Walmart closes 269 stores as it continues to chase Amazon

Profile picture for user ddpreez By Derek du Preez January 17, 2016
Summary:
The US-based supermarket chain Walmart has also recently issued a profit warning, as it announced plans to invest in its e-commerce portfolio.

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US-based supermarket chain Walmart is continuing to feel the pressure from fast-growing online giants, such as Amazon, following the news that it plans to close nearly 300 of its stores around the world. The announcement follows a recent profit warning, which said that the company would be prioritising investments in e-commerce.

Amazon’s early investments in logistics, availability, speed and online presence are putting pressure on brands that have traditionally relied on a physical footprint to reach customers. Equally, Amazon’s investors are less concerned about early profit gains, favouring long-term growth, which is arguably not true for the likes of Walmart.

The company’s CEO Doug McMillon has said that the company will be closing smaller stores in favour of large supercentres and by investing in e-commerce, where he said that online customers shop more regularly and have a strong relationship with the brand.

He said:

Actively managing our portfolio of assets is essential to maintaining a healthy business. Closing stores is never an easy decision, but it is necessary to keep the company strong and positioned for the future. It’s important to remember that we’ll open well more than 300 stores around the world next year. So we are committed to growing, but we are being disciplined about it.

Walmart’s share price dropped a couple of percentage points on the news on Friday.

McMillon said that the company would be closing 154 stores in the US, including 102 of the smallest format stores which had been in pilot since 2011, as well as 115 stores outside of the United States.

On the financial impact, Walmart said the closures is estimated to be approximately $0.20 to $0.22 of diluted earnings per share from continuing operations, with approximately $0.19 to $0.20 expected to impact the fourth quarter of fiscal 2016. The remainder of the impact will fall into the first half of fiscal 2017.

In total, some 16,000 employees will be impacted by the decision, with about 10,000 of them in the US. Walmart said that it hopes that associates will be able to be placed in nearby stores, but where this isn’t possible it will provide 60 days of pay and, if eligible, severance.

Marrying physical with online

In a Q&A, CEO McMillon made it clear that the closures were about focusing on a physical footprint that worked for the company, whilst making large investments in online to protect the future growth. He said:

We conducted a thorough review of our stores and clubs worldwide that took into account a number of factors, including financial performance as well as strategic alignment with long-term plans. In total, the impacted stores represent less than 1% of both global square footage and revenue.

The large majority of U.S. stores closing are Walmart Express stores. While we have learned a lot from this pilot, including a deeper understanding of the everyday needs of our customers, we have decided not to proceed with this offering. We feel we can better serve our customers by focusing on Supercenters and Neighborhood Markets and by investing in e-commerce and services like Pickup.

He added:

We intend to win in our stores in the U.S. by strengthening the Supercenter format and optimizing Neighborhood Markets. We'll focus on adding capabilities to our supply chain by building out a fulfilment network to create a seamless customer experience.

What Walmart can do that no one else can is marry e-commerce with our existing assets to deliver a seamless shopping experience at scale. That is our vision and our mission, and managing our portfolio is essential to accomplishing our goals.

And if we were in any doubt about Walmart’s ambitions being a direct challenge to Amazon, it was recently revealed that the company is considering launching a fast delivery service similar to Amazon Prime - dubbed Tahoe. It is said that the service will be a subscription service, but will be made available at a cheaper price point than Prime’s $99 fee.

This plays into what McMillon said back in October about Walmart wanting to develop its online relationship with its customers, as he believes these have greater longevity for the company. He said:

Our growth plan is the roadmap we will follow to win through FY19. It focuses on customers who shop with us not only in stores, but online too. These shoppers spend more and shop more frequently and they are the kind of customers everyone is chasing. Good news is we already have a relationship with many of them.

At its core, our growth plan has one goal: Walmart will be the first to deliver a seamless shopping experience at scale. No matter how you choose to shop with us, it will be fast and easy.

We will do this by winning with our stores, deepening our digital relationship with our customers and adding critical capabilities necessary to drive growth.

Whilst in the UK…

It just so happens that last week I wrote a story about how one of the UK’s largest supermarket chains, Sainsbury’s, is also feeling the heat from Amazon and is considering a takeover of online retail business Argos in order to broaden its logistical and e-commerce capabilities.

Although the deal is all very ‘cautionary’ at the moment, Sainsbury’s released a detailed presentation outlining why it felt like the bid made sense for it’s multi-channel growth and future. It said:

Customer expectations are changing; they want a huge variety of products and they want them quickly, online and mobile, in-store, home delivered or click & collect.

Our experience shows that the more a customer shops with us across multiple categories

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and channels, the more we capture of their overall food and grocery spend.

My take

It seems that 2016 is going to be the year that supermarkets begin to realise that digital isn’t just an add-on to their existing assets and capabilities, but actually needs to be front and centre of everything that they do. Those making investments early are likely to suffer some backlash from investors, but they will be in a better position in three years time.

Does this mean that they will be able to take on Amazon? Only time will tell, but I’m not entirely convinced.