

Groceries are a low-margin business, and delivering groceries has historically been unprofitable for the company, operating as something of a loss leader. However, by pairing free delivery of groceries with general merchandise, Walmart has an opportunity to win business for more profitable products, especially from customers who prefer to buy groceries from Walmart. The so-called long tail of e-commerce, where infrequently purchased items command higher margins, is the biggest opportunity for Walmart here, and leveraging its grocery business is a smart move.

However, management will have to do more to make the service attractive to new customers if it is going to move the needle in its battle against Amazon or on its own bottom line. At this point, Walmart+ could be the start of a potentially powerful subscription service, but investors should be hoping there's more to come.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.