How Wal-Mart Plans To Fend Off Competition From Amazon

Amazon Go – Amazon‘s (NASDAQ:AMZN) grocery store concept that allows customers to bypass checkout lines – could provide the company its next wave of growth. Further, the soon-to-open outlets which would let shoppers pick up grocery orders made through Amazon Fresh online, signifies that the online retail giant is not only planning to expand its presence in the grocery market, but to some extent into the brick and mortar space as well.

Traditional retailers such as Wal-Mart (NYSE:WMT), which are already facing stiff competition from Amazon’s e-commerce business, will now have to compete with the online retailer in the grocery space as well. While Wal-Mart is the biggest player in the U.S. market, capturing 17.3% (as of 2016) of U.S. food and beverage retail sales, Amazon captures a very small percentage (<1%) of this highly fragmented market. However, it is expected to command approximately 3% (third largest grocery share behind Wal-Mart and Kroger) of the total estimated $903 billion grocery market by 2021, according to Cowen & Co. Wal-Mart has acknowledged this growing threat, and plans to counter it by accelerating efforts in its technological capabilities and leveraging its wide network of 4672 stores in the U.S.

Wal-Mart Looks Well Prepared 

Wal-Mart launched its own mobile wallet, Wal-Mart Pay, last year to facilitate convenient payment and to bring more customers to its stores. Following in the footsteps of its rival, Target (NYSE:TGT) also recently announced plans for an in-app store payment option, with the service expected to launch by the end of this year, initially for Target’s REDcard holders only. Wal-Mart also recently began providing free two-day shipping to all its customers on orders of $35 or more instead of charging a membership fee of $49 per year through its existing shipping program. This move should help Wal-Mart compete with Amazon’s Prime service. To add to that, the company’s e-commerce sales and GMV increased 63% and 69% (including acquisitions), respectively, in fiscal first quarter. The majority of this growth was organic through Walmart.com, and was likely boosted by the company’s two-day delivery initiative.

Additionally, Wal-Mart rolled out a new pickup discount on online items that aren’t sold in stores, which would lower the prices on items if customers choose to pick up their orders at a local store instead of opting for shipping. This offer could help the company cut down on shipping costs, and consequently pass down the savings to customers. In fact, this feature is believed to come from the Smart Cart technology developed by Jet.com, which Wal-Mart acquired. By the end of June 2017, this discount should be available on more than 1 million of the site’s most popular items, according to the company’s management. The company covers more than 50 million SKUs to date, from a marketplace perspective.

Wal-Mart Is A Leading Grocery Seller

Groceries account for 56% of Wal-Mart’s total business. The company is aggressively cutting prices in its grocery department, which has made it one of the cheapest options for groceries in the country. In fact, the company tends to dominate food prices in the retail industry due to its sheer size, which gives it s competitive edge. Moreover, the fact that there is a Wal-Mart store within 10 miles of 90% of the U.S. population makes it the convenient choice for the grocery shopping. Typically, customers still prefer to buy groceries in person, and have been less receptive to the online shift so far. According to Cowen’s estimates, only about 12% of U.S. grocery sales were completed online in 2016.

However, Amazon is trying to change this trend by providing a digital experience for grocery shopping through the use of sensors and artificial intelligence, and introducing fresh foods into its diverse portfolio. Going forward, the market for online groceries is expected to be among the sectors driving overall e-commerce growth through 2022, as the sector is expected to grow at a 20% CAGR over five years. It will interesting to see how Amazon performs in the coming years, but as of now Wal-Mart remains well-positioned in the grocery space.

Please refer to our complete analysis for Wal-Mart 

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