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For Walmart, ecommerce is a bulwark amid consumer shifts

Walmart ecommerce sales grew 12% in Q2, while advertising was up 30%.

A Walmart sign

Walmart is building a "different business." (Courtesy photo)

When history looks back on Walmart’s recently-ended second quarter, it will likely be remembered for how the retailer slashed its profit forecast and laid off 200 corporate employees as the quarter was coming to a close, then beat earnings expectations anyway in the final results.

A mix of falling fuel prices, back-to-school shopping, markdowns and new spending from higher-income shoppers amid rising prices are some of the trends that helped propel it to a strong close in July. That provided revenue growth of about 8%, and offered some calm to those who see the nation's largest retailer as a barometer for an economy that many fear could be heading for a recession.

The quarter could also prove to be remembered for the moves it made to deal with inventory. Alongside markdowns, Walmart canceled billions of dollars in orders to prevent even more merchandise that was mismatched to demand from adding to the pileup.

These speak to the state of the company now. But it's also important to remember how Walmart is moving forward. For Walmart, that means growing a digital and ecommerce business, and this quarter marked what could later be seen as a milestone step on that journey.

As Walmart Inc. CEO Doug McMillon put it to analysts, “We're becoming more digital and even more relevant as an omnichannel retailer, and the related businesses like fulfillment and advertising continue to grow. We're building a different business and we're making progress.”

That progress can be seen in the results.

Ecommerce grew 12% year-over-year, and 18% on a two-year stack. This outpaced revenue growth (8%) and comp sales (6.5%), and came after 1% growth in the first quarter. The company showed that building for the long haul could weather the moderation of sales during a quarter that in-person shopping ticked back up.

It comes as a result of expansion. The company now has more than 240 million items on its ecommerce sites, and its third-party marketplace seller count has increased about 60% year-over-year.

The retailer is also seeing international growth in ecommerce. Over the last two years, Mexico grew 31%, Canada grew 32% and China grew 152%.

When it comes to the company’s fulfillment network, supply chain automation technology is also being introduced at stores and distribution centers. CFO John David Rainey, who recently joined the company from PayPal, talked about VizPick, an augmented reality tool for inventory management.

“The team is also working on getting items to customers faster while lowering the cost of delivery through a significant increase in the number of orders fulfilled by stores,” McMillon said. “We've increased this volume by nearly 40% from a year ago.”

GoLocal, the company’s white-label local delivery service, passed 1 million deliveries for other businesses, and expects to have 5,000 pickup locations this year.

Advertising grew nearly 30%, including Walmart Connect in the US and Flipkart in India, which McMillon called “nice to have.”

“Improvements to search and our large first-party shopper data have led to performance improvements for our advertisers both year-over-year and sequentially,” McMillon said. “We've seen the number of active advertisers investing with us increase 121% over last year. Even more encouraging, these improvements have supported the overall site experience for our customers by helping them find the right products or discover new ones that are most relevant to them.”

Another key component is Walmart+, the subscription service that offers a growing number of perks like free delivery, fuel discounts and members-only events. Walmart is growing what the membership offers, but less is known about the results of this expansion. The company has not yet provided membership metrics for this program. The results of a new deals event held a month before Amazon Prime Day, called Walmart+ Weekend, weren't disclosed, either. Last week, market research firm Consumer Intelligence Research Partners released an analysis showing that Walmart+ growth had plateaued through the last two quarters, as the share of Walmart.com members who were subscription members was relatively level.

On the earnings call, the company’s leaders touted a new lever to strengthen retention in the program. Walmart signed a deal to add a free membership to the Paramount+ streaming service to Walmart+.

“When we talk to members and ask what are the benefits they were looking for, the number one feature outside of delivery of product from both stores and ecommerce was an entertainment benefit,” Walmart US President John L. Furner said. “And there were others they talked about, but entertainment was at the top of the list, and that’s what led to the decision to add this benefit to the program.”

Each part of the digital business works together. Membership helps to direct more returning ecommerce customers to a growing marketplace, where brands tap the company’s advertising tools to stand out, and in turn help customers discover new goods, which leads them to back to buying. There is the potential for connections to be made across the programs, as well. Given that Walmart is piloting shoppable streaming ads with Roku and just launched a streaming service, it's easy to envision future crossover between a Walmart+ perk and advertising as well.

“The relationship between digital growth, marketplace growth and advertising is something that we're trying to take advantage of. And in the case of the US business, the ability to attribute sales later on to in-store transactions makes us uniquely positioned, and we've made a few enhancements lately for people that are consuming advertising from us,” McMillon said.

The importance of the ecommerce business to Walmart came through when executives were asked about how the company would come out on the other side of the current period of inflation and consumer shifts that include trading down to save money.

“We certainly hope to hold share around the world, and I think this inflationary environment is going to last for a while, so people are going to be value conscious, which plays to our strengths,” McMillon said. "The ecommerce experience in the end is a focus of ours and we want to continue to grow our pickup and delivery businesses around the world.”

For the retailer, ecommerce helps to expand the number of products a customer can access, and the ways in which they can access them. The company presents this variety as a way to help navigate shifts. It rapidly grew these capabilities over the last two years as demand rose during the pandemic. Now, they are helping to navigate changes in spending habits. Convenience will grow in importance, as well. Listening to the company’s leaders, one gets the sense that they feel ready. Furner recalled the 2008-09 recession, and what the company had built since.

“In that time period, we had our store business and a small ecommerce business. We did not have food pickup. We didn