How Walmart Can Fight Online Encroachment
- By Shudeep Chandrasekhar
The growth of ecommerce has taken away a lot of shine from brick-and-mortar retailers, and that scenario is not about to change any time in the next decade. The more this segment grows - where people simply click a button and expect delivery at their doorstep - the lower the growth possibilities for physical retail chains - unless they are ready to jump on the ecommerce bandwagon.
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The intrinsic value of WMT
In an earlier article called "Walmart is Getting Smarter," I wrote about Walmart's (WMT) gains in China and how it was learning its lessons well overseas. In this article, I'll address a major shift in its strategy that can help it deal with the competition from ecommerce players such as Amazon (AMZN).
Joining the ecommerce train, however, is not an easy move for retail companies that are already operating with wafer-thin margins. Last-mile shipping costs are heavy, and ecommerce needs continuous investments and sales growth in physical retail but is already seeing a decline.
The question, really, is: How many brick-and-mortar retailers are in a position to sustainably grow the ecommerce part of their business?
It's a challenge, for sure, but there is one area in which physical retailers can give ecommerce companies a run for their money - and that's in groceries and perishables. By their very nature, these products are not fully amenable to online ordering and subsequent delivery - unless you're able to get it to the customer's home in a matter of hours. Amazon has started doing this on a small scale, and it's seeing some success, but is it sustainable?
At the very least, it's a difficult proposition for any company other than Amazon, and this is one area where brick-and-mortar stores - with their reach and scale of their stores - can give some serious headaches to online players.
The grocery angle
The graph above shows the growth rates of various grocery segments for 2015. As you can see, dollar growth is consistently up for all segments even though some show a drop in volumes. All I can say is, at the end of the day, it's the dollars that count (or are counted).
The best case in point is Walmart, which saw groceries consistently bring in the majority of its revenues for several years running.
Last year Walmart sold $167 billion worth of food, and 56% of its merchandise units are groceries.
Kroger (KR) saw its perishable segment's sales grow from $18.7 billion in 2011 to $25.7 billion in 2015.
Whole Foods (WFM) saw its revenue accelerate from $10.1 billion to $15.39 billion during the same period.
So it's clear that this segment is an extremely crucial one for brick-and-mortar stores, and the sheer spread of their store locations is one advantage they will start leveraging to the detriment of online players. Moreover, it is their best moat against the onslaught of ecommerce.
Walmart's online grocery bid
To compound the problem for e-tailers, Walmart already allows its customers to place grocery orders online and have them delivered to their homes - or they can pick them up at designated stores.
With the number of urban locations that Walmart now operates under the Neighborhood Market brand, customers can pick up their orders right in the city instead of having to drive all the way to a supercenter. That gives the company some leeway in the last-mile shipping problem that all online retailers have, including Amazon.
But that's not the only thing that's happening at Walmart.
"In a growing number of Walmart stores, there's an entire wall dedicated to organic produce, fresh sushi and a selection of about 50 gourmet cheeses. These Walmarts are the leading edge of what could become a grocery revolution at the giant retailer -- and one of the key reasons why food sales were a factor in the company's latest upbeat quarterly earnings report. Walmart's produce and bakery sections are being upgraded to make them more attractive and easy to navigate with some surprising options for the country's largest discounter." - USA Today
Now all of this does not mean that Amazon is going to sit still and let this market slip away from its grasp. What it does mean is that if physical retailers play their cards right by strategically locating their stores and focus on increasing their grocery revenues, then that's a moat that most online retailers won't be able to cross.
In short, the brick-and-mortar chain that will win this war is the one that can effectively and efficiently "marry" its physical stores with its online offerings in the grocery segment.
Disclosure: I have no position in any of the stocks mentioned and no intention to initiate any position in the next 72 hours.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Sign with WMT. Click here to check it out.
The intrinsic value of WMT
