Walmart’s Rural Dominance: A Brick & Mortar Advantage in an eCommerce Battle
Can Walmart use digitalization to develop a customer experience that Amazon currently cannot?
In an age of rapid digitization, traditional brick & mortar retailers have been forced to evolve their business models and increase their online presence. Given such, Walmart’s $3.3B investment decision to build and open 292 Walmart stores and Sam’s Clubs in 2017 directly contrasts with the direction most retailers have taken.[1] Walmart continues to expand its operations in traditional retail with a greater focus on creating a digitally integrated, multi-channel experience.[2] Traditional retailers, particularly those who serve customers in suburban and rural regions, must find a way to go on the offensive against eCommerce pure-plays to minimize customer turnover. Walmart continues to embrace its heritage as a mass market traditional retailer, yet recognizes that it must rebuild its competitive advantage through superior omnichannel operations that service the customer both on and offline.[3] Rather than competing directly against Amazon in the online space, Walmart will differentiate itself through its extensive distribution network throughout the United States
Over time, Walmart has restrained from actively entering urban areas and instead has predominately focused on on rural and suburban regions. Walmart currently serves as the primary low-cost retailer for a high contingent of rural poor Americans, operating with “2.5 times as much selling space per inhabitant in the poorest one-third of states as in the richest one-third.”[4] Although the firm initially faced great resistance from local retailers within small rural towns, evidence points to a more positive economic impact for those towns in which a Walmart was located relative to those where one was not.[5] Such commitment to under served markets has enabled Walmart to aggressively expand its footprint across rural America—ninety percent of Americans now live within 10 miles of a Walmart store.[6] When compared to the fact that thirty-one percent of Americans live within 20 miles Amazon’s distribution centers, the race for retail market share among suburban and rural geographies becomes more competitive.[7]
These firms have two of the most elite supply chains in industry, yet face opposing business challenges—Walmart must identify ways to integrate eCommerce to prevent customer turnover while Amazon continues to focus on shifting consumer behavior away from traditional retail toward eCommerce. Nonetheless, Amazon has defined the pace to-date at which Walmart must evolve to remain competitive in the eCommerce space. Walmart has begun offering free two-day delivery on all Walmart.com orders over $35 and has also rolled out its Pickup Today program which allows omnichannel shoppers to order online and pick-up in stores. [8] [9] This ‘buyer-arranged pickup’ strategy enables Walmart to provide an alternative for on-the-go customers who would prefer to minimize the time spent in stores, however, will not be enough to threaten Amazon’s ‘seller-arranged delivery’ system in the long term which enables quick door-to-door delivery.[10] Walmart must continue searching for a cutting-edge strategy that changes the way customers think of shopping. Digital strategy must not be developed in a silo as a way to attract and retain customers, but rather as an additional component of a broader customer promise that emphasizes strong cross-channel coordination.[11] Walmart has highlighted its intention to slow its investment in opening new stores in 2018 and instead redirect much of this capital toward eCommerce and technology.[12] Plans to accelerate the focus on evolving the customer experience across channels demonstrates Walmart’s intention to strike a balance between maintaining its core business and evolving its use of technology.
As Walmart continues its transition toward becoming an omnichannel player, it needs to monitor the pace at which its consumers begin leveraging its online channel. This understanding should provide visibility into how consumer behavior is evolving and reveal insights into optimal ways that Walmart can drive its customers back into stores. This will not only keep consumers engaged with the brand, but also allows Walmart to extract greater value from its customers; omnichannel shoppers spend 4% more in stores on average and 10% more online than single channel shoppers.[13] By using the digital channel in ways that enhance the shopping experience and drive customers into stores, Walmart has an opportunity to reestablish a competitive advantage in rural and suburban markets that will challenge Amazon as the retail landscape continues to evolve.
Questions:
- What can make a traditional retailer successful in the age of digitization?
- Do demographic differences between urban and rural populations lead to slower adoption rates of the online channel?
(720)
[1] Walmart, 2017 Annual Report, p. 26, http://s2.q4cdn.com/056532643/files/doc_financials/2017/Annual/WMT_2017_AR-(1).pdf, accessed November 2017.
