Five years ago, Walmart (NYSE:WMT) made a big move into e-commerce.
The retail giant said it would acquire Jet.com for $3.3 billion. The move was generally panned by critics, who dismissed as an "acqui-hire" to gain the services of Marc Lore. Lore would run Walmart's e-commerce division until last month, but the acquisition also helped jumpstart rapid growth in an area where the company had fallen behind.
Walmart's U.S. e-commerce sales jumped 79% in fiscal 2021 -- the year that just ended -- following 37% growth in fiscal 2020, and brought in more than $50 billion in revenue last year, not including Sam's Club. Walmart is now the biggest e-commerce seller in the country behind Amazon, and is growing faster than its chief rival.
Much of that growth has been driven by the expansion of its grocery pickup and delivery service, leveraging one of its key strengths as the country's biggest grocer. The chain now provides grocery pickup from 3,750 stores and delivery from 3,000 stores, the vast majority of its store base, leaving little room for expansion.
That effort to build out the retailer's e-commerce business was one of necessity. Before CEO Doug McMillon took over in 2014, Walmart had paid little attention to e-commerce, essentially ceding online retail to Amazon (NASDAQ:AMZN) -- but as Amazon grew, Walmart's brick-and-mortar sales became vulnerable, and it became essential for Walmart to defend its business by aggressively growing its own e-commerce operation.
Stepping on the gas
Having successfully built out that business, Walmart is now focused on playing offense, layering on higher-margin services in e-commerce and elsewhere. Those include its third-party marketplace, where the company has teamed up with Shopify and is improving its e-commerce profit margins, delivering triple-digit revenue growth in the third quarter. Following Amazon's lead, the company also launched third-party fulfillment a year ago, another way of driving profits from low-margin online sales.
The company is also tapping advertising for its online platform, much in the same way Amazon has. Walmart brought its ad business in-house and rebranded it as Walmart Connect. It plans to devote more space in its stores to ads and share its valuable shopper data with brands in an effort to grow its advertising business by a factor of ten over the next five years, up from an estimated $1 billion last year. More recently, it's partnered with The Trade Desk, a leading programmatic advertising company, to give ad buyers more transparency and perks, like store-level precision in geotargeting -- which even factors in weather signals, allowing advertisers to respond to events like storms. Trade Desk built the platform specifically for Walmart, and tech giants like Google and Facebook have shown how profitable digital ads can be. If Walmart can bring in $10 billion in advertising revenue, that could translate into $3 billion or $4 billion in profit.
Amazon's ad business has also grown quickly, reaching $20 billion in revenue in 2020 and reporting a 66% increase in revenue in the most recent quarter. Amazon is now the third-biggest digital advertiser behind Google and Facebook.
The superstore giant also has its sights set beyond traditional retail, and even e-commerce -- in the earnings release, the company touted its investments in healthcare. With its existing store footprint, the company sees an opportunity to provide health clinics like pharmacy chains CVS and Walgreen do. And in fact, Walmart itself already has one of the country's biggest pharmacy businesses.
Walmart opened its first Walmart Health clinic in September 2019. The company now has more than a dozen health clinics, and sees an opportunity to both drive traffic to its locations and leverage its store footprint, as it has locations within ten miles of 90% of the U.S. population. Walmart also expects to play a major role in providing COVID-19 vaccinations across the country, especially in underserved rural areas.
Last October, the company launched a licensed insurance brokerage, Walmart Insurance Services, that will help people enroll in health insurance plans. Combined, those initiatives show that Walmart wants to be a major player in healthcare, providing prescription drugs through its pharmacies, healthcare through its new clinics, and even insurance through its brokerage.
The other major new industry the company is exploring is financial services. Last month, the company launched a new fintech start-up in partnership with Ribbit Capital that has invested in Robinhood, Credit Karma, and Affirm, and Walmart expects to make partnerships with and acquisitions of other leading fintech companies. Walmart's release did not provide many details, but financial services are another area that the company has significant opportunity in given its customer base. It's also had success with PhonePe, FlipKart's digital wallet, and CEO McMillon said one in five people in India now use the app.
With its customer base made up of many unbanked and underbanked customers, Walmart may have a built-in audience for a new financial service product.
The stock fell 6% on the release of the earnings report, as investors were cool on Walmart's guidance for the current year, which just calls for low-single-digit growth in revenue and earnings. But the company is on the brink of some groundbreaking growth opportunities, and is moving beyond its traditional business model.
The investments in e-commerce to protect its retail business have paid off. And having capped its store base, management is free to pursue new growth drivers. By leveraging its massive store and customer base, Walmart has the potential to make significant inroads into a number of new industries -- and the company is promising significant investments, with $14 billion in capital expenditures planned for this year, up from $10.3 billion last year.
While its numbers may not wow investors this year, it would be a mistake to ignore the company's long-term strategy and disruptive potential in new industries here.