Wal-Mart’s Same-Day Delivery: A Defensive Play Against Amazon

Following the decision to stop the sales of Amazon’s (NASDAQ:AMZN) Kindle Fire tablets last month, Wal-Mart (NYSE: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. ^[1]

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. ^[2] 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. ^[2] In comparison, Amazon only operates 40 distribution warehouses in the U.S. and has plans to open 20 new warehouses globally. ^[2] 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. ^[3]

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. ^[3] 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. ^[3] Furthermore, the products will be supplied by United Parcel Service Inc (NYSE:UPS) which will add up to the costs of the products. ^[3]

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. ^[3]

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. ^[2] 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%. ^[4] 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.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Wal-Mart Tests Same-Day Delivery to Boost Online Shopping, Bloomberg, Oct 10 2012 [↩]
2. Same-Day Delivery Test At Wal-Mart, The New York Times, Oct 9 2012 [↩] [↩] [↩] [↩]
3. Wal-Mart Delivery Service Says To Amazon: ‘Bring It’, The Wall Street Journal, Oct 9 2012 [↩] [↩] [↩] [↩] [↩]
4. Companies’ SEC filings [↩]