Re-inventing the flywheel - how Walmart plans to transform retail as the COVID e-commerce boom slows down

It’s indicative of the extraordinary impact of the COVID pandemic on the retail sector that some commentators have observed that in Walmart’s just-released Q4 numbers, e-commerce revenues “only increased by 69%”. 

Now while that’s down on the 80% year-on-year rate reported in Q3 and the e-commerce arm still isn’t turning a profit, 69% growth is nothing to be sniffed at. But such has been the surge online during the pandemic and the assumptions made that this move is permanent, Wall Street is e-commerce ravenous and in no mood for anything that doesn’t satisfy that greed. 

So it is that the CEO of the world’s biggest retail firm - $559 billion in revenues for fiscal 2020, well ahead of Amazon on $386 billion - finds himself making the case to the analyst and investor community about what he plans to do to secure its future: 

We're in an early stage of building a new business model that will enable us to serve people how they want to be served at any particular moment and thrive in the next generation of retail as a business.

Mind you, as Doug McMillon pointed out, he can recall a previous Walmart CEO, David Glass, talking in the 1990s about the firm “just getting started”, nearly three decades after the  retailer was founded. Plus ca change perhaps, but the circumstances are different this time as McMillon repeats the ‘just getting started’ mantra. 

The COVID crisis has changed the way that customers engage with Walmart, the very definition of an essential retailer, as online shopping surged and the need for omni-channel fulfillment became critical, be that in the form of pick-up services or home delivery. Those aspects of the pandemic-induced changes of the past year are unlikely to go away and expectations remain high for e-commerce growth, now pitched at topping $100 billion within a couple of years. 

But that requires some adjustments to strategic planning. Stores aren’t going away and while Walmart’s oft-cited customer proximity to a physical branch remains an enormous asset, the role of those outlets will alter and at a faster pace than the retailer would have anticipated a few years ago. In addition, the Walmart eco-system needs to expand as consumers come to expect more and more from the firm in terms of service offerings. 

All of that’s going to cost money, of course. Walmart’s now looking at upping its CapEx next year by around 30% to $14 billion, most of which will go e-commerce, supply chain optimization and automation, as well as fuelling expansion into non-retail markets, including advertising, financial services and data monetization. It’s a wider shift to a service-based approach, argues McMillon: 

In the future, people will still want to shop in compelling stores, but more and more there will be occasions where they prefer to pick up an order or have it delivered. Some customers will eventually allow us and pay us to keep them replenished in their home on the items they routinely purchase. For an increasing number of customers, Walmart will seem more like a service. Customers will think of us as the merchant that serves their wants and needs, but in ways that take less time and effort. We won't just be utilitarian for them. 

Fulfilling the vision

So what does that mean in practice? The needs of the customer come first, argues McMillon, with the original Walmart flywheel of lowest prices on items they buy all the time still true, with the main priority being to win their business when it's time to buy what he calls “the big basket, the stock-up trip”. Thereafter, how that relationship is transacted is open to question:

Customers can choose to visit a store, pick up their order, have it delivered, have it delivered into a secure box on their front step, into a garage, refrigerator or all the way into their kitchen, even when they're not at home. When you hear us say delivery, define that as the combination of delivery from our stores, Clubs and e-commerce fulfillment centers (FC). Our customers and members are indifferent as to whether their delivered items come from a store or an FC, so we can optimize for speed and cost behind the scenes as well as meet or exceed customer expectations.  

But in terms of fulfillment options, while having physical presence close to 90% of America is an advantage, the retailer has struggled to meet the increased demand for pick-up and delivery, admits McMillon. Good problem to have in one way, he argues, but one that needs to be addressed quickly as the crisis dies away. This is where automation is going to need to scale, he says: 

We'll be investing in our distribution centers, our e-commerce fulfillment centers and in market fulfillment centers (MFC), which will in many cases be inside of or built beside our stores. Those investments will enable productivity improvements for years to come. Think of our US supply chain with hundreds of distribution and fulfillment centers, 1000s of stores and clubs so close to so many people, functioning in a hybrid fashion,  automated where they should be, based on volumes, and complemented with on site market fulfillment centers or off site MFCs, where we see incremental demand. Importantly, imagine our supply chain is inter-connected, so the cost to meet or exceed customer expectations is optimized and imagine our growing network with a next gen level of automation.

In all this, those close proximity stores have a new importance, with 1.5 million deliveries each week now coming out of them, more than 7 times as many as a year ago: 

We have algorithms that tell us when a customer's walmart.com order includes items that are sitting in their local store. And when it makes sense, we just pick those items from the shelf and we use our 'last mile' network to drive them right to their home. Three thousand of our stores are now doing these deliveries. They've added density to our ‘last mile’ business and helped accelerate it. And think of the savings on something like a television that we're now able to deliver from a store a few miles away, instead of from an FC several states away.

