The evidence is piling up that Walmart will have to make massive new investments in an eCommerce distribution network in order to defend its position against Amazon.com and get back on a growth footing.
On Tuesday, Walmart announced that it had opened its second distribution center in the U.S. dedicated to fulfillment of eCommerce orders, and the company said it will bring a third on line next year. This announcement inadvertently exposes the Achilles heel of Walmart’s online initiatives – the company’s utter lack of investment in a dedicated eCommerce logistics infrastructure.
Massive logistics infrastructure underpins Walmart’s brick and mortar retail success
To clarify this point, let’s review some relevant statistics.
- Walmart and Sam’s Club distribution centers in the US: 140
As these two charts from MWPVL show, the long-term rate of growth in Walmart’s distribution center square footage has significantly exceeded the rate of growth of the company’s retail square footage, although both have been spectacular.
Does this mean that Walmart’s logistics operation has grown inefficient? Not at all, according to MWVPL’s Mark Wuufrat, who writes:
Distribution centers are not evil cost centers that must be beaten into the ground to drive costs out. Distribution centers are absolutely critical to the success of the business and its ability to be price competitive.
In other words, Walmart’s investment in a physically massive and technologically sophisticated logistics operation helps the company save money by reducing transportation, labor, and inventory costs.
Clearly, when it comes to old-fashioned, brick and mortar, Walmart has an enormous retail footprint, massive sales, and a massive network of cost-efficient DCs to serve its stores.
Walmart has not invested in eCommerce infrastructure
Now let’s look at the eCommerce side of things.
- Walmart’s dedicated eCommerce distribution centers in the United States: 2
- Share of Walmart FY 2013 sales attributable to eCommerce: 1.6% [i]
- Walmart losses on eCommerce in FY 2012: Undisclosed [ii]
- Walmart’s anticipated investment on eCommerce-related infrastructure in the current fiscal year: $430 million.
As eCommerce grew over the last decade, Walmart – the unquestioned king of the retail supply chain – failed to invest in an eCommerce logistics infrastructure. The company opted instead to make do by carving out space in existing DCs for eCommerce and attempting to fulfill online orders via stores. This strategy saved money but it also constrained eCommerce growth, slowed down fulfillment, and added cost. While Walmart was saving money, Amazon was investing.
Amazon.com’s growth rooted in logistics investments
- The share of consumers who cite Amazon.com as their preferred online merchant in a recent poll by Stores.org: 58 percent
- Amazon.com fulfillment centers in North America: 46
- New U.S. fulfillment centers planned by Amazon for 2013-14: 10
- The amount Amazon has spent on new distribution-related facilities since 2010: $13.9 billion
Amazon.com has invested massively – not only in innovative software – but also in its logistics infrastructure, allowing the company to become dominant in eCommerce, which is growing much faster than retail as a whole.
But Walmart is still a $466 billion company and it returns a lot more money to shareholders than Amazon, so all of this concern about eCommerce is overblown, right? Maybe not.
Walmart faces limits to brick and mortar growth, needs eCommerce to grow
Writing recently on The Motley Fool, Asit Sharma points out that Walmart’s recent sales slump is consistent with the longer-term deceleration in the company’s growth. He suggests that Walmart has reached the point of diminishing returns on investments in physical stores and needs to look to eCommerce for future growth.
Sharma’s concerns are only magnified by broader trends in retail. The Wall Street Journal reports that, while online sales make up about 5% of the total retail market in the U.S., they are growing at 16% a year, compared to only 5% for sales at physical retailers. And the National Retail Federation projects that online holiday sales will be up 13 to 15 percent over last year, while store sales increase just 3.9 percent.
Walmart executives are notably defensive about their eCommerce failings. Still, they have tried to make a virtue out of necessity by claiming that the company’s 4,100 U.S. stores represent an asset which the company can leverage for eCommerce – by using them as fulfillment centers.
Why stores are no substitute for a dedicated eCommerce infrastructure
The idea that stores can serve as fulfillment centers is a highly questionable proposition.
First of all, modern distribution centers are massive, highly automated nodes in a larger logistics network. Stores cannot match their efficiency.
Secondly, a typical Walmart Supercenter carries 125,000 items, whereas Walmart plans to sell 5 million items online this holiday season. Stores just cannot substitute for dedicated DCs when it comes to selection, which has been one of Amazon’s big strengths with consumers.
Thirdly, the fact that Walmart and other retailers do so much of their annual business around the winter holidays would seem to argue against stores as DCs. All of the inefficiencies of the store-as-DC model will be magnified by the chaos and congestion of the holiday shopping season.
Finally, and leaving aside these more or less objective factors, there is also the problem of Walmart’s particular operational difficulties. Anecdotal evidence suggests that Walmart has not done so well with execution in its ship-from-store and ship-to-store programs. Morning News Beat yesterday featured a long comment by a frustrated reader about Walmart’s ship-to-store service. That shopper’s conclusion:
Thinking out loud, I wonder how many secret shoppers, or Walmart personnel, have actually tried their own service and how they would rate its performance. I doubt it has this many flaws in Bentonville, but my retail experience reminds me that the further away from the Corporate Office, the worse the execution. While it might be great on paper, the execution was horrendous, and provides me with another example of how traditional retailers fail by not meeting consumer’s expectations.
Amazon continues to invest aggressively and Walmart will be forced to reciprocate
Amazon.com is not resting on its laurels. Instead, the company is ramping up its capacity for same-day delivery and perishables, which together may well represent the holy grail of eCommerce. There’s no question that Amazon is already way ahead in infrastructure, execution, and customer satisfaction and the company is investing aggressively to widen its advantage.
Walmart executives are kidding themselves – and investors – if they think the company can take up Amazon’s challenge in eCommerce without massive new investments in logistics infrastructure.
[i] See also Walmart’s 10-K for FY 2013.
[ii] Walmart does not disclose eCommerce revenues but the company admits that eCommerce is not profitable.