Wal-Mart (NYSE:WMT) has an Amazon.com (NASDAQ:AMZN) problem.

The physical retailer has seen its online-only competitor steal customers and beat it at its own game by winning the pricing war. Wal-Mart, however, has not conceded defeat to its digital rival and has big plans for becoming more competitive. The company shared some of them at its 22nd Annual Meeting for the Investment Community on Oct. 14.

Wal-Mart, which already invests heavily into its digital efforts plans to ramp things up even further, but the company's CEO wanted to make it clear that it was starting from a position of strength.

"We have also been building an e-commerce business; we have been hiring top technology talent in Silicon Valley and around the world," CEO Doug McMillon said to in his speech kicking off the investors' event. "Refreshing the customer experience and becoming a true Internet technology company. We are now one of the top three online retailers by traffic and our Wal-Mart U.S. app is among the top three apps in retail with tens of millions of customers downloading it and using it regularly."

Source: Wal-Mart

What is Wal-Mart doing?
The world's largest physical retailer plans to spend an addition $2 billion on developing its e-commerce efforts over the next two fiscal years. A key part of that strategy, McMillon said, comes from leveraging its physical locations.

"First, win with stores," he said. "We know customers love shopping in stores and they will want great stores tomorrow. And why wouldn't they? The chance to interact with products, to see something new, to look at an item, touch a fabric, smell something, see a color -- it is important to them. The opportunity to buy something and take it home right away is satisfying."

The CEO believes that e-commerce and other digital initiatives can support and enhance the in-store experience. He explained that making changes in the supply chain can benefit in-store and online customers. He acknowledged the need to "build deeper digital relationships with our customers," but said that the company's ultimate success would be from using its unique set of assets:

We win on our unique combination of assets. Our opportunity to build digital relationships with customers in ways that are seamlessly integrated into their lives is an important one. We are building that relationship today through our improved site experience and apps. Tomorrow we will build it through an enhanced or experience including how they find items, how they pay and how they check out. When you add it all up here is our plan: we will be the first to deliver a seamless shopping experience at scale. No matter how you choose to shop at Wal-Mart -- in stores, online, mobile, or a combination of them -- it will be fast and easy.

Essentially, McMillon believes that Wal-Mart will compete with Amazon by offering something the online retailer can't -- a mix of digital and physical sales all optimized to offer the best possible customer experience.

How big is the gap?
Currently, Wal-Mart has about $13 billion in digital sales, making it the third largest online retailer, but still only about one sixth as large as Amazon, Fortune reported. That's a big gap, but it's important to note that it's not like Wal-Mart is just getting into the online game. The company has a level of success to build upon. 

Will it work?
The biggest challenge for Wal-Mart is turning the customers who walk through its door into digital shoppers. To do that it needs to improve its website so it's as easy to use as Amazon's. Once it does that, the chain can leverage the fact that it can offer in-store returns and pickup -- something it's rival cannot do.

Wal-Mart has stumbled, but the digital sales it puts up only look bad when compared to Amazon. The company has a large customer base to woo onto its digital platforms and there's no reason to believe it won't be able to do that, especially after spending $2 billion to enhance the experience.

This is a slow road for Wal-Mart, but the company is clearly committed and its physical stores should be able to give it a strong marketing advantage. The retailer may not catch up to Amazon, but it should be able to reverse the trend of consumers leaving for the online-only rival. Wal-Mart can offer competitive prices. If it can deliver a competitive digital experience then there is no reason to believe it won't win some business back.

Daniel Kline has no position in any stocks mentioned. He greatly prefers shopping at Amazon. The Motley Fool owns shares of and recommends Amazon.com. 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.