[2] Ibid., p. 3.
[3] Adi Ignatius, “We Need People to Lean into the Future,” Harvard Business Review, March-April 2017, https://hbr.org/2017/03/we-need-people-to-lean-into-the-future, accessed November 2017.
[4] Pankaj Ghemawat & Ken A. Mark, “The Real Wal-mart Effect,” Working Knowledge: Business Research for Business Leaders, August 23, 2006, https://hbswk.hbs.edu/item/the-real-wal-mart-effect, accessed November 2017.
[5]Georgeanne M. Artz & Kenneth E. Stone, “Revisiting WalMart’s Impact on Iowa Small-Town Retail: 25 Years Later,” Economic Development Quarterly 26(4) (November 2012): 307.
[6] Michael E. Porter & Jorge Ramirez-Vallejo, “Walmart: Navigating a Changing Retail Landscape,” HBS No. 717-474 (Boston: Harvard Business School Publishing, 2017), p. 11.
[7] Ibid., p. 10.
[8] Walmart, 2017 Annual Report, p. 7, http://s2.q4cdn.com/056532643/files/doc_financials/2017/Annual/WMT_2017_AR-(1).pdf, accessed November 2017
[9] ‘Wal-Mart Stores Inc SWOT Analysis’ 2017, Wal-Mart Stores, Inc. SWOT Analysis, pp. 1-9, Business Source Complete, EBSCOhost, viewed 15 November 2017.
[10] Lee, H., Chen, Y., & Gillai, B. “Technological Disruption and Innovation in Last-Mile Delivery,” Stanford Graduate School of Business White Paper, June 2016, https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/vcii-publication-technological-disruption-innovation-last-mile-delivery.pdf, p 5.
[11] Plazibat, I., & Dadić, M. (2017). Contemporary issues in retail industry. Paper presented at the 525-536. Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1945552920?accountid=11311, p. 531.
[12] Walmart, 2017 Annual Report, p. 27, http://s2.q4cdn.com/056532643/files/doc_financials/2017/Annual/WMT_2017_AR-(1).pdf, accessed November 2017.
[13] Sopadjieva, E, Dholakia, U, & Benjamin, B 2017, ‘A Study of 46,000 Shoppers Shows That Omnichannel Retailing Works’, Harvard Business Review Digital Articles, pp. 2-4, Business Source Complete, EBSCOhost, viewed 15 November 2017, p. 3.
Interesting thoughts Kyle. Though I agree that both Amazon and Walmart have complementary strengths and weaknesses, I think Walmart’s lagging entrance into the e-commerce area will continue to haunt them. In particular, given Amazon’s wealth of data on its customers going back several years, I believe it will have the leg up launching into the omnichannel space. Given the knowledge it has on its customer’s buying and searching habits, it is better poised to open more efficient brick and mortar operations that are leaner on inventory and thus real estate costs among other benefits. Moreover, Amazon’s integrated platform (e.g. Alexa, Amazon TV), gives it a further advantage.
However, there is burgeoning customer push back on the emerging Amazon monopoly, which I believe Walmart should capitalize on. Walmart needs to create viable competitors across the spectrum of Amazon’s products, such as launching a best-in-class app for phone and TV among other things, so that customers who are wary of solely buying through Amazon have a viable alternative.
The Amazon onslaught on brick and mortar has created many problems for traditional retailers such as Wal-Mart. While this threat is ever present for retailers, Kyle’s piece does a great job highlighting some of the key aspects of the Wal-Mart model that might potentially protect it (unlike most retailers) from the growth of Amazon-led eCommerce. In particular, Kyle mentions that Wal-Mart’s store density is much higher in rural and poorer regions in the United States. This point raises a very interesting question– is Amazon a threat to the core base of Wal-Mart customers or do the two behemoths have different primary customer bases? With Wal-Mart’s emphasis on low costs of goods, it is possible that it has ciphered off a customer segment that would be less willing to spend for Amazon Prime membership and the higher price points found on Amazon.
