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After Years Giving Short Shrift to Web, Retail Giant Plays Catch-Up
By Shelly Banjo | The Wall Street Journal – 18 hours ago (6/19/2013)
Cited from Yahoo! Finance http://finance.yahoo.com/news/wal-marts-e-stumble-000000954.html
Amazon.com Inc. has become the runaway leader in online sales thanks to a network of more than 40 U.S. warehouses, some employing robotic assistants, which speeds orders to homes with ruthless efficiency.
As it seeks to play catch-up in e-commerce, Wal-Mart Stores Inc. has concluded it doesn't want to simply clone Amazon's model since it also has to worry about supplying its stores.
Instead Wal-Mart is creating a vast new logistics system that includes building new warehouses for Web orders, but also uses workers in stores to pack and mail items to customers, because Wal-Mart has determined it is faster and cheaper to send some shipments from its more than 4,000 U.S. stores.
"We're starting to gain traction," Chief Executive Mike Duke declared during the company's annual meeting this month. "I say starting because we know that it's an area we still have a long ways to go."
Wal-Mart is being forced to invent its own solution because it still hasn't figured out how to economically deliver all its products into the hands of online shoppers, current and former executives say. It is a remarkable admission for the Bentonville, Ark., company, which became the world's largest retailer in part by the efficiency of its supply chain.
Despite countless promises to become an online force since it got into e-commerce a decade ago, Wal-Mart has fallen far behind Amazon.Last year, Amazon posted Web sales of $61 billion, compared to an estimated $7.7 billion for Wal-Mart, according to trade publication Internet Retailer.
The stakes are only getting higher for Wal-Mart. Last year, online sales rose 16% in the U.S. to $224.3 billion, and today account about 5% of overall consumer-goods sales. That number is expected to double by 2017, according to Forrester Research Inc. Physical-world sales still account for $9.50 of every $10 spent, but increased just 5% from the year before.
Part of Wal-Mart's problem, according to former company executives, is that it was late to invest in Internet distribution due to a culture clash between revenue-focused online engineers at its Walmart.com office in California and profit-driven logisticians in Arkansas.
E-commerce at Wal-Mart is run as a distinct business, with its own headquarters, CEO and merchants who buy items specifically for the website. Every year, executives would start a "five-year planning exercise, but the plans were never executed and management would say the sales weren't there to justify the investment capital," says a former online-division executive. "Even now e-commerce is a rounding error in the U.S. market." Wal-Mart said it expects $10 billion in online sales this year, which would amount to about 2% of its $469 billion in annual revenue.
As Wal-Mart's online orders grew, it turned to makeshift spaces carved out of store-serving distribution centers and third-party warehouse operators to help handle the load. The extra layer added to its costs. Wal-Mart's online shipping can cost $5 to $7 per parcel, while Amazon averages $3 to $4 per parcel, analysts say—a big difference considering some of Wal-Mart's popular purchases are low-cost items like $10 packs of underwear.
Wal-Mart declined to disclose shipping costs.
Two years ago, Mr. Duke emailed e-commerce executives and asked if the company should avoid promoting special Web deals on the Friday after Thanksgiving, worried it would overwhelm the distribution network without adding to profits, a former company data scientist says.
Wal-Mart, which says e-commerce is now a top priority, responds that it didn't suppress promotions for operational efficiency. "We're always vigilant about balancing growth and profitability, but we've continuously expanded assortment and our free shipping" to grow sales, a spokesman says.
It now is vowing to solve its online problem with a distribution network that shares inventory information between 4,000 stores and 158 warehouses and immediately sizes up the most efficient way to deliver a television or T-shirt to a customer nearby. It will build additional e-commerce distribution centers this year but declined to disclose an amount.
In some cases, workers with shopping carts will pluck the items off Wal-Mart store shelves, package them and mail them out to millions of Americans.
Two-thirds of the U.S. population lives within 5 miles of a Wal-Mart, and trucks crisscrossing the country arrive daily to replenish the stores, "which can greatly reduce shipping costs," says Joel Anderson, head of Walmart.com's U.S. division.
Wal-Mart is testing the concept in 35 stores and plans to expand it to 50 this year. Starting this month, it also will install lockers at a dozen stores to allow customers to pick up goods ordered online.
Some experts are skeptical, noting no major store chain to date has figured out how to handle online orders as skillfully as Amazon while integrating delivery to the stores.
The idea is also not entirely new. Department stores like Nordstrom Inc. and Macy's Inc., which have significantly fewer stores and a narrower range of merchandise than Wal-Mart and Amazon, have also begun filling online orders from store back rooms. Macy's expects 500 stores will be able to fill online orders by this fall, up from 23 when it began the program in 2012. Amazon, which doesn't have to worry about keeping store shelves full, has put growth ahead of profits in the past 15 years.Commanding about a third of the total online market, Amazon's revenue rose 27% in 2012 to $61 billion, while it posted a $39 million loss, in part due to heavy spending on distribution, including a $775 million acquisition of robotic company Kiva Systems Inc. last year.
To develop its "next generation fulfillment network," Wal-Mart has called on consultants from Deloitte & Touche to improve its distribution systems. It also recently hired Jun-Sheng Li, a former trucking executive, to head its global e-commerce logistics, a newly created position.
In March, it said its e-commerce investments this year would cost 9 cents a share, which works out to roughly $430 million in pretax dollars, the first time it has broken out such costs.
Wal-Mart believes using stores to fulfill some online orders will save shipping costs, as those shirts or coffee pots can piggyback on regular deliveries to stores. But the process comes with serious limitations, particularly since it diverts workers' attention away from ensuring stores are clean and properly stocked, analysts say. UPS and FedEx would transport the orders from stores to customers.
Neil Ashe, Wal-Mart's president of global e-commerce, says Wal-Mart has solved similar conundrums before—most notably in 2005, when it reinvented its supply chain after plunging into the fresh-grocery business. Groceries now account for 55% of the company's U.S. sales.
Still, he concedes the online problem is challenging. He recounts a conversation at a director's meeting held at the e-commerce headquarters in San Bruno in March, when he was asked how long it would take and much it would cost to build out the e-commerce operation.
"It will take the rest of our careers and as much as we've got," Mr. Ashe says he replied. "This isn't a project. It's about the future of the company."
Greg Bensinger contributed to this article.
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