It's been more than a decade since Wal-Mart (NYSE:WMT) entered the e-commerce zone, but the company's yet to become a prominent player. The big-box retailer's scale of operation is unbelievably gigantic, with revenue inching closer to the $500 billion mark, but its online sales make up a tiny contribution -- less than 3% of total revenue. Ramping up the e-commerce business is essential for Wal-Mart to drive growth, and it's investing heavily to capitalize on this growth opportunity. Here's a look at Wal-Mart's strategies and initiatives.
The buzzword for growth: e-commerce
E-commerce is expanding big time in America. In 2013, total consumer retail spending saw a marginal single-digit improvement, while online retail buying expanded 14%, according to comScore. Wal-Mart VP of marketing Brian Monahan vouched for the rising popularity of e-commerce when he tweet in April: "On Black Friday, over half of our traffic came from mobile devices."
Here's a look at average monthly visitors, in millions, on retail websites in the U.S. as of the second quarter of 2014 -- and where Wal-Mart fits in:
Amazon.com (NASDAQ:AMZN) tops the visitors chart, with an average of 162 million folks visiting the site in a month. Wal-Mart comes in fourth with an average of 61 million visitors. In 2013, Wal-Mart's online sales climbed 30% to top $10 billion, and the company expects to see a similar surge this year, with $12.5 billion in sales.
Online retail shopping is predicted to grow to $304.1 billion this year and expand to $491.5 billion in 2018. Karen Webster, CEO of Market Platform Dynamics, talks of a 50% drop in foot traffic in malls in the 2013 holiday season compared with the level three years back -- and a lot of that comes down to e-commerce.
Strengthening the e-commerce platform
Wal-Mart is heavily investing to develop its e-commerce platform as offline sales growth is almost stagnating. In the current fiscal year, the company has planned to spend around $1 billion in e-commerce initiatives, stepping it up to between $1.2 billion and $1.5 billion in 2016, and mellowing it down thereafter. Some of its key strategies:
1. Omni-channel commerce: The traditional retailer isn't emulating Amazon's business model. The company believes that to do so would be a blunder, "considering it has 4,100 stores within five miles of two-thirds of the U.S. population," said former Walmart.com president Joel Anderson. Wal-Mart plans to build the "next-generation fulfillment network" using its existing stores, distribution centers, and newly opened facilities. This strategy is called the omni-channel approach and is being adopted by bricks-and-mortar retailers to improve store and e-commerce channel integration.
Oder-online-and-pick-up-at-store, order-online-and-pay-at-store, as well as ship-from-store are some of the innovative delivery paths. These options can be quite remunerative, as customers visiting stores to collect their online order end up purchasing additional items.
2. More fulfillment centers: Not long ago, the retailer had just one dedicated online fulfillment center compared with Amazon's 40 storehouses across the nation. Wal-Mart's opening a couple of fulfillment centers -- one in Pennsylvania and the other in Georgia -- to manage online orders more competently, speed up deliveries, and make the most of the holiday season.
It aims to provide next-day delivery to several million of its U.S. and Canadian online customers. The two centers, each 1.2 million square feet, will start operating in the middle of next year, employing between 300 and 400 people. The company hasn't disclosed the number of warehouses it plans to open, but it said the number will increase as business grows.
3. Minimizing delivery time: The ship-from-store method, which sets Wal-Mart apart from Amazon, could reduce the order-delivery time to as little as 90 minutes. The company now has more than 80 stores catering to online orders, compared with 35 last year. Employees of these stores pick and pack the ordered item and put them in FedEx or UPS delivery trucks. Apart from saving precious time, the approach reduces warehouse cost and, more importantly, wins customers' appreciation by providing almost instant delivery. Wal-Mart is spending $430 million in its "global technology platform" that will help the retailer execute distributed order management to allocate store inventory efficiently.
Wal-Mart ships most of its next-day delivery orders through costly overnight air services, so opening strategically located fulfillment centers and using the ship-from-store method would cut costs considerably. Brent Beabout, Wal-Mart's senior VP of the e-commerce supply chain, says the company will be able to provide next-day delivery service to about 65% of the customers by the middle of next year.
4. Other initiatives: Wal-Mart's on an acquisition spree to fuel e-commerce growth. The retailer has made more than a dozen acquisitions in the past three years -- the latest being Luvocracy, which provides an online community to helps people discover products recommended by family, friends, and others. It's also interested in buying 3-D printing companies, as the technology helps manage inventory and cut costs.
Wal-Mart is testing the option of selling groceries online, which is a challenging proposition because of the perishable nature of the products and lower margins. It's gotten a strong response from customers, though, with more than 90% scoring the service from average to outstanding. If Wal-Mart can create an online grocery market of its own, it could open an excellent new growth avenue.
With sales growth practically stagnating for Wal-Mart, investors are waiting for a new growth driver, and e-commerce could fit the bill. If the company is able to leverage its huge bricks-and-mortar infrastructure with effective online capabilities and strategies, it could enter a new era of growth. It's true the big-box retailer's e-commerce spending could be absorbing a lot of cash in the near term, but the results should help it fetch better returns in the days to come.
ICRA Online has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, eBay, FedEx, Home Depot, and United Parcel Service. The Motley Fool owns shares of Amazon.com, Apple, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.