Has Wal-Mart closed the e-fulfillment barn door long after Jeff Bezos and Co. have scampered down the road? The answer may not only determine which U.S. retailer gains the upper hand in the years ahead, but may gauge the future for the most successful retailer in history.
Wal-Mart Stores Inc.'s decision to pilot an unlimited and guaranteed two-day delivery service for online orders to counter Bezos' Seattle-based Amazon.com Inc.'s successful two-day delivery offering, called "Prime," is the Bentonville, Ark.-based giant's most ambitious step yet to cut into its rival's lead in online sales, growth, and mind share. Wal-Mart had offered a three-day guarantee for online deliveries.
Wal-Mart is rolling out the heavy artillery: About 6,000 tractor-trailers that comprise one of the country's largest private fleets as well as a cluster of regional carriers; 4,573 U.S. stores that could be used as potential fulfillment locations; and eight distribution centers dedicated to the service. For good measure, it will charge a $49 annual subscription fee for the service, $50 less than Amazon charges for Prime.
The launch, which Wal-Mart has not commented on publicly on its web site or in response to media requests for additional information, comes at a key point in what is likely to resemble a high-stakes e-tailing cage match. Amazon is coming off a rock-solid first quarter, where it actually made money from businesses other than selling Internet cloud capacity. Sales rose 28 percent year-over-year. Amazon has also begun to control its own two-day delivery network by leasing 40 Boeing 767-300 air freighters from cargo carriers Air Transport Services Group Inc. and Atlas Air Worldwide Holdings Inc.
Wal-Mart, by contrast, reported a modest 8-percent gain in global e-commerce volume in its fiscal 2016 fourth quarter, which ended January 31. It posts fiscal 2017 first-quarter results tomorrow. The company, which reported $482 billion in revenue in its 2016 fiscal year, does not break out online sales in dollar terms. However, consultancy Shipware LLC estimates that, as of last October, online sales accounted for just 2.5 percent of Wal-Mart's total sales.
Wal-Mart, already years behind Amazon in e-tailing success and prowess, must emulate Amazon's philosophy of providing a "buy anywhere and anytime" experience to consumers and businesses, but do it in a way that leverages Wal-Mart's unique assets—namely, its large store network, said Satish Jindel, who runs the SJ Consulting Group Inc. transport and logistics consultancy.
Jindel said the company should designate one or two stores in each market as that market's fulfillment locations. Ironically, fellow retailer Sears Holdings Corp., which lost much of its retail marketing dominance at the hands of Wal-Mart, has adopted such an approach to meet omnichannel demand. He said he was doubtful that Wal-Mart could consistently hit two-day delivery targets by fulfilling from the eight DCs alone, without bringing the store network into play.
What Wal-Mart must avoid is copying Amazon's execution, not only because the two companies come at retailing from totally different backgrounds, but because no one is more efficient than Amazon at executing its model, Jindel added. "Wal-Mart can't run its e-commerce business by the rules written by Amazon," Jindel said in a phone interview Monday.
Bradley James Cook, managing director of spend-management and procurement consultancy Total Procurement Solutions LLC, thinks otherwise. He contends that eight DCs is more than enough for Wal-Mart to fulfill consistently, and that the physical stores would be needed only as sources of backup inventory. The mix of physical stores and DCs may be the proving ground for Wal-Mart's next move, which would be next-day deliveries, Cook said.
The analyst added that even one DC might be adequate for Wal-Mart's current task at hand, as long as the company is prepared to absorb the higher transportation expenses required to deliver over longer distances. "It just depends on what they want their shipping costs to be," he said in an interview Monday at the MHI annual meeting in Atlanta.
Wal-Mart's dilemma, Cook said, has less to do with the network that's needed to move the stuff and more to do with the amount of stuff it has available to move. "The breadth of products Amazon sells is so much greater than what Wal-Mart offers," he said. Wal-Mart can't go head to head with Amazon unless it expands its online selection, he added.
James A. Cooke, principal analyst at consultancy Nucleus Research, said in-store fulfillment poses more problems than opportunities. For one, there is a lack of visibility at the item level, meaning store employees may know the product is there, but not exactly where, he said. Radio-frequency identification (RFID) tags that identify a product's location are fine for expensive items like jewelry and electronics, Cooke said, but it would be too costly and time-consuming to tag every item in a superstore.
The store fulfillment model also suffers from unfavorable comparisons to the dedicated DC operation in terms of labor costs relative to productivity, according to Cooke. Hourly picking productivity at the dedicated DC level can be eight times faster than in a store setting, especially if the brick-and-mortar retailer also has floor workers helping with customers, Cooke said.
Wal-Mart's best chance lies with transforming shuttered stores into fulfillment houses where is it practicable to do so, Cooke said. The company closed 154 U.S. stores earlier this year. The challenge, he said, would be to identify which of those "dark" locations can tolerate a steady stream of vehicles moving in and out without causing massive traffic congestion, which would be self-defeating for Wal-Mart's fulfillment model and risk generating ill will with surrounding businesses and industries.
For traditional retailers trying to make sense of an unfamiliar logistics model, it is a daily balancing act to allocate orders across different nodes, and to do so cost-effectively. Jindel of SJ, who last week released a summary of a white paper saying that Wal-Mart has a clouded future in a world dominated by Amazon, said Wal-Mart's future as a retailing force depends on the company achieving that delicate balance.
"They better wake up, or they'll find themselves like Sears, losing business every year," Jindel warned.
Ben Ames contributed to this story from Atlanta.
Gartner, Inc.
