Walmart announced on Wednesday that it is revising its forecasted outlook for 2016 and 2017 downward, in part because of expected flat sales, and in part because the company plans to make additional unplanned investments in its business – primarily around wages, training, and the key here: investments in eCommerce. The market’s reaction has been to run away, first by contributing to the largest single-day decline in thirty years, and second by declaring that “eCommerce has won,” a conclusion that also happened to drag down the share price of other retailers like Best Buy BBY +2.86%.
Walmart’s challenges are large and complex, but the one thing I know for sure is that this is not about Walmart vs. eCommerce pureplays, or even as specific as Walmart vs. Amazon. This is about price.
Walmart has long positioned itself as the lowest price leader. Not just “a low price leader,” but THE low price leader. Its history is strewn with stories about squeezing suppliers, a bare-bones corporate headquarters, and a relentless focus on driving costs out of its notoriously lean supply chain.
The problem with competing only on price is that you’d better always be the lowest price. In recent years, that has not always been the case. Amazon doesn’t always beat Walmart on prices, but it has certainly garnered a reputation for being THE low price leader, even as Walmart has continued to position that way.
Now, let’s ignore the fact that Amazon famously makes little to no profit, and some have argued that in fact, Amazon Web Services actuallysubsidizes a money-losing retail business. Mind you, that’s a big thing to ignore. It’s very difficult to swallow the idea that Walmart’s business model is somehow fundamentally unsound (i.e., it has stores) while Amazon’s is the way of the future, when the online retailer has yet to create any kind of sustainable retail business model. But ignore all that, nonetheless. Because where Walmart is losing is not in “owning” the eCommerce space – not trying to compete strength to strength against Amazon, which frankly is never a great strategy. Walmart is losing because it has ignored a very important cost, one that consumers are discovering for themselves – and responding.
That is the cost to serve. It’s easy for retailers, especially chain-based retailers, to ignore cost to serve because they don’t really bear that cost. You could argue that stores represent a cost to serve, along with the employees that staff them, but only a fraction of those resources are actually spent on “selling” – the rest is devoted to storing and moving product, which is a cost to deliver, not a cost to serve.

Consumers bear the majority of the cost to serve in retail. They drive to the store, they spend time there, they choose their products and take them home. eCommerce has disrupted these costs by saving consumers time in traveling to the store, and saving them hassle in getting products to their homes. They tend to talk about it in terms of “convenience,” and it is this convenience, as well as price, that they talk about when they describe what they like about Amazon.
So Walmart has a few choices ahead of the company. Clearly they need to invest in eCommerce. Even though the company was an early leader in ship-to-store, and a fairly early adopter of the same marketplace selling model that juices some of Amazon’s profits, the eCommerce business has historically been kept at arms length. It’s even headquartered in California, not Arkansas, mainly to keep the stores business happy and store cannibalization by online sales at a minimum (though the location certainly helps the company attract digital skills better than the prospect of relocating to Bentonville). The result has been a paltry 3% of sales coming from online when other retailers have achieved much greater growth.
No, Walmart has a much bigger choice ahead. Can it use its e-commerce investments to make itself as “convenient” as Amazon? To regain its low-cost leadership by reducing customers’ costs, as opposed to the ones that sit on its own books? In a way, that means competing strength to strength against Amazon. There’s nothing really differentiating in that, unless Walmart uses its strength in stores – something Amazon doesn’t have – to combine with digital to create something new. That would be differentiating indeed.
Or should Walmart abandon low cost leadership and pursue product or customer differentiation? The company tried during the recession to de-emphasize national brands in favor of its own private label, and then ended up putting them back after customers started to switch retailers instead of merely switching to the other offered products. Product leadership didn’t work last time. It’s doubtful it will work again.
Customer differentiation – well, there are a lot of retailers already working on that. And Walmart has such a broad reach that 100,000,000 people shop there every week. Tracking, targeting, and creating unique insights on subsets of that population isn’t something that is going to happen overnight – or even in 3 years.
Walmart is stuck. Raising wages and investing in e-commerce will help some, but all it will really do is extend the life of a losing strategy. E-commerce hasn’t won anything. It’s just that Walmart is losing.