Walmart's Ecommerce Focus Delivers Growth and Squeezes Margins

Aggressive moves drive results but come at a cost

Author: Andria Cheng

August 17, 2017

On, a Lego City Great Vehicles ferry set was discounted to $23.83 from an original price of $29.99, and you can get it shipped to you for free in two days. But if you should choose to pick up that item inside a Walmart store, you get to take off another $2.55 through Walmart’s new Pickup Discount program. That means the total price you would pay: $21.28, the very same discounted price charges for the product.

The Pickup Discount feature is just one of a wave of aggressive moves Walmart has made in its battle with Amazon, and the use of its physical stores as an asset is a key to the way the battle will play out. 

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Walmart says its stores are within 10 miles of about 90% of the US population. That means those brick-and-mortar locations could help Walmart reduce costly last-mile delivery expenses and serve as online distribution and fulfillment centers of their own.

“The war is on,” said Cowen & Co. analyst Oliver Chen. Walmart “will continue to need to use its physical assets as a competitive advantage.”

The fight is going to get more intense. More than four-fifths of Walmart's shoppers also visited Amazon in the second quarter, Chen said, citing a Cowen consumer survey. Walmart shopper overlap with Amazon has increased for 10 straight quarters, he said. 

The Bentonville, Ark.-based company’s namesake US division on Thursday reported a 1.8% Q2 comparable sales gain, including a 0.7 percentage point contribution from ecommerce sales, which jumped 60%. Despite such ecommerce acquisitions as and, Walmart said organic growth was the biggest sales driver.

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Third-Party Power

Walmart's Marketplace Gains Ground Fast

One driver of ecommerce growth is Walmart’s online marketplace of third-party sellers, which it has expanded dramatically. The number of units sells online has jumped more than 30% since Q1 to more than 67 million. Gross merchandise value sold via Walmart US ecommerce segment surged 67%. 

Another driver is groceries. Walmart President and CEO Doug McMillon said Walmart US also has seen “strong results” from its online grocery pickup feature, which the company has expanded to more than 900 US locations and allows shoppers to pick up their grocery orders curbside. That could further boost sales of the company’s grocery sales, Walmart US’s largest segment. The company said US grocery comparable sales rose in the low-single-digits, the category’s best performance in five years.

Ecommerce growth also has been boosted by Walmart’s Pickup Today service that allows consumers to pick up some online orders in stores the same day.

Meanwhile, Walmart’s spate of acquisitions this year, including men’s clothing seller Bonobos, also are expected to help the company expand product assortment and give Walmart “critical category expertise” in more profitable categories such as shoes and apparel, McMillon said. However, don’t expect acquired brands such as ModCloth or Bonobos to surface on quite yet. Spokesman Ravi Jariwala said in an email that the company’s hope was to add some of those brands on, which he said shares a similar customer demographic to that of ModCloth and Bonobos.

But Walmart’s ecommerce growth, like rival Target’s, has come at a cost. Walmart US Q2 gross margins dipped, hurt partly by its growing ecommerce business. Operating expenses as a percentage of sales rose at the same time, also due to the company’s ecommerce and other technology investment. 

And as Amazon is known for its willingness to sacrifice profit in the name of growth, Walmart may also have to stomach that trade-off as it continues the battle.