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4 Ways Walmart's Following Amazon's Playbook

By Adam Levy – Updated Aug 27, 2021 at 9:31AM

Key Points

  • Amazon has become more of a services business than a retailer.
  • Walmart's offering more services for retailers and merchants.
  • But this one service is still struggling, and it's a keystone to its success.

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Can Walmart make e-commerce profitable by following in Amazon's footsteps?

Over the last 25-plus years, Amazon (AMZN -3.31%) has transformed from merely a retail company to a collection of services for merchants, enterprises, and consumers. That's a playbook its competitors are eager to follow, and Walmart (WMT -1.02%), largely following in Amazon's footsteps, has dramatically expanded its operations over the last couple of years.

Here are four ways Walmart's copying Amazon's playbook.

Three Walmart boxes moving down a conveyor belt.

Image source: Walmart.

Fulfillment

Walmart launched Walmart Fulfillment Services (WFS) at the start of 2020. The service gives third-party merchants on Walmart's marketplace access to Walmart's fulfillment network in order to store, pick, pack, and ship items to customers. Walmart also handles returns and customer service for its WFS merchants. It's an exact copy of Amazon's Fulfillment by Amazon (FBA) service.

Former Amazon CEO Jeff Bezos said the FBA program is a big reason third-party merchants' share of Amazon's total merchandise sales grew from 3% in 1999 to 58% in 2018. But he also said investing in the service was no sure bet. In his 2018 letter to shareholders, Bezos wrote:

We had to continue investing significantly over time as we experimented with different ideas and iterations. We could not foresee with certainty what those programs would eventually look like, let alone whether they would succeed.

Walmart's in the early stages of WFS. It's investing significantly, and it's seeing good results so far. During Walmart's second-quarter earnings call, CEO Doug McMillon said WFS is on track to reach double-digit penetration of its gross merchandise volume by the end of the year. Walmart announced plans to accelerate its capex spending earlier this year with a focus on its supply chain, opening more opportunities for WFS partners. So far, it's working out -- but, like FBA, it's still no sure bet.

Advertising

Walmart rebranded and expanded its advertising business at the start of 2021 under the new name Walmart Connect. The service aims to leverage Walmart's 150 million weekly customers across its physical stores and websites to provide unique advertising capabilities for merchants, brands, and other marketers.

Walmart has always had an advertising business, focused primarily on in-store ads like endcaps, but Amazon's success with promoted listings and brand banners in its search results may have inspired the rebranding and bigger focus on the e-commerce channel opportunity. Amazon grew its advertising business from less than $3 billion in 2016 to more than $28 billion in the last four quarters.

Walmart's advertising business is far smaller than Amazon's, but it's showing good progress. Sales increased 95% in the second quarter, and active Walmart Connect advertisers increased 170%. Keeping up that pace could help Walmart turn its e-commerce operations profitable while giving it extra cash flow to invest in the growth of other services.

A Walmart employee putting bags into the back of a minivan.

Image source: Walmart.

Omnichannel services

Walmart's most recent efforts to expand its services include offering its omnichannel sales technology and delivery services to other retailers.

Over the last few years, Walmart has built out its omnichannel capabilities. The highlight is its curbside grocery service (which now includes more general merchandise). Curbside pickup is now available at over 3,900 Walmart stores in the U.S. Walmart's also rapidly expanded its delivery network to offer same-day delivery on items from over 3,250 of those stores.

Now, Walmart is offering access to its software to facilitate similar online orders for other merchants and retailers, as well as opening its delivery network to other local businesses.

While there's no exact analog within Amazon, the company follows the playbook Amazon perfected. It builds something for its own internal operations, and then it uses its scale to offer it at a relatively low price to other businesses. The marginal profits from following that model can be substantial, since many of the operating costs are already baked into the larger retail business.

Walmart+ vs. Prime

Where Amazon really stands out from its competitors is its Prime membership program. The e-commerce giant counts over 200 million global subscribers, and that's a big reason Amazon's merchant services, like advertising and FBA, have been so successful. Prime drives customer loyalty to Amazon.

Walmart has been working on a Prime competitor for years, and its latest iteration is Walmart+. Unfortunately, the success of Walmart+ is also a big uncertainty. While Walmart initially signed up millions of customers to the program focused on unlimited grocery delivery and fuel discounts, it's having a hard time keeping them engaged and subscribed. 

That's a real problem for Walmart, as it needs to build both sides of its network -- merchants and customers -- to have Amazon-level success with e-commerce. If it can't attract enough customers to Walmart.com, the value of its fulfillment and advertising services is diminished. And with the heavy capital investment in building out the fulfillment network, it could be a big drain on cash and operating expenses if Walmart doesn't have enough demand to utilize its full capacity. 

Amazon won't have any qualms if Walmart or other competitors want to copy its playbook. Building an organization as large as Amazon is a lot harder than it looks.

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. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned

Walmart Stock Quote
Walmart
WMT
$151.65 (-1.02%) $-1.57
Amazon.com Stock Quote
Amazon.com
AMZN
$91.01 (-3.31%) $-3.12

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