Shares of Wal-Mart (NYSE:WMT) plunged on Oct. 24 after it offered bleak bottom-line guidance through fiscal 2017. The retail giant expects its 2017 earnings to decline 6% to 12%, partially due to $2.7 billion in investments on training and wage hikes over the next two years.

However, wage increases only represent part of the problem. Another major weight on Wal-Mart's bottom line is e-commerce expansion. To widen its defensive moat against Amazon (NASDAQ:AMZN), Wal-Mart previously vowed to invest $1.5 billion into its e-commerce efforts this year, up from $1 billion in 2014.

But can Wal-Mart evolve its massive business to challenge Amazon after years of similar promises? Or is the company simply pouring billions into a money pit?


Source: Wal-Mart.

How Amazon disrupted Wal-Mart
Amazon's growth turned Wal-Mart and other big-box retailers into big showrooms for online purchases. Wal-Mart reluctantly matched Amazon's prices, which was tough on margins since brick-and-mortar stores have higher overhead costs than online retailers.

Meanwhile, Amazon's new product categories, improved delivery options, and expanding digital ecosystem enforced brand loyalty. Amazon capitalized on that loyalty in 2005 by introducing Prime, now a $99-per-year service that offers free two-day shipping on select items, discounts, free streaming content, e-books, cloud storage, and other perks. It also started adding grocery delivery, home services, and self pick-up in select markets.

Between fiscal 2004 and 2014, Amazon's annual revenue rose 1,186% to $89 billion. During the same period, Wal-Mart's annual revenue only rose 69% to $486 billion. Looking ahead, analysts polled by S&P Capital IQ expect Amazon's adjusted EPS to surge 211% and for revenue to rise 19.8% in 2016. By comparison, analysts expect Wal-Mart's earnings to slide 11% as revenue growth stays flat in 2016.

How Wal-Mart is fighting back
Back in 2011, Wal-Mart acquired Kosmix, a social media firm focused on e-commerce, and renamed the company @WalmartLabs. The unit created an internal search engine called Polaris, which optimized product searches on Wal-Mart's website. A year after its launch, the unit claimed that Polaris boosted product views on Walmart.com by 20% with a 10% to 15% increase in conversion rates from views to purchases.

Over the past four years, @WalmartLabs has made 15 acquisitions to beef up its e-commerce abilities. Most of these acquisitions were made to enhance the ability of Wal-Mart's app with location-based, social-recommendation, customer-engagement, and price-comparison features.

But despite all those improvements, Wal-Mart's e-commerce revenues only rose 22% annually to $12.2 billion and accounted for 2.5% of its top line in fiscal 2015. That percentage might rise slightly this year after Wal-Mart's recent buyout of Yihaodian, its e-commerce operations in China, for $760 million.

Clumsily matching Amazon's features
Wal-Mart has also tried to match Amazon's digital features with mixed results. Back in 2010, it acquired online video service Vudu. Earlier this year, it launched the Vudu Spark, a $25 streaming stick to challenge Amazon's Fire TV Stick and other cheap streaming devices. Unfortunately, the Vudu Spark hasn't claimed a meaningful share of the streaming device market yet.

Wal-Mart also stopped carrying Amazon's Kindle and started selling its own e-books, which can be read on iOS, Android, and Windows devices. But just like Vudu's streaming video devices, these e-books didn't steal much business away from Amazon.

To challenge Amazon's free two-day shipping for Prime customers, Wal-Mart started testing a $50-per-year subscription service with unlimited three-day shipping earlier this year. It countered Amazon's same-day grocery delivery services with an online grocery delivery service in select markets with free curbside pickup. When Amazon tried to generate Black Friday hype in the middle of the summer with "Prime Day," Wal-Mart fired back with a rival sale.

Lacking a common digital thread
The core problem with Wal-Mart's responses to Amazon is that they aren't connected by a common digital thread. Unlike Amazon's Prime customers, who pay $99 per year to access all the perks right away, Wal-Mart's mobile app, digital initiatives, and delivery options aren't tightly woven in a single ecosystem.

Research firm CIRP recently claimed that almost half of Amazon's U.S. customers, or 44 million people, were Prime members. It also found that Prime members spend an average of $1,200 per year on Amazon, compared to $700 for non-members. Those are all customers who probably prefer shopping at Amazon instead of Wal-Mart.

Despite those challenges, investors shouldn't count Wal-Mart out yet. The company can keep leveraging its network of brick-and-mortar stores as fulfillment centers for online orders. It could match Amazon's delivery options with cheaper prices. It might finally pull together Vudu, e-books, and its mobile app features into a cohesive ecosystem. But until that happens, investors should expect a lot of big investments and very little progress in Wal-Mart's digital push against Amazon.

Leo Sun has no position in any stocks mentioned. 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.