Wal-Mart Takes a Swing at Amazon

Wal-Mart Stores Inc. is determined to topple the No. 1 online retailer, and it is doing it by copying Amazon.com’s proven strategy of discounting books and allowing other retailers to sell on Walmart.com.

“Wal-Mart is saying, ‘We’re nothing in this online business and how do we get a position?'” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm in New York. “The way you get a position is you take the 100-pound gorilla and you give him a kick in the butt. And it is exactly what Wal-Mart is doing.”

But Amazon of Seattle, which reported sales of $15 billion in the first three quarters of 2009, has some new strategies too. On Oct. 15, it announced it was offering same-day delivery in seven major cities, with more to follow in the coming months.

“Wal-Mart sees this as a tremendous bonanza for them in a lot of ways, and I agree with them,” Davidowitz said.

Wal-Mart had sales of $404 billion in 2008, but only $1.74 billion of that was generated by Walmart.com, according to Internet Retailer, a Chicago firm that tracks Internet sales. (Wal-Mart doesn’t separate out its online sales in its financial reports.) Not only were the world’s largest retailer’s online sales less than a tenth of Amazon’s sales last year, they were dwarfed even by Staples Inc. of Framingham, Mass., which had $7.7 billion in online sales in 2008.

Wal-Mart’s recent moves online are already paying off as more people have turned to their computers to do their shopping.

On the Monday after Thanksgiving, online sales were up 13.7 percent compared with “Cyber Monday” in 2008, according to Coremetrics of San Mateo, Calif., which tracks online retail sales. And consumers bought nearly 30 percent more items per order on Cyber Monday this year than on the corresponding Monday last year.

“We’re not seeing a slowdown of Internet sales at this point,” said John Squire, chief strategy officer for Coremetrics.

A Walmart.com spokesman declined to discuss its strategy with Arkansas Business, but Raul Vazquez, the CEO of Walmart.com, told BusinessWeek in November that he expects to see online holiday sales improve by as much as 30 percent compared with 2008.

And Vazquez told BusinessWeek his goal for Walmart.com: To be the most visited and valued online retailer.

Walmart.com is also trying to one-up Amazon by allowing customers to ship their items for free to their nearest Wal-Mart store for pickup.

Retail experts disagree, though, on how much of a benefit that service is.

“Ship-to-store is a nice feature, but if you’re shopping online, you really don’t want to go to the store,” said Kurt Peters, editor of Internet Retailer. “I think it’s an approach that has limited appeal.”

Others think customers who come to the stores to pick up online orders are likely to spend another $6 or $7 while they are there, Davidowitz said.

“Wal-Mart sees this as a way to grow [same-store sales],” he said. “The potential for Wal-Mart is much more than Amazon [because] they’ve got stores.”

 

Online Stepchild

Wal-Mart’s online venture has been filled with a number of missteps.

It launched a bare-bones Web site in 1996, but early Web surfers largely ignored it. The company renovated the site in fall 1999, but it had trouble getting items to customers by Christmas.

Wal-Mart again tried a major overhaul of its Web site in 2000. And this time critics took notice.

“Move over Amazon.com, the big boys of retailing are finally online in a big way,” said a November 2000 headline on Washingtonpost.com.

“If Amazon hears heavy footsteps behind it, here’s the 800-pound gorilla making the noise,” the article said. “Relaunched two weeks ago, this is the whole superstore, minus the laundry detergent and paper towels, online.”

But it was Amazon’s sales that took off, going from $3.9 billion in 2002 to $19.2 billion in 2008.

Wal-Mart treated its online version as “a little bit of a stepchild,” said Craig Johnson, president of Customer Growth Partners LLC, a retail consultant in New Canaan, Conn. “They weren’t giving it the corporate focus and the resources that they are giving it now.”

Davidowitz said Wal-Mart had too many other issues on its plate – such as attacks on its businesses practices – to concentrate on its online segment.

Wal-Mart, like many other retailers, had the luxury of taking a wait-and-see approach to its Web site because it already had a successful brick-and-mortar business, said Eric Best, CEO of Mercent of Seattle, which tracks online sales.

 

Threat

Even in the worst economic conditions in decades, Amazon managed to see its sales increase from $12.5 billion in the first nine months of 2008 to $15 billion in the same period this year.

In addition, its net income rose from $627 million to $743 million during that period. Amazon predicted that it would have between $8.12 billion and $9.12 billion fourth-quarter sales, which would represent an increase of 21 to 36 percent from last year.

Wal-Mart, on the other hand, has seen its sales dip from $293.2 billion between February and October 2008 to $292.2 billion during the same period in 2009. Its income, however, rose from $9.5 billion during the nine-month period in 2008 to $9.7 billion in 2009. Wal-Mart didn’t release sales projections for its fourth quarter.

Amazon was able to achieve continued growth because it opened its Web site up to other retailers to sell items, Best said.

“Amazon has become the de facto starting place for shoppers looking for the best price and the best availability for virtually any product they might be interested in buying,” he said.

Davidowitz said Wal-Mart officials saw Amazon as a threat because it was gaining some of Wal-Mart’s market.

 

Price

In October, Walmart.com announced it was selling 10 best-sellers for $10 each, and the news didn’t go unnoticed – many news agencies ran the story as well as stories about competitor responses.

“That drove consumers to start to evaluate their Christmas shopping much earlier,” said Squire, of Coremetrics. “It also spurred a whole group of online retailers to get their promotions out in front of the customers as soon as possible.”

Amazon tried to keep up with Walmart.com by lowering some of its book prices to $9, and Walmart.com responded by dropping its price to $8.99.

“We will go as low as we need to,” Walmart.com’s Vazquez told BusinessWeek.

Davidowitz thought price slashing was a good strategy because Walmart.com can establish itself as a low-price leader, just as Wal-Mart has done with its stores.

Another big push for Walmart.com was when it allowed third-party retailers to sell items it didn’t carry in its stores – such as caskets – online. The Wal-Mart Marketplace now has about 1 million new items for sale from vendors such as CSN Stores and Pro Team.

Still, online sales make up only about 6.5 percent of total sales everywhere. But that percentage is projected to grow to 15 to 20 percent in the next five to seven years, said Internet Retailer’s Peters.

“A lot of chains are finally realizing this Internet thing is here to stay,” Peters said.