Walmart's efforts to follow Amazon weigh on him – The Fool Motley

Walmart (NYSE: WMT) has invested billions in its e-commerce activities in the domestic market for the past three years, since the acquisition of Jet.com and the installation of Marc Lore at the head of e-commerce in the United States. He has purchased several digital native brands, including Bonobos and Modcloth, and has successfully attracted new brands to Walmart.com and created his own brands in-house.

But its online grocery business, an activity that existed prior to the acquisition of Jet.com, has been the show's star in recent years. The online grocery store enabled Walmart's US online business to generate 40% revenue growth last year. A similar level of growth will help Walmart reach $ 21-22 billion in online sales this year.

Although grocery shopping is a remarkable winner, Walmart's efforts to capture a share of more traditional online shopping have been very expensive. According to a report from Recode, the company is expected to lose more than $ 1 billion this year from its US e-commerce business.

That's the cost of taking Amazon.com (NASDAQ: AMZN)but there would be detractors within Walmart who are unwilling to continue to lose money on e – commerce.

Source of the image: Walmart.

You have to spend money to earn money

Walmart has agreed to spend hundreds of millions of dollars for small acquisitions in ecommerce over the past few years, as well as to invest in its digital grocery shopping platform and other shopping activities. line, but the direction does not seem to have the courage to lose.

Lore reportedly pushed Walmart's warehouse network for online orders, but encountered significant resistance from CEO Doug McMillon. Amazon has 110 distribution centers across the country, while Walmart has at most 20, according to Recode. Building more warehouses would cost hundreds of millions of dollars at Walmart. This can take several years from the day a warehouse is opened until it runs at full capacity.

These are long-term investments that Amazon is more than willing to do for 20 years. Chief Financial Officer Brian Olsavsky recently announced to analysts that the company would invest an additional $ 800 million in the second quarter to improve its distribution network to facilitate the one – day shipment of $ 100 million. unique items that she is currently shipping from her warehouses. He is already able to ship 10 million different items to customers with a one – day warranty.

Meanwhile, Walmart has decided to compete with Amazon with its own one – day shipping program, NextDay. The service is deployed in certain metropolitan areas throughout the year. More than 200,000 items will be shipped to customers within 24 hours. Walmart says its strategy of shipping only NextDay orders from a single warehouse and relatively short distances will be more cost-effective than average online orders.

But Jason Del Rey of Recode points out that the elements available via NextDay generally have very thin margins. Even with lower shipping costs, Walmart will have trouble generating a profit on NextDay orders.

E-commerce acquisitions do not work

As part of Amazon's online shopping frenzy, Amazon has bought several fashion brands, including Bonobos, Modcloth and more recently Eloquii. It was able to recover these companies after they failed to raise a new tranche of venture capital due to slower sales growth. This strategy seemed unwise at the time, and the three companies remain unprofitable, according to Recode sources.

To offset the losses of the e-commerce business, Walmart is looking to sell at least one of the fashion brands, probably ModCloth. And she will not recover the $ 50 million she paid for the company.

Jet.com, the only high-growth e-commerce company Walmart has acquired, has been significantly reduced since Walmart bought back the company founded by Lore. Walmart advertises Jet only in a few metropolitan areas and the team is now part of the Walmart.com team.

Walmart has spent hundreds of millions of dollars in these acquisitions with little to show them. Not only is its balance sheet missing on its balance sheet, but its net result is also affected by ongoing losses. Meanwhile, Walmart's management does not seem willing to invest in these companies in order to generate long-term profitability.

Unless Walmart accepts the fact that it needs to invest and lose money now to compete with Amazon in the long run, it will be hard for it to keep up with the pace of market sales growth. and make your online business profitable.