In its battle against Amazon, Walmart is betting on a future
where its supercenters will quickly get groceries to your door,
replace the doctor's office and rent out computing power to passing
drones and autonomous cars.
By Sarah Nassauer
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 21, 2019).
After years of internal debate about how to compete with
Amazon.com Inc., Walmart Inc. boss Doug McMillon took the stage at
a recent strategy meeting and revealed the centerpiece of his plan
to thrive in an e-commerce era: giant stores.
Walmart, he told executives at the meeting, wasn't going to win
by building an unprofitable e-commerce operation or other
stand-alone ventures. Instead, its supercenters could be the heart
of a web of businesses all working together to attract shoppers and
drive profits.
The supercenters are sprawling stores of around 180,000 square
feet offering 100,000 products, bathed under LED lights. Groceries,
clothes, camping gear and televisions are for sale; customers can
also fill medical prescriptions, transfer money or get their hair
done. They're often open 24 hours and are community gathering
spots, becoming backdrops for videos of teenage pranks that pop up
on YouTube, or a place for senior citizens to take a walk in cold
weather.
The re-emphasis on the giant outlets Walmart started building in
the 1980s was a change from a strategy laid out just a year ago.
Then, at an investor meeting, Mr. McMillon described stores,
e-commerce and other businesses as individual ventures serving the
Walmart customer in different ways.
In the new view, disparate parts of the business would interact
to drive profitable growth. Walmart would capitalize on its
customer data to sell online advertising to brands, according to a
person familiar with the presentation.
Turning far outside its retail expertise, Walmart plans to build
"edge computing" capacity, in which data is processed physically
close to where it is being collected, a faster system than sending
data to the cloud. That system, spread out among retail locations,
could be rented out amid new demand by autonomous vehicles and
other systems that may use the technology to process large amounts
of data quickly, according to people familiar with the company's
plans.
Added warehouse and shipping capacity could be sold to
third-party sellers, to allow more companies to easily sell their
wares on Walmart.com. Customers would have a bigger product
selection, and Walmart could collect fees for processing and
shipping. And online orders for Walmart's groceries and other items
could increasingly be fulfilled by traditional stores, where
customers pick up goods.
"The time where people might have been worried that our boxes
were too big has long passed," Mr. McMillon said at an investor
meeting earlier this month. "The supercenter footprint and
positioning gives us a great opportunity to expand services and
help the economics of the model." Walmart declined to make Mr.
McMillon available for an interview.
Adding to market share
The retailer has largely weathered the shift to online shopping
and the rise of Amazon. Sales from U.S. stores and websites open a
year have risen for 20 straight quarters, as Walmart added online
grocery pickup in store parking lots, cleaned up stores and lowered
prices. As other traditional retailers lose customers and fail to
compete, Walmart has increased its market share.
The company's stock has surged nearly 30% so far this year,
trading near the highest levels since the retailer went public in
1970.
But the sales gains have been costly. Walmart spent heavily to
improve stores and to grow online, and the efforts have been
dependent on U.S. stores producing steady profits to fund
investments. Walmart executives have been wrestling with the best
way to continue, according to people familiar with the
situation.
Walmart's revenue is more than twice Amazon's, but the pace of
Amazon's profit growth is racing past Walmart's. Last year,
Amazon's operating income tripled to $12.42 billion, while
Walmart's operating income grew 8% to $22 billion. Amazon's profits
largely come from its cloud-computing arm and nonretail activities,
such as advertising.
Amazon Web Services, the cloud-computing business, generated $25
billion of revenue in the first nine months of the year, or 13% of
the company's total, yet it generated 62% of Amazon's operating
income in the period. Ad revenue at Amazon hit over $3.6 billion in
the most recent quarter. The company is now the third-largest U.S.
seller of digital ads after Facebook Inc. and Alphabet Inc.'s
Google, according to eMarketer.
At Walmart, more leaders are asking, "Where is our cloud?" said
one former Walmart executive. "We can't do this without another
revenue source."
