How Will Wal-Mart’s Shipping Pass Program Progress Against Amazon’s Prime?

Similar to Amazon‘s (NASDAQ:AMZN) Prime membership program, retail giant Wal-Mart (NYSE:WMT) is about to launch its Shipping Pass, where customers can sign up for $50 a year for free three-day shipping on walmart.com orders. The company is looking to grow its web revenues and strengthen its online presence against the market leader, Amazon, by enhancing customer loyalty. For similar benefits, Wal-Mart is charging almost half the membership fee as compared to Amazon’s prime program ($99 a year). With a lower membership fee, enormous presence in the market and EDLP (i.e., Every Day Low Prices) image, Wal-Mart seems to have an outright advantage over Amazon.

While a survey shows that not many Wal-Mart customers are thrilled about the Shipping Pass launch, since lower-middle income shoppers are generally less eager to pay $50 just to speed up the delivery process, customers with higher spending power have shown interest in the service. Interestingly, potential subscribers to Wal-Mart Shipping Pass most likely already have Amazon’s Prime membership. Hence, several of them can gravitate to the lower cost alternative. That said, in order to make Shipping Pass work, Wal-Mart needs to ensure that it can offer better deals than the online giant, since buyers usually browse Amazon before any other website.

The big-box format has almost run its course and the future of retailing is online and in the omni-channel. For the next wave of revenue growth, Wal-Mart is relying heavily on its online business and is searching for new growth avenues. While online isn’t a big contributor at the moment, it has grown relative to the company over the past several years. Last year, online revenues increased more than 20% to $12 billion, accounting for about 2.5% of the retailer’s sales. The segment may be small presently, but it is where Wal-Mart is placing its bets.

Our price estimate for Wal-Mart stands at $82, which is over 10% below the current market price.

See our complete analysis for Wal-Mart

According to a survey conducted by Prosper Insights & Analytics, only about 12.4% of 6,000 U.S. consumers polled were “likely” or “very likely” to pay for Wal-Mart’s Shipping Pass, and close to 65% did not show much interest in the service. ^[1] If this figure is taken as a proxy for Wal-Mart’s total U.S. customer base (the company caters to over 100 million customers every week), more than 15 million customers are expected to sign up for Shipping Pass. While this is a huge number in itself, it appears insignificant relative to Wal-Mart’s sheer size.

However, it is interesting to note that almost half of the consumers who are “likely or very likely” to subscribe to Wal-Mart Shipping Pass belong to the millennial group, which is the target demographic for almost all the retailers now. Americans born between 1981-1997 are defined as millennials, and the entire generation is regarded as a group of big spenders. Wal-Mart has traditionally served low-middle income groups with its typical stores, and it will do wonders for the company if it can attract customers who tend to spend relatively more. The Census Bureau projects that millennials will number over 75 million in 2015, accounting for about one-fourth of the total population. ^[2]

The demographic that can potentially consider Wal-Mart’s Shipping Pass is huge and has a higher spending power, which should please the retail giant. However, it is likely that those who show interest in Shipping Pass might already have an Amazon Prime membership, given that the latter has already expanded to over 38 million households. Hence, customers already using Amazon Prime will carefully assess Wal-Mart’s Shipping Pass, before subscribing to the service. Wal-Mart has an outright price advantage in terms of the fee, but some of Amazon’s deals can easily outweigh the fee difference. Moreover, walmart.com isn’t the most preferred shopping destination currently as just 2.5% of the customers are likely to visit the website first as opposed to 32% for amazon.com. ^[1] Hence, Wal-Mart needs significant work to expand its loyal online customer base. Ultimately, it will have to beat Amazon’s product quality, variety and value.

In terms of delivery, Wal-Mart should not have too much trouble in meeting its three-day delivery promise, thanks to its massive store fleet. The retail giant has about 4,000 stores in the country, which it can easily utilize as fulfillment centers to reduce delivery time while keeping shipment costs under control. Amazon is equally effective in terms of delivery though it incurs higher expenses and, hence, charges a higher fee for Prime membership. Since there isn’t much difference between the two companies in terms of service, product quality and price will eventually be the main differentiating factor. For a certain category, where product quality and value are comparable, walmart.com will most certainly be the preferred choice.

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1. Why Wal-Mart’s Shipping Pass May Win With Shoppers, Forbes, Jun 22 2015 [↩] [↩]
2. This year, millennials will overtake baby boomers, Pew Research Center, Jan 16 2015 [↩]