How should Wal-Mart fill web orders? That seems like a straightforward question. And, given that Wal-Mart sold over $7 billion of stuff on the web last year, you would think they would have figured that out by now. Still as the Wall Street Journal tells it, the retail giant is still working through how best to fill orders (Wal-Mart’s E-Stumble With Amazon, Jun 19).
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.
As the quotes make clear, this is all about how to match Amazon so Wal-Mart remains relevant as more transactions move on-line. To put the challenge in perspective, check out this graphic of Amazon’s distribution network.
There a couple of observations worth making. First, as the article notes, Wal-Mart has a boat load of stores and two-thirds of the US population lives within five miles of a Wal-Mart. That is a huge potential advantage as customers expect faster and faster fulfillment. A McKinsey study earlier this year made a compelling case that one only needs a few fulfillment centers if everyone is happy but with two or three delivery but that number goes way up if the firm has to provide next day delivery. (See here.)
However, that is not as easy as it sounds. Again, the article notes that “no major store chain to date has figured out how to handle online orders as skillfully as Amazon while integrating delivery to the stores.” (Also, check out Gady’s recent post about how Macy’s can muck up shipping orders from multiple stores.) If it were easy to integrate shipping individual orders to consumers within the logistics operations of a conventional retailer, then Wal-Mart’s current practice of filling orders out of its various warehouses would likely be enough.
To my mind, this points to the importance of focus. Different arrangements of resources and processes result in different levels of performance. A process set up to efficiently ship large quantities to stores is not going to perform as well at fulfilling individual orders as a process set up for that express purpose. Unless Wal-Mart is willing to bite the bullet and dedicate significant resources to direct to consumers e-commerce, they will underperform Amazon. Even if they do invest heavily, they might not catch Amazon given the lead Amazon currently enjoys. Indeed, one must admit that there is more than a whiff of the innovator’s dilemma in this story. Wal-Mart could always justify underinvesting in on-line fulfillment because it was a mere sideshow relative to their stores. However, as more and more consumer move to on-line shopping, their inattention has left them behind and unprepared.