With customers prizing speed of access to goods now more than every, Wal-Mart’s existing footprint of being within 10 miles of 90% of Americans potentially gives them an advantage as Amazon seeks to add warehouse space and brick and mortar stores of its own. Another interesting point that I would love for Kyle to explore further would be the role of grocery sales as a competitive advantage for Wal-Mart. In 2016, food sales represented over half of Wal-Mart’s total sales and only 12% of U.S. consumers purchased food online during the year. With customers being slower to adopt food purchases online relative to soft goods, this could potentially be another area in which Amazon could leverage its competitive advantage against Amazon moving forward.
Though facing this big threat, Kyle’s proposal to monitor the pace at which its customers leverage online is it a bit worrisome to me. While I understand the rationale of attempting to leverage omnichannel customers to increase basket size, Wal-Mart risks potentially losing customers to other eCommerce sites if it intentionally slows its development in this area.
Awesome perspective, Kyle! I had a few thoughts on Walmart’s omni-channel strategy and competitive positioning over Amazon. Over the past few years, it’s clear that Walmart has made strides in expanding its omni-channel strategy. However, it doesn’t seem clear to me that Walmart’s rural presence has been an operational asset in directly enabling that growth. While this may be changing, I suspect most of Walmart’s eCommerce orders are still fulfilled by its central distribution centers. Potentially there is some level of brand recognition generated by physical stores that adds incremental value. Lastly, a good chunk of Walmart’s digital growth surely comes from its acquisition of Jet.com in 2016.
Amazon seems to be chipping away at some of the brick-and-mortar advantages through growth and acquisition. As recently as two years ago, Walmart was piloting a curbside grocery pickup service as well as grocery delivery—both of which were digital-enabled. With Amazon’s acquisition of Whole Foods, this in-person service would now be easier to match. Whole Foods is also quickly becoming a digital asset to Amazon as well, with Amazon offering hundreds of Whole Foods pantry and dry goods to its Prime members.
Amazon is aggressively opening new fulfillment centers as well. They recently announced 23 new centers, including center expansion projects, across the US [1]. Many of these projects involve buying old shopping malls to convert into fulfillment centers. At the moment there is no shortage of vacant malls, so Amazon’s conversion strategy could be viable in the medium to long-term, depending on the density of centers they are targeting.
1. http://www.businessinsider.com/amazon-is-buying-up-old-shopping-malls-2017-10
The two questions posed at the end of the piece here are important to think through when addressing the WalMart / Amazon question — I think people have been a little quick to hand the trophy over to Amazon. I think a successful retailer in the age of digitization will leverage their installed store base as an asset for both brick-and-mortar and online sales. Whether it’s fulfilling ecommerce orders from store inventory, accepting online returns in-store, or delivering items to a customer’s door that he/she picked out in person, there are myriad ways in which WalMart’s 5,412 US stores can be used to its advantage vs. Amazon [1]. Similarly, there are things (perishable groceries, pharmaceuticals, last-minute items) for which online sales penetration is very low (and may remain so for some time). WalMart can up its game in these categories. Lastly, they need to stop taking cash in store and provide a card-based solution for unbanked consumers. The card processing fees are minor compared to the lost insight on customer buying behavior that you get with credit card data. They need to know their customers inside and out in order to serve them best in whichever channel they transact in.
As an aside, it has always slightly perplexed me why ecommerce adoption was slower in rural areas than urban ones, given the value proposition (bringing the world to your doorstep) seems higher when your doorstep is potentially miles away from the closest store (vs. mere blocks). What can ecommerce companies do to make the value proposition to rural shoppers more compelling?
1. http://stock.walmart.com/investors/financial-information/unit-counts-and-square-footage/default.aspx
I believe that Walmart is in a unique position to utilize eCommerce. The benefits of eCommerce are definitely skewed towards low priced goods (1). Customers are wary of buying items with high price-tags online (particular if there is any question of the suppliers credibility) as they would rather check the quality of the good before purchasing. This gives a particular benefit to Walmart that is known for focusing on low cost, high turnover goods and gives them an advantage over other brands like Target.
