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This Trend Could Be a Problem for Walmart

Walmart's (NYSE: WMT) online sales ballooned last year amid the pandemic, growing 69% or better every quarter in fiscal 2021. Growth slowed to 37% in the company's first quarter, but that's still a strong showing considering it lapped a quarter of 74% growth and the start of the COVID-19 pandemic.

But Walmart could see a significant slowdown over the next few quarters not just because it's lapping even stronger periods in the second and third quarters, but because its biggest growth driver last year is now a drag on growth.

A man in a Walmart vest loading groceries into the trunk of a minivan.

Image source: Walmart.

Grocery shopping goes back in stores

As the pandemic took hold in the U.S. in March and April of 2020, more consumers started shopping online in new categories like groceries. Online grocery sales in the U.S. grew an estimated 54% year over year in 2020, according to eMarketer. Walmart was a big beneficiary of that growth after having laid the groundwork to fulfill online grocery orders from all of its stores in the previous few years.

But Walmart and other online grocery providers are having a hard time holding onto those shoppers. Online grocery sales fell 16% year over year in May to $8 billion, according to a report from Brick Meets Click and Mercatus. That's also the second month in a row of declining online grocery sales.

Online grocery sales in May were still well above pre-COVID levels, and most of the pandemic gains are sticking around. However, they're no longer a source of growth for online retailers. About two-thirds of Walmart's online sales growth came from an increase in online grocery orders during its first quarter last year.

Not only is the market for online groceries shrinking as we lap a period of tough comparables, but Walmart's share of the market is shrinking as competitors have quickly caught up to its position in grocery fulfillment.

If those trends continue, Walmart's online sales-growth rate could plummet through the end of fiscal 2022.

Walmart's loyalty program is already under pressure

Walmart launched Walmart+ last year with online grocery ordering as the centerpiece of the loyalty program. The $98 per-year membership includes free delivery on online grocery orders, which usually costs $10 per order. It also includes free shipping on all Walmart.com orders, and prescription and fuel discounts.

But Walmart is struggling to retain subscribers of the new service. While unlimited free grocery delivery is the biggest and most marketed perk of the program, the company is having greater success retaining customers that use its fuel discounts, according to a report from Recode. Yet for most consumers, a $0.05 per gallon discount on fuel by itself won't be worth $98 per year.

Walmart+ may continue to struggle as the demand for online grocery delivery stabilizes and consumers gain more options for ordering consumables online.

There's a domino effect as well. Walmart+ is supposed to increase customer loyalty to Walmart.com. By increasing online grocery orders, Walmart was hoping to translate that into more higher-margin general merchandise sales through Walmart.com. So, not only is the biggest category driving growth in 2020 now acting as a headwind for further growth at Walmart, it's also potentially dragging sales growth for the entire e-commerce business.

Walmart still generates the vast majority of its sales from its physical stores, which make it the largest retailer in the U.S. But as more commerce moves online, it will struggle to grow as quickly as the competition, and it will lose market share.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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