Walmart bombs as Wall Street gets a bad case of 'Amazon panic'

Profile picture for user slauchlan By Stuart Lauchlan February 20, 2018
Summary:
Walmart saw its Q4 e-commerce numbers more than halved on those in Q3. Wall Street didn't like that one little bit, despite the retailer's insistence on playing a long game.

walmart
Ouch! Walmart just had its worst ever days on Wall Street after committing the new cardinal sin of coming in under part on its e-commerce revenue.

The stock price fell by over 10%, Walmart’s biggest decline in over 30 years, as investors panicked that the US retail giant is ‘Amazon-fodder’ waiting to happen - and a 42% fall in quarterly earnings didn’t help calm anyone’s nerves.

Online revenue actually grew by 23% in the fourth quarter, but that’s less than half of the 50% growth recorded in the third. While Walmart execs insist they’re looking at 40% online growth this year, CEO Doug McMillon was on the back foot when talking with analysts yesterday. He argued:

The majority of this slowdown was expected as we fully lapped the Jet acquisition, as well as created a healthier long-term foundation for holiday. A smaller portion of the slowdown was unexpected as we experienced some operational challenges that negatively impacted growth.

Overall, we finished the year with e-commerce sales growth of more than 40%, so we feel better about the year than the quarter. Looking ahead, we expect eCommerce growth to increase from the fourth quarter level as we enter the New Year with about 40% growth for the year.

McMillon took the only line that he could - keep calm and carry on:

We're confident in our strategy to transform the company, and we continue to be guided by four key objectives: make every day easier for busy families, change how we work, deliver results and operate with discipline and be the most trusted retailer.

We're accelerating innovation in the business to make shopping faster and easier for our customers. Creativity, decisiveness and speed are priorities. We made good progress this past year to save busy families time and money, and we'll do more.

By becoming stronger at mobile and leveraging digital capabilities, we improved in-store experiences, including our pharmacy and money services areas. We enabled Easy Reorder online. We're making the checkout experience easier with Scan & Go and also digitizing the returns process.

We’ve made acquisitions to improve our online assortment, and we're partnering with others like Google and JD in new ways. We're expanding online grocery in the U.S. and around the world and broadening our delivery capabilities in the U.S., China and other international markets.

He added:

It's really all about providing more convenience for customers. Customers that shop across all channels are important to us. As we said in October, U.S. customers that shop us in-store and online spend nearly twice as much as customers that only shop with us in stores. Their loyalty to Walmart strengthens overall.

Online grocery customers are a great example as they spend more with us in total once they start using the service. So we'll lean in this year by nearly doubling the number of online grocery locations in the U.S. We're also becoming more efficient by changing the way we work, including leveraging technology to equip and empower our associates to be successful. They now have better information, tools and training.

Learning

Away from online groceries, McMillon pitched the idea that Walmart is on a learning curve:

On the non-food side, we're building a business. Non-food e-commerce has not been our historic competency over the last few decades and the history of the company, and so we're learning something new.

We're trying to build an assortment that enables a margin ultimately, and that's got components to it like attracting brands, being able to execute from a fulfilment point of view during a busy season. We've got some exciting things coming out with site redesign and other things this spring, I think, that will help us make more progress in that area. So I don't think it's that we've learned something new. I think it's a question of pace.

Despite talking up the acquisition of Jet, McMillon admitted that there had been some issues relating to this that had had a negative impact:

Jet.com complements Walmart.com nicely. Walmart.com, including Online Grocery, is and has been the key driver of our eCommerce growth and that will continue. The Jet brand over indexed with higher-income, urban, millennial customers when we made the acquisition, and we intend to build on that strength going forward.

The cost to acquire a new customer on a nationwide basis is cheaper with the Walmart brand so we've been investing more in Walmart.com on a national basis and reducing marketing investment in Jet, except in certain urban markets. Due to this change, Jet will not grow as quickly as it did in early days but it will be well positioned where we've chosen to focus the brand.

That focus is a critical factor, he added:

As it relates to the brands, Walmart is just a really well-known brand for value throughout the country. And when you get into Oklahoma and Texas, in the middle of the country, it just makes a lot of sense to invest in that brand rather than investing higher incremental dollar to introduce a brand that's less familiar.

Now on the other hand, if you take the New York metropolitan area as one example, not the only one, the Jet brand is really well known, has a lot of traction, has appeal, as we mentioned earlier, to urban, millennial, higher-income customers. So it's really just a positioning choice, and that choice was made before we made the acquisition.

I think we wanted to leave our minds open as we acquire Jet to make the best choices about how we use the brand and where we position it. But our thoughts before we bought it that basically become confirmed, that Jet plays a great role reaching parts of the country and selling, in some cases, some brands that are not ready to sell on Walmart.com.

So I think what you'll see is Jet will go through a period of adjustment and then it'll start to grow again in the future but focused on specific markets and opportunities, whereas Walmart will be the broad-based, big part of the business, and growing it will be a priority.

That’s a rational enough explanation, but it wasn’t enough to calm Wall Street jitters yesterday. Neither would McMillon’s outlook for 2018:

I think as we look at this year, we're trying to preserve flexibility as we go through the year to decide what level of investment we want to make in e-commerce as we go month to month and quarter-to-quarter. It's possible we may choose to lose a little more in eCommerce this year than we did last year, but generally speaking, we think it'd be about the same level of losses.

My take

‘Amazon’s coming to get you’ is a threat that hangs over every retailer today - and not without some justification. The panic on Wall Street yesterday was an overreaction however. I’m with Neil Saunders of GlobalData Retail who commends Walmart for taking a long term view, but has some warning words of advice:

There are many demographics, especially younger and professional segments, for whom Walmart is not the destination of choice online. This is a tough nut for Walmart to crack, and one that it can only break by more heavily marketing its services and proposition. Walmart needs to invest in evolving and adapting. If it doesn't, it will become irrelevant. In so doing, it is following the same strategy as Amazon: taking less profit today, for the prospect of a stronger, better business tomorrow."