Beginning in 2016, Walmart moved aggressively onto Amazon's
e-commerce turf. It purchased Jet.com, an unprofitable startup
created to underprice Amazon on millions of items. Jet's founder
Marc Lore and much of his staff took over Walmart's wider
e-commerce operations. The company soon took "Stores" out of its
corporate name as "a symbol of how customers are shopping us today
and how they'll increasingly shop us in the future," Mr. McMillon
said at the time.
Mr. Lore and his team poured investment into e-commerce
operations by lowering prices online, spending more on marketing
and prioritizing faster shipping. Mr. Lore pushed Walmart to better
integrate its store and online activities for shoppers, according
to people familiar with the situation. The team also scooped up
smaller e-commerce sites, including women's apparel company
ModCloth, outdoor retailer Moosejaw and men's apparel brand
Bonobos.
Online sales grew, but losses mounted amid the high costs. Last
fiscal year, U.S. online operations lost around $2 billion -- more
money than planned for the second year in a row, according to
people familiar with the figures. Though the e-commerce unit has
long lost money, failing to hit targets was problematic for a
company obsessed with frugality that finely calibrates its
financial goals, said some of these people.
A Walmart spokesman declined to comment on e-commerce
losses.
The website, selection and shipping speeds still need to
improve, Mr. McMillon said at the investor meeting earlier this
month. "I would have thought we would have been further along in
e-commerce," he said. "We're not pleased. We'd like to go
faster."
By the end of last year, executives in the e-commerce unit heard
from Mr. McMillon, Mr. Lore and other leaders that it was time to
aggressively cut spending, according to people familiar with the
situation.
"It was a whipsaw effect from one year to another," said a
former executive on the e-commerce side of the business. "In the
beginning it was all about growth, how can you win share away from
Amazon," the person said. "Now it's about profit."
Earlier this year Hayneedle, the online furniture seller that
Jet.com acquired, cut a third of its staff. Bonobos laid off
workers. What remained of Jet's headquarters staff was folded into
the rest of Walmart. Modcloth was sold. Walmart has told Bonobos
and Moosejaw they need to stop losing money, according to people
familiar with the situation. Walmart is also exploring a sale of
Vudu, the video streaming service it bought in 2010, according to a
separate person familiar with the situation. The unit faces
challenges as competitors from Netflix Inc. to Walt Disney Co.
invest heavily to produce their own content.
Borrowing from Disney
Walmart saw that a bright spot in e-commerce was directly tied
to its stores: more than half of the 40% growth in U.S. e-commerce
sales last year came from expanding online grocery pickup or
delivery service run out of stores, according to people familiar
with the figures. At the same time, it was seeing results from its
push to improve stores, snagging shoppers from other traditional
chains.
At the recent strategy meeting, Mr. McMillon told top executives
that giant stores could be the base for new ventures like fast
delivery, health clinics and other services, according to the
person familiar with the meeting.
The concept borrowed from a famous 1957 sketch that laid out
Walt Disney's blueprint for growth at his film production company,
Mr. McMillon said during the meeting, according to the person. The
drawing detailed how cartoon movies could feed profits in other
businesses, such as television, comics, toys and theme parks; and
how those operations, in turn, could prop up the film studio. As
some movie studios struggled at the time, Disney continued to grow
by using the interconnected profit formula.
Walmart's stores could also act as a base for potentially
profit-making technology infrastructure or business-to-business
services.
In edge computing, computing power is physically close to where
data is being collected -- in contrast to cloud computing, in which
computing power is located in distant server farms, slowing down
processing.
More devices such as drones, autonomous cars and sensors collect
large amounts of data that could be processed by edge-computing
systems.
It takes around a quarter to half a second for data from a
device to reach the cloud. That length of time "doesn't sound like
a lot, but if you are in your car and it's trying to recognize a
ball rolling out in the street or a kid running behind the ball,"
that might be a decision that needs to be made faster, said Rob
High, chief technology officer for IBM Edge Computing, who isn't
working with Walmart on the project.
Hypothetically, autonomous car makers could contract with
Walmart to do on-the-fly, fast calculations in cars driving through
town, hopping on and off various stores' systems. Around 90% of
Americans live within 10 miles of a Walmart, the company says.