The challenge that Walmart will face in moving increasingly towards eCommerce is that rural internet users are more wary of utilizing eCommerce than their urban counterparts (2). I imagine this has more to do with comfort than with access. As you mentioned, I think the omni-channel can be one solution to this problem as it provides customers the ability to see and feel their products before taking them home. I do not however think this will be enough. I believe that Walmart will need to improve its questionable customer service to be able to compete with the likes of Amazon online. Would I trust something that I buy at a Walmart store? Sure, I can touch it. Would I trust something that I bought from Walmart online? Mayhaps not. And would I trust that if I had an issue with an online purchase that Walmart would be able to resolve the issue? Probably not.
(1) https://www.crazyegg.com/blog/reasons-people-buy-products-online/
(2) https://www.researchgate.net/publication/4990788_Urban-Rural_Differences_in_Internet_Usage_e-Commerce_and_e-Banking_Evidence_from_Italy
Kyle,
I think that the question you raise about the differences between urban and rural populations leading to slower adoption of online shopping is a very interesting one. One thing in particular that sticks out to me is that Amazon has somehow avoided the stigma that Wal-Mart has in small town America for killing local business. For some reason, people will fight tooth and nail at city hall to prevent Wal-Mart from opening a store in their town, but then go home and order off Amazon.
While I don’t think that Wal-Mart can get around this stigma and effectively enter towns where they are prevented from having a physical presence, I would agree with you that pushing customers to order online and pick up in store can help defend their market share around existing stores. Training customers to order this way could also have the side effect of improving the quality of existing Wal-Marts by cutting down on wait times, congestion, and keeping the stores cleaner.
If I were simply to assess what the optimal way to deliver on Wall Mart’s customer promise i.e. providing inexpensive consumables mostly skewed towards groceries in rural areas I would say that a high degree of e-commerce makes a lot of sense. It seems safe to assume that the vast majority of the Wall Mart customers don’t go to Wall Mart to experience their stores live (which might more be the case of more upscale grocery stores such as Whole Foods) but rather to get a good ‘value for money’ shopping experience – an experience that is equally accessible online. This brings me to another question that is worth noting in this context: how fast will grocery/food mature as a pure e-commerce business? The maturity of different e-commerce products heavily relies on cost and time effective distribution techniques (i.e. it will probably take a while before we see Starbucks deliver coffee to our homes?).
Since I believe distribution technology will quickly be improved – be it through drones that reach homes in rural areas or other creative solutions for me it all comes down to the long-term perspective of what is the optimal, from a customer perspective, way of accessing groceries? In my opinion the answer to that question is pure e-commerce with home delivery shipping.
In essence I agree with you that boosting their omni-channel initiatives is a good short-term measure given their current position to differentiate to Amazon. Moreover, in the short to medium perspective I do think the store foot print will give Wall Mart a competitive advantage especially in rural areas/places to which it takes Amazon longer time to deliver (evidence of Amazon recognizing the benefits of omni-channel can be deducted from their acquisition of Whole Foods for instance – as has been mentioned in previous comments). But given my assumption that pure online shopping will prevail also in this industry I do think they need to heavily invest in their e-commerce platform and refrain themselves from expanding their physical store print/even reduce their current network to prepare for the next phase.
This is a very interesting article that highlights a question that is applicable to almost every piece of the retail industry. In my opinion it is hard to make the argument that incumbents have an advantage over players such as Amazon since they have a legacy network of outlets that challenge their cost-effectiveness compared to Amazon.
Great post Kyle – in response to your first open question, I think minimizing floor space is key. As you note they have started doing this – they are currently remodeling 500 stores to shift footage from retail to warehouse space. Furthermore, I’m sure they will see a reduction in headcount. WalMart’s 1.4 million retail employees are an asset – they are currently in a pilot program where employees deliver packages after work to customers – however, this is expensive and far from logistically thoughtful. I think they also need to make it cool to work at Wal Mart – this will attract tech talent to improve WMT’s existing online platforms, etc. Right now they are throwing money at this…the average salary of a WMT software engineer is $170k vs. 150k across Silicon Valley.