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Walmart Is Sounding Like a Tech Company

By Jeremy Bowman - Feb 23, 2021 at 9:15AM

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The retail giant is on the verge of its biggest transformation ever.

Walmart (WMT 2.13%) shares dipped on its fourth-quarter earnings report Thursday.

The company missed analyst estimates on the bottom line and guided toward slow growth this year as it laps a bumper performance in 2020, aided by pandemic-related tailwinds. It also said it would raise wages and called for $14 billion in capital expenditures, up from $10.3 billion last year. The market didn't seem to like the increase in spending.  

However, investors may be missing the bigger story here. As a mature company, Walmart's results are scrutinized for things like minor improvements in profitability, but there's something more important happening. The retail giant is rapidly evolving from a brick-and-mortar retailer to a diversified omnichannel business that can be both the world's biggest retailer as well as a provider of high-margin services.

Walmart CEO Doug McMillon in a crowd of employees

Walmart CEO Doug McMillon. Image source: Walmart.

The future comes into focus

For years, it's been clear that Walmart is evolving beyond its historical business model as a physical retailer. Its acquisition of Jet.com nearly five years ago helped accelerate its growth in e-commerce, and now the company is the second-largest online retailer in the U.S. with a robust grocery pickup business.

Building on that momentum, the company laid out its "integrated omnichannel strategy" in the latest earnings report, saying that one of its goals is "innovating to enhance a seamless, digital customer experience designed to deepen customer relationships and increase share of wallet, enabling the company to diversify the business model by growing related businesses with accretive margins such as marketplace, advertising, financial services, and data monetization." 

Walmart envisions a future where its stores anchor a diversified services business, which includes an e-commerce marketplace, pickup and delivery, the Walmart+ membership program, financial services including a new fintech start-up, advertising, and healthcare, including expanding healthcare clinics in its stores and selling health insurance plans.

The retailer is well aware of its strengths. The company has huge economies of scale, an unrivaled store footprint across the U.S., and a reputation for everyday low prices. That combination of assets gives Walmart several ways that it can monetize its store base and customer traffic.

Pivot to services

If Walmart's strategy sounds familiar, that's because it is. Analysts have famously touted Apple's (AAPL 2.32%) "pivot to services" for years. The tech giant has long derived a majority of its sales from the iPhone, but the success of that product was also seen as a weakness as it matured, making it difficult for Apple to deliver significant growth.

The company has executed on its promised transition to services, driving increased engagement with its devices through new products like Apple Music, Apple TV+, Apple Pay, and AppleCare, and squeezing more profits from its App Store. Similarly, it's made its product ecosystem stronger and stickier with new devices like the Apple Watch and Airpods. The growth of Apple's services business is a big reason that Apple stock has tripled in the last three years.

Walmart's equivalent to the iPhone is its store base. But much like the iPhone a few years ago, Walmart's store base seems to be both a weakness and a strength in the eyes of investors. Physical retail sales growth has slowed and Walmart has lost market share to Amazon (AMZN 4.03%) as e-commerce has grown. But Walmart's store network is also a unique asset that, along with its customer relationships, gives the company an opportunity to dive into areas like healthcare and digital payments, higher-margin services that can drive profits over the long term, much as they did for Apple.

Amazon is another tech giant that has used its strength in first-party e-commerce to layer on higher-margin services like its marketplace, third-party fulfillment program, and advertising. That strategy has also delivered huge profits for the company.

Will it pay off?

Walmart stock was down 6% in afternoon trading on Thursday, showing that investors were unimpressed with guidance in 2021 and the company's plans to invest in capacity and automation to improve its supply chain, as well as customer experience and productivity. 

The last time Walmart announced a similar investment cycle, in 2015, the stock plunged as the company said it would raise wages and spend money to improve stores. However, those moves clearly paid off and the stock has nearly tripled since it made that announcement.

Having successfully improved its store operations and added grocery pickup and delivery capabilities to most of its stores, Walmart is now beginning its next ambitious project. The company has a long list of goals ahead, and not all of them will come to fruition. But management is investing in areas that will grow profits and expand the business beyond the confines of a conventional retailer. With the company's many strengths, the strategy looks like a wise one, and Walmart has shown with its e-commerce growth that it can accomplish big things quickly when it makes them a priority.

Walmart proved the market wrong the last time investors doubted its big spending plan. With the retail stock selling off since releasing earnings, it looks like investors are making the same mistake twice.

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