Wal-Mart Stores's increasing reliance on e-commerce to fuel sales comes at a time when Amazon.com is tightening its grip on the American consumer, making it a risky gambit.
Wal-Mart told investors Thursday it would pull back on the number of new stores it was opening and instead invest some of that money into online operations.
It's a key milestone: For the first time, the company expects e-commerce gains to contribute more toward its growth than expanding its brick-and-mortar footprint.
Analysts and investors are sceptical that Wal-Mart can pull it off. Consumers are rapidly getting ingrained in the habit of turning to Amazon for everything from toilet paper to a new dress. Among US online consumers, 55 per cent say they go to Amazon first when searching for a product and about half of American households have a $99-a-year Amazon Prime membership. US shoppers spend 30 per cent of their time online at Amazon.com's website, compared with 3 per cent on Walmart.com.
"I get that you have to be in e-commerce, but you are chasing the 800-pound gorilla," said Brian Yarbrough, an analyst with Edward Jones & Co. "You aren't going to out-Amazon Amazon."
Yarbrough worries that Wal-Mart's growth online will mostly be coming from its existing customers -- and as a result will cannibalise its stores, which are more profitable and where customers are more likely to make an impulse buy.
At the same time, Amazon has been increasing its reach into Wal-Mart's customer base. Forty-two percent of Amazon Prime members are also Wal-Mart shoppers, compared with just 20 per cent in 2013, said John Black ledge, an analyst at Cowen & Co.
And there are no signs Amazon is slowing down. It is set to add 12 million Prime members this year, on top of the 10 million it added in 2015, Black ledge estimates.
With at least 17 times as many items for sale as Walmart.com, Amazon is increasingly expanding its reach into areas once dominated by traditional retailers.
This year, Amazon is set to sell more apparel than Wal-Mart, and by 2018 it will be the second-largest seller of consumables, such as cleaning suppliers, paper towels and diapers, Black ledge said.
Then there is Amazon's ever-increasing delivery speed. While Wal-Mart is in the early stages of offering a membership program where customers can get free two-day shipping -- rather than waiting the standard five to seven days -- Amazon is offering free same-day delivery in 27 major cities. In some markets, the e-commerce company delivers millions of products within an hour.
A lot of the foundational elements that we've been telling you for years that we needed to grow the e-commerce business are now in place.
"To compete, Wal-Mart would have to replicate the value proposition of Prime," Black ledge said. "If they could do that at scale, then they would have something, but Amazon has been singularly focused at this for 20 years."
None of that should be news to Wal-Mart Chief Executive Officer Doug McMillon.
He knows the company has a lofty goal in front of it, but since paying about $3.3 billion for e-commerce start up Jet.com, McMillon seemed to have a bit more spring in his step when talking to investors about the company's online strategy.
"A lot of the foundational elements that we've been telling you for years that we needed to grow the e-commerce business are now in place," McMillon said. "It's time to invest more money. It's time to really get this going and start growing our e-commerce business in a different way."
That new way will be led by tech-industry darling Marc Lore, who founded Jet.com and joined Wal-Mart following the acquisition. McMillon sees him as key to the company's future. The CEO half-jokingly recalled walking down the street with Lore and instinctively stepping out in front of an oncoming car to protect him.
"If Marc can be Marc within this company, great things are going to happen," McMillon said.
The Internet and technology are changing the world, they are changing industries, and they're changing retail.
Wal-Mart expects online sales to grow 20 per cent to 30 per cent over the next three years with the addition of Jet. That would be a major acceleration: Online sales grew 7 per cent in the first quarter and 12 per cent in the second. But even 20 per cent growth on a base of about $13 billion does little to move the needle at a company with nearly $500 billion in annual revenue.
In the meantime, the investments are taking a toll on Wal-Mart's bottom line. The company said profit would be flat next year in part because of the heavy spending online.
Wal-Mart shares fell 3.2 per cent Thursday when the retailer's executives made their case to investors, and the stock was down an additional 1.2 per cent on Friday.
The question is whether Wal-Mart can change the shopping behaviour of the tens of millions of Americans already entrenched in Amazon. Is Wal-Mart the retail equivalent of Microsoft's Bing, which tried and failed to convince Americans to break their habit of going to Google? Or can Wal-Mart -- with Jet.com -- be a disruptive force in the industry?
"If someone is locked into Prime, the chance of you bringing their business over is slim," Yarbrough said.
Wal-Mart's main selling point has been its physical stores, which let shoppers buy items online and pick them up on the premises. That includes having employees deliver groceries to customers' cars in the parking lot. Wal-Mart also can use its stores as a shipping point, helping it lower delivery costs.
Jet.com may help give it an advantage on price. The start up has developed a system where customers pay less if they are ordering items from the same location or if they opt out of services, like the option to return the item. Lore also said using store pickup could help cut shipping costs.
But adapting to the internet isn't really a choice -- it's an imperative. And that's something Wal-Mart founder Sam Walton would recognise, McMillon said on Thursday.
"The Internet and technology are changing the world, they are changing industries, and they're changing retail," he said. "Sometimes people ask me what would Sam think about what Wal-Mart is going today, and I don't know. But the one thing I know for sure is we would be changing and we'd be changing quickly."