Following the decision to stop the sales of Amazon's (
AMZN
) Kindle Fire tablets last month, Wal-Mart (
WMT
) recently decided to imitate Amazon's same-day delivery program
for online orders ahead of the holiday season. Wal-Mart is testing
this program in Minneapolis, North Virginia and Philadelphia and
plans to add San Jose, California and San Francisco by early
November.
Wal-Mart's decision to take on Amazon in an area of its strength
clearly indicates that the world's largest retailer does not want
Amazon to enjoy its near monopoly in the online segment. The
same-day delivery program can suit Wal-Mart well due to its vast
network of stores and suppliers throughout the U.S. However,
Wal-Mart's strategy of using the stores as distribution centers
will result in an increase in the cost of products. Furthermore,
the retailer is only looking to add the discretionary items such as
toys, electronics and sporting goods to the same-day delivery
program. In order to compete effectively against Amazon, Wal-Mart
will have to maintain competitive pricing for these items which may
lead to mild pressure on the margins.
See our complete analysis for Wal-Mart
Wal-Mart Can Provide Competitive Online Retail
Service
Although Wal-Mart is a relatively new player in the online
segment, its wide scale reach puts it in a good position to provide
better online services than its counterpart Amazon. The retailer
will look to leverage its strong presence in the U.S. in order to
develop an efficient supply chain for the online orders.
Wal-Mart has around 4,000 stores in the U.S. which the retailer
will look to utilize as its distribution centers. In comparison,
Amazon only operates 40 distribution warehouses in the U.S. and has
plans to open 20 new warehouses globally. This advantage will not
only help Wal-Mart adhere to its same-day delivery promise but will
also give it an opportunity to expand its online presence further
in the U.S. Moreover, Wal-Mart provides more than 5,000 items under
the same day delivery system thus enabling its customers to choose
from a wide variety of products.
Wal-Mart also provides its customers with a pay with cash
facility where the customers can order online and pay with cash at
the stores. This is primarily beneficial to customers who do not
own a credit or a debit card. This service is gaining acceptance
among Wal-Mart's customers and accounts for more than 50% of
Wal-Mart's online sales. Amazon being a pure play online retailer,
does not provide any such service
Margin Pressures Will Be Minimal
Although the same-day delivery program does seem to be a good
catalyst for improving the Wal-Mart's online sales, there are
certain additional expenses associated with the service. The
products ordered online through Wal-Mart's website will be shipped
directly from its stores. While this will assist in the efficient
delivery of the products, the retailer will encounter an increase
in their prices due to additional cost of picking, packing and
delivering. Furthermore, the products will be supplied by
United Parcel Service
Inc (
UPS
) which will add up to the costs of the products.
Only the discretionary items such as toys, electronics and
sporting goods are a part of the same-day delivery program. In
order to compete with Amazon on their prices, Wal-Mart will have to
absorb the increased expenses and this will create a pressure on
its margins. However, this is unlikely to have a noticeable impact
on Wal-Mart as online sales constitute only about 1% of its
sales.
Through this decision Wal-Mart aims to facilitate a sales shift
from Amazon to itself just before the holiday season. Wal-Mart's
overall sales are about 10 times that of Amazon's but the online
sales are about one-tenth of Amazon's. This indicates that the
physical retailer has a good scope of growth in the online segment
and is taking valuable steps just at the right time.
Wal-Mart has registered an average revenue growth in the U.S. of
around 1% in the last three years whereas Amazon's revenues have
grown at an average rate of 40%. The fast growth of Amazon can be a
potential threat to Wal-Mart in the future and thus, the physical
retailer seems to be taking a defensive step to ensure its revenue
growth. Although, this segment may not prove to be as profitable
for Wal-Mart as its remaining business, an improvement in the
online sales will help protect itself against competition in the
longer run and grow its revenue per square foot.
Our price estimate for Wal-Mart stands at $70
, implying a discount of about 5% to the market price.
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