Digital pioneers often lose a lot of money in the process of building the infrastructure that will eventually (they hope) allow them to produce profits. That's how Amazon (NASDAQ: AMZN) operated for years -- and while it's in the black now, thanks in large part to its cloud business, it continues to invest for the long term while forsaking larger short-term profits.
For a few years, Walmart (NYSE: WMT) seemed to be willing to follow a similar model when it came to e-commerce and omnichannel sales. After the retail giant paid $3.3 billion for Jet.com in 2016, it empowered Jet CEO Marc Lore to run its digital division, and integrate it into store operations.
That led to bold offerings such as free two-day shipping, in-store pickup kiosks for online orders, and curbside grocery pickup. Those innovations, however, did not come cheap, and with recent reports that forecast Walmart's e-commerce division will lose $1 billion this year on sales of between $21 billion and $22 billion, some within the company want changes.
Walmart has been working toward an omnichannel model. Image source: Walmart.
What's happening at Walmart?
Traditional retailers like Walmart do not generally choose a strategy of losing money steadily in order to make a profit at some vague point down the line. Competing with Amazon, however, means doing that.
The brick-and-mortar giant still has much work to do in its effort to transform its stores so they can also serve as digital fulfillment centers capable of matching Amazon's new one-day shipping offer. Walmart has struggled to hit the mark on two-day shipping, and it only offers a few hundred thousand items for fast delivery, compared to the more than 100 million available via Amazon Prime.
Continuing to compete with the e-commerce leader means continuing to lose money, and Vox has reported that Lore is under increased scrutiny from CEO Doug McMillon and the company's board. Lore, meanwhile, has made it clear to Walmart's leadership that success on this front will require not just modifying the chain's stores into e-commerce hubs, but also adding more fulfillment centers.
Amazon currently has 110 U.S. fulfillment centers; Walmart has just 20, and its stores, while large, lack the inventory diversity to compete with Amazon's product selection. Both are solvable problems -- if the company is willing to invest.
"The problem is that building the online version of the Everything Store requires millions more products, and that means two things that Walmart's current infrastructure does not support: dozens more e-commerce warehouses and a lot more merchants and brands selling through Walmart.com," wrote Vox's Jason Del Rey.
Basically, Lore knows what must be done to achieve his goals, but has run up against a traditional retail mentality that abhors operating losses. This is probably not a battle he has any chance of winning, and based on a series of recent corporate moves that included integrating Jet.com's employees more closely into Walmart's main digital operations (and some top executives leaving), the war may already be lost.
It takes resolve
Walmart can be an e-commerce success without going head to head with Amazon in every category. The chain has already rebuffed Lore's attempts to vastly expand its warehouse network, and has explored selling the unprofitable digital brands ModCloth and Bonobos, which Lore was instrumental in purchasing.
Walmart acquired those brands both to inject itself with more start-up experience and to give it products Amazon wouldn't have access to. If Walmart sells one or both, after it has already scaled back Jet.com and dramatically cut its marketing budget, that would be a firther repudiation of Lore's preffered strategy.
Walmart will continue to evolve its digital operations, but it's likely to scale back spending on that front, and instead invest in more traditional areas like cutting prices in stores. That's something U.S. stores CEO Greg Foran has pushed for because it's a tried-and-true tactic that has worked for the retailer.
Amazon lost money consistently for its first few years, and CEO Jeff Bezos made it clear that profit was not its short-term goal. But the online leader's long game paid off. In the first quarter of 2017 alone, it booked as much profit as it had earned in the 14.5 years that followed its May 1997 IPO.
That's not a game Walmart appears willing to play. The brick-and-mortar chain won't throw in the digital towel, but expect it to become significantly more selective about where it chooses to compete. That should mean greater short-term profits, but unfortunately, they'll come at the expense of longer-term opportunity.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.