Walmart competes with almost everyone in retail, but increasingly suppliers see the giant focused on a new and, to some, surprising rival: Amazon.
Walmart, struggling to eke out even single-digit same-store sales in the U.S., could use a bigger dose of what gave Amazon 44% top-line growth last quarter. But Walmart is also playing defense against Amazon's increasingly aggressive moves into packaged goods. And e-commerce supports broader strategies for the Bentonville behemoth as it looks to boost its presence in urban markets, take another stab at reaching upscale consumers and build more small stores.
That has put Earth's largest retailer and Earth's largest online retailer on a collision course for what could be the retail battle of the decade.
While Walmart may be 10 times Amazon's size in overall sales, it has only about a tenth as much in online sales, making Walmart a distant also-ran online, even in staples like shampoo and diapers. Amazon's acquisition last year of Quidsi and its Diapers.com and Soap.com sites made those core Walmart categories one of the e-commerce giant's biggest strategic priorities.
While 1% or less of the sales of packaged-goods giants such as Procter & Gamble Co. or Unilever come via e-commerce today, that number is growing fast in some key categories. In the past year, Amazon has gone from a top-10 to a top-five U.S. retail account for P&G's Pampers, according to people familiar with the matter. And according to some industry estimates, diaper sales in e-commerce are higher than those in supermarkets (though not drug stores, supercenters or clubs).
Beyond CPG, sales in electronics and general merchandise (EGM) have gone from 43% of Amazon global sales only two years ago to 59% last quarter, and an even bigger 61% in North America.
Walmart would love Amazon's top-line growth, but isn't about to settle for its profits. Building staff and infrastructure to support the growing general-merchandise business and rising media-content costs produced disappointing third-quarter profits and projections for a possible loss in the all-important fourth quarter at Amazon. That has some Walmart suppliers believing that while Amazon presents a growing threat, Walmart is better positioned to grow profitably in e-commerce.
Key to Walmart's emerging e-commerce strategy is integrating store and online marketing like never before. That's meant removing barriers between Bentonville and the Brisbane, Calif.-based Walmart.com. Joel Anderson*, a veteran of store operations, took over in August as president of Walmart.com U.S., as the top three executives at or overseeing Walmart.com have left or soon will leave.
There are also changing incentives. As of the new fiscal year beginning Feb. 1, Walmart's store managers and employees will get credit for online sales from their territory, just like sales in the store. That will give them more reason to promote Walmart.com, the new iPad app, My Local Walmart Facebook app, and its soon-to-be-released refurbished iPhone app to the 140 million weekly in-store shoppers.
Walmart is also trying to use its 3,800 stores and 150 distribution centers as a logistical and marketing advantage over Amazon. Last month it rolled out "Home Free" delivery, with free shipping on orders over $45 from its stores -- sans a $79 membership fee like Amazon Prime. And Mr. Anderson said in October that Walmart plans "next- day delivery at a very economical price" using its stores as distribution centers and aimed largely at urban markets.
Walmart is also experimenting with everything from home grocery delivery in San Jose to a a pilot using the U.S. Postal Service to deliver items shipped from a rural store in Nevada. And the planned expansion of other smaller formats, both supermarket-size markets and smaller Walmart Express stores now in test , could extend Walmart's already massive logistics operations closer to consumers.
Walmart also offers free "site-to-store" options. One reason: Orders picked up at stores generate an average $60 additional purchase on the same trip, said spokesman David Tovar. And Walmart sees e-commerce helping it enter urban markets that have resisted supercenters. At an analysts' conference last month, Mr. Anderson said the retailer will "overindex" in online ads in urban areas it hasn't reached with stores.
E-commerce may also help Walmart profit from the upscale shoppers it has had trouble appealing to since its latest strategic reversal. In the past year, to appeal to its core consumers in the $30,000-$60,000 income range, it added back 10,000 items and millions of square feet of display space, something it had previously cut to make stores more visually appealing to upscale shoppers. Predictably, trips and spending among wealthier households suffered, according to Consumer Edge Research.
Some see Walmart's new iPad app as aimed largely at more upscale urban shoppers reluctant to enter its stores -- both an alternative and inducement to at least pick up items ordered online. (Walmart's Mr. Tovar, however, noted that iPads appeal to more than just the wealthy: They've become one of the most popular items so far in the layaway program the retailer restored last month.) Walmart earlier this month also began testing Walmart.com-branded pop-up stores in more upscale Southern California shopping centers.
But the e-commerce strategy is far from complete. Walmart has recently named a new team to flesh out details, according to people familiar with the matter. And they say Walmart, once a leader in computing infrastructure, needs to ramp up spending to catch up with Amazon there as well.