Plus size thinking 

Walmart Plus, the firm’s $98 a year Amazon Prime rival, offering subscribers in-store and online benefits, such as unlimited free delivery and fuel discounts, will also have increasingly important role to play, predicts McMillon:

Over time, more and more of our customers will want Walmart Plus, because it makes life better. That relationship will drive repeat business and provide data that enables us to serve them even better and be more personalized. It's an important piece of our strategy. We're focused on continuing a high quality experience for Walmart Plus members as we add capacity. Over time, we'll add more benefits to the membership to broaden its appeal. 

Take-up numbers to date remain vague, but that’s not the right metric anyway, insists McMillon: 

When I think about Walmart Plus, the thing that I'm focused on most is the Net Promoter Score of a Walmart Plus member, not the number of memberships that we're selling. The number of memberships will work out, but let's focus on quality as we start to scale it. Walmart Plus then unlocks data that we can use to serve up items for customers more effectively, which helps us with margin mix, so that's important and something that over time will matter [more] to the company. We're not great at that today; it's a skill we're learning.

New profit pools

That data is also a monetizable asset, as he notes: 

Data is obviously really valuable. We’ve got a history of giving our data away to suppliers and doing that so that we could get in stock. That’s obviously really important and some portions of our data will continue to be free because we need their help serving our mutual customers. But there are other aspects of our data that are really valuable and can be put to work in ways that we haven't before. The concept of building products, digital products that we can use internally and also monetize outside, is a really exciting prospect. Some of those things will be purely digital, some will be a combination of people-plus-digital.

Other sources of new revenue include plans to expand healthcare offerings and to push into financial services: 

Financial services are also a way we can help make daily life better for customers. Last month we announced the formation of a new fintech start-up designed to develop and offer innovative and affordable financial solutions. Our customers have been clear that they want more from us in terms of financial services and this new approach will help us deliver for them in a differentiated way more quickly. For a fintech start-up, customer acquisition costs are high and our platform lowers those costs. We have a head start.

The most public of these new revenue stream initiatives to date is probably the firm’s move into advertising via its media arm, newly re-named Walmart Connect. This is intended to create “ways for partners to be top of mind in Walmart stores, on its digital properties and across the internet in a way that is additive to customers’ experiences”, according to the official company descriptor. It’s going to be big business, predicts McMillon: 

Five years from now, we expect to be well within the top 10 advertising platforms in the US, ahead of big players like, Hearst, Fox and Twitter. Walmart is one of the biggest buyers of media in the country. We understand the relationship between advertising spend and business returns, so we know what marketers want….We've got a unique opportunity because of our stores. We've got all of the things available to us related to e-commerce growth and digital growth and the reporting we provide for the investors and our advertising program is there. If a customer decides to come into a physical store, our store and buy [an item], we can connect those dots for you [as a seller]. That's the unique proposition of our advertising program. We just haven't been that aggressive with our site and app. We want to preserve the customer experience when they are looking for an item and not have ads clutter that up in a way that is going to detract from the experience, so we're going to manage that as we drive the growth up. 

This “scaling new profit pools” is going to be a recurring theme now as retail re-invention gets underway. All of which brings McMillon back to his predecessor Glass’s comment as today’s Walmart CEO concludes: 

We've been building for this moment. And the moment is here. It's up to us. We can make it true that in 2021 this company was just getting started. 

My take

The fact that Wall Street sent the Walmart share price down yesterday won’t have come as a surprise to McMillon or his team - and it probably won’t register as that much of a concern. It’s clear that the executive leadership has a transformation and evolution plan in place for the world’s biggest retailer; it now just needs to execute on it. 

That means a combination of rationalisation of unprofitable or no longer wanted business operations alongside hefty investment in areas for future growth.  And of course, it means keeping Wall Street nerves calm and ready to go along with a retail invention that will play out as a long game. CFO Brett Briggs tried that on the post-results analyst call yesterday, saying: 

Let me describe the Walmart I want you to see. We have more customer store traffic than anyone in the world. We have one of, if not, the largest pick-up businesses in the world and we're scaling delivery. We're one of the largest e-commerce companies in the world, approaching $100 billion in revenue in the next couple of years, and we believe $200 billion a few years after that. We have one of the largest marketplace businesses in the world and now, we're scaling a marketplace fulfillment services business to grow even faster. 

We're majority owner of one of the most successful retailers in the world, Walmax, with over $50 billion market cap with great growth opportunities. In India, we're majority owner of one of the largest e-commerce and payment businesses and one of the largest and fastest growing economies in the world. We have a $75 billion Club business globally, one of the fastest growing segments in the retail industry, and it's a winner in three key markets in the US, Mexico and China. We have a rapidly growing advertising platform, which should be a multi-billion dollar business in the very near future. We're a global leader in supply chain innovation with exciting initiatives on the table…That’s the Walmart I want to make sure you see. 

What Walmart we do end up seeing will take time to emerge. But the next step has certainly started.