Walmart moves to free-shipping model for 2 million online items

Wal-Mart Stores is vying to offer two-day free-shipping for online orders of $35 or more, replacing the Shipping Pass service and refunding those costs to subscribers, according to a blog post by Walmart.com CEO Marc Lore on Tuesday (Jan. 31).

“In today’s world of e-commerce, two-day free shipping is table stakes. It no longer makes sense to charge for it,” Lore said. “For me, the road ahead is pretty simple: We’ll keep our fanatical commitment to saving customers money – it’s who we are. And, we’re going to be equally obsessed with saving our customers time.”

Lore who took over the management of Walmart.com just four months ago said the retailer is moving fast and it feels like he’s working for a startup.

Over the past two years, Wal-Mart has invested billions into building out an dedicated e-commerce fulfillment system that includes five campus locations with a sixth expected to come online later this year in central Florida. Wal-Mart told Talk Business & Politics it will be using these high-speed fulfillment centers.

The retailer evaluated the items most often ordered online through its Shipping Pass program during the past two years to curate the two million products eligible for the two-day shipping. It’s important to note that Wal-Mart offers now 30 million products online with its own inventory and its third-party marketplace inventory, but the two-day free shipping will not include marketplace items, weekends and holidays.

A Walmart.com spokesman told Talk Business & Politics that many of the marketplace items already have free shipping. He said if a customer purchases an eligible item such as Tide detergent and their basket total is just $10, but they also purchase a $25 marketplace item, that Tide will be delivered in two-days because the total basket was counted.

Keith Anderson, senior vice president of strategy and insight at Profitero, said this is a clever move by Walmart.com.

“Everyone appreciates that Prime has been profound in increasing wallet share because Amazon has worked to build value into Prime memberships. When Jet began, it too was membership-based but Lore dropped the membership fee, which I thought was a smart move given that households could be starting to experience membership fatigue. Lore figured out he could not out Prime Amazon, so he settled on being ‘the good enough option for cost conscious consumers’ which meeting the coupon-conscious shoppers where they are,” Anderson said.

He adds that it will be interesting to see if this move by Wal-Mart will have any unbundling effect on Amazon. He said those consumers that have more time than money and don’t use the media add-ons of Prime, nor order frequently could find the Walmart option cheaper for their households.

“There are some opportunities in this space for Walmart. I don’t think Walmart will convert avid Prime users, but it’s a clever move regardless,” Anderson said.

Carol Spieckerman, CEO of Spieckerman Retail, agrees this is a “smart strategy for Walmart” in part because she said “it removes barriers to shoppers putting Walmart in the consideration set with Amazon for items over $35.”

Spieckerman said price optimization is the critical success factor and it’s not an easy feat for Walmart.

“Walmart must beat, not just match, Amazon on price at both the Prime and nonPrime level for like items. The complexity associated with hitting this goal can’t be underestimated. Amazon may have multiple providers for a single item, for example, with some options offered under the Prime program and others excluded. All options may carry different price points and the ability to buy some items used can also get thrown into the mix. Walmart’s algorithms will have to take all of this into account somehow to arrive at an optimized price that takes Amazon out of the running,” she explained.

Annibal Sodero, assistant professor of supply chain management at the University of Arkansas, agreed with Spieckerman that this is not an easy endeavor. He said there are increased costs to accomplishing two-day delivery. He said Poppin, an online office furniture retailer, has a similar delivery model with a $35 threshold and two-day guarantee. He said the e-tailer has experienced customer service issues along with increased costs because it’s not that easy to do with ground delivery.

Sodero said Amazon can do it because it has roughly 200 distribution nodes across the country, noting that wasn’t always available in Northwest Arkansas by Amazon, until they added fulfillment centers in North Texas and Overland, Kansas. He said if Wal-Mart just relies on its fulfillment centers equipped for e-commerce there may be times the delivery can’t be made in two days in rural areas and that would mean express might have to be used to keep the guarantee, raising the cost for Wal-Mart. He said raising costs is not in line with the retailer’s core operational strategy which is to take costs out of the supply chain.

He said if Wal-Mart is ever able to consolidate its inventory systems between stores, distribution centers and online fulfillment centers they would have an advantage for home delivery given they are located within 5 to 10 miles of 90% of the U.S. population.

Wal-Mart said it continues to work on consolidating its inventory systems and is making progress in those endeavors. Anderson said it’s very complex and if Wal-Mart could actually pull it off it would be an advantage over other retailers.

But Anderson and Sodero warned that just because a brick and mortar retailer can fulfill online orders from stores, doesn’t mean it makes financial sense to do so.

Sodero said it raises inventory levels in stores and in store labor costs because someone has to pick that item from the shelf. Anderson adds there is also increased risks of out-of-stocks in stores which is bad for customer service, an area Walmart is also committed to improving.

The retail experts largely applaud the move by Wal-Mart, but none think it will make a dent of any size in Amazon’s business.