5G rollout
Mr. High said the rollout of faster, wireless 5G networks could
allow more edge devices in a given area to be connected at once,
making the technology more useful.
Walmart executives have met with large telecom companies to
discuss allowing the firms to install 5G antennas on the roofs of
stores for a fee or to provide access to faster network
connections, said a person familiar with the talks.
The retailer is already adding computing power to its stores to
process data from new technologies such as robots that clean
floors, sensors that alert staff when a freezer is too warm and
systems that use cameras to visually track the pace of sales.
Walmart executives think there will be excess capacity to sell,
according to people familiar with the plans.
Walmart may not go through with the plan to use edge computing
to generate profit, and some executives have expressed skepticism
internally about pursuing the effort, said a person familiar with
the situation.
The Walmart spokesman declined to comment.
In May, Walmart hired a former Google and Amazon executive as
global chief technology officer, a newly created position that
reports directly to Mr. McMillon. Suresh Kumar previously spent
about four years at Microsoft Corp. working on cloud
infrastructure.
Last year, former Walmart International CEO David Cheesewright
began researching artificial intelligence and technology that might
help Walmart boost profits or save money, according to people
familiar with the situation.
Mr. Cheesewright met with a range of AI and other experts and
led sessions for other executives to educate them on his findings.
By the end, he had compiled a list of 20 ideas, including edge
computing.
As another way to boost profits, Walmart is working to sell more
of its vast trove of data on hundreds of millions of shoppers who
buy online or use credit cards in stores, and to use that data to
sell more advertising.
In February, at a conference with suppliers, executives openly
discussed plans to create an advertising network that could help
brands like Kellogg's and Tide target online ads based on Walmart
shopper data. It was a service that Walmart had previously relied
on a unit of WPP PLC to sell.
The advertising effort has had a bumpy start, according to a
former executive in the Walmart Media Group. Technical snafus after
the business was brought in house caused many ads that had been
sold to not appear online, according to former executives familiar
with the situation and executives at consumer goods companies.
Walmart's advertising business is growing, said the Walmart
spokesman. "As you would expect when you're building a complete
in-house media business, we're learning and iterating along the
way."
Walmart.com is now working to grow faster, but more profitably.
The company plans to add e-commerce warehouse capacity to have more
of its products available for next day delivery, according to a
person familiar with the situation. Like Amazon, Walmart also plans
to invest in more capacity to offer fulfillment services and
warehousing for third-party merchants -- the outside companies that
list their goods on Walmart.com.
At Amazon, the majority of merchandise comes from outside
sellers, who pay Amazon fees to list or ship products. That has
fueled rapid growth while also causing problems, with some
customers and sellers saying Amazon's marketplace is peppered with
knockoffs or unsafe products.
Amazon said it prohibits the sale of counterfeit products and
requires all products sold to comply with applicable laws and
regulations, according to an Amazon spokeswoman. "Safety is a top
priority," she said.
On an earnings conference call last month, Mr. McMillon said
Walmart needed to improve profits at its e-commerce operations. The
company moved several Bentonville, Ark.-based Walmart veterans into
e-commerce leadership roles earlier this year, including Ashley
Buchanan as chief merchant and Steve Schmitt as finance chief.
Earlier this year, Mr. Lore raised eyebrows around the office by
alternately wearing two black baseball hats with white lettering
reading either "innovator" or "operator," according to people
familiar with the situation.
In a meeting, wearing the "operator" hat, Mr. Lore jokingly
explained the hats as a way to convey to everyone that he and the
team could operate the business effectively as well as push Walmart
to try new tactics, according to some of the people.
Mr. Lore wore the hats a couple of times to emphasize to his
team the need for dexterity on both fronts, said the Walmart
spokesman.
"He was like, I'm both," said one of the people familiar with
the situation. "And if you are confused look at my hat."
Write to Sarah Nassauer at sarah.nassauer@wsj.com
(END) Dow Jones Newswires
December 21, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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