Walmart Chasing Online Revenue That Isn’t There

Is Walmart tilting at windmills again? Hey, the year is 2015 -- Walmart is tilting at drones!

Late last month, the world's largest retailer filed an application with the FAA to begin testing drones for delivering merchandise and tracking inventory. If you think that sounds like a ploy to chase its propeller-headed rival Amazon, you might have a point. Walmart's new, technology-driven, Amazon-channeling program is budgeted at $2 billion over the next two years. Last month's announcement drew giddy applause in the media. The money on Wall Street, however, ran for the hills, and sent the stock plunging by 10 percent.

Since the 1990’s Walmart has had good reason to hesitate over copycatting Amazon. For one, Walmart's core competency of keeping shelves stocked in a chain of massive stores is completely different from Amazon's home-delivery model. Each requires its own technology, and the two don't have much overlap.

Second, Amazon's high-tech retail sales model is least desirable when it comes to Walmart's most important niche -- groceries. Food and beverage, which accounts for 56 percent of Walmart's business, has been a notoriously tricky category online, where it accounts for just 2 percent of sales industrywide, according to ComScore.

Walmart's CEO Doug McMillon has been fairly tight-lipped on exactly how he plans to spend the $2 billion. However, the little McMillon has revealed hasn't been compelling -- namely, that he's got big hopes for using Walmart's stores as pickup destinations for online grocery orders.

"We like our chances," McMillon says, noting that Walmart has the stores for this exciting new retail frontier and Amazon doesn't.

Walmart By The Numbers

Let's get a few numbers out of the way. After 20 years of online retailing, grocery now accounts for just 1.3 percent of the industry, and it's been flatlining at that level for the past three years, according to data compiled by TABS Group.

As for picking up groceries ordered online, only 0.5 percent of adults are doing it regularly (six-plus times per year). Again, this is after years of market testing by grocers nationwide. But hey, maybe I'm being too negative. Past performance is no guarantee of future results, right? 

In the wake of WebVan's collapse in the Internet bubble of the early 2000s, only lately have groceries begun to inspire what looks like a new crop of online competitors. In addition to the AmazonFresh initiative, there's Instacart, a well-funded, supermarket-to-home delivery startup. But AmazonFresh has been tested in California for more than a year, and the buzz has been decidedly muted. Meanwhile, Instacart's high costs and slim margins have drawn skepticism about its growth prospects, even in the Silicon Valley circles.

Based on TABS Group research it’s not hard to see why Walmart – and the industry overall - will continue to struggle with online grocery. Only 4 percent of consumers say they shop for groceries online regularly. It gets even worse: only one third of U.S. consumers have bought groceries online even once. That translates to a measure we call "stated loyalty," wherein only 12 percent of buyers become regular shoppers. In fact, barring some dramatic tech advances, the future of online grocery retailing looks persistently small, like Peapod -- Ahold's seven-year-old, still-obscure supermarket-to-home service.  

If you're wondering why, try ordering a cartful of groceries online. Clicking through dozens of web pages might make you long to grab a cart with wheels and hit those wide-open aisles again. Not to mention scheduling the delivery, the fees and sweating those broken eggs.

Indeed, for all the hype, the $340 billion in online retailing accounts for well under 10 percent of the $4.6 trillion annual U.S. retail sales. This is consistent with our research showing 11 percent of U.S. adults consider themselves heavy online shoppers. Sure, online has a much bigger chunk of retail sectors such as apparel, personal electronics and travel, but when is the last time anyone spoke about any of these sectors being a strong suit for Walmart?

So where's the real action? Same as it ever was: bricks and mortar. The fact is, 78 percent of U.S. consumers buy their consumables regularly in traditional grocery, and 57 percent buy regularly at Walmart. Stated loyalty for each is 88 percent. Compare these figures to the online figures of 4 percent regular purchasing and 12 percent stated loyalty.

Competition In The Vitamin Category

With more than half of U.S. adults being regular Walmart shoppers, some argue this points to tremendous potential for Walmart.com. However, low-hanging fruit has gone unpicked. Consider the $11.4 billion vitamin category: Walmart is the No. 1 brick-and-mortar outlet accounting for about 20 percent of vitamin sales in the U.S. Additionally, TABS research shows online is huge for vitamins, accounting for 17 percent of sales. Why, then, is Walmart's share of online vitamins just 4 percent versus Amazon's 36 percent?

If Walmart can’t win online in vitamins, what makes us think they can win it anywhere?  Walmart is better off developing a plan that addresses the seemingly unnoticed expansion of discount grocery, such as Aldi, whose U.S. share of grocery is five times that of online -- and growing rapidly.

What to do? I suggest following the sensible lead of Target when it comes to grocery delivery. Rather than spending $2 billion, Target has launched a modest pilot program with Instacart. In addition, Walmart must prove that it can be successful in a “gimme” category like vitamins.

Unfortunately, Walmart now looks obsessed with mimicking Amazon the same way it was obsessed with mimicking Target a decade earlier, when it made a failed bid to go upscale and sell "cheap-chic" fashions. The Target-style adventure was an expensive distraction; without any meaningful revenue to be gained in online grocery, the Amazon-style adventure could be a full-scale disaster.

Consider the aggravation of finding a Walmart associate to retrieve, say, a Schick Hydro Razor behind a locked counter. Now imagine that same associate strapping that Hydro Razor along with a shopping trip’s worth of other merchandise under a tiny flying machine destined for your house five miles away. Three words come to mind…"Duck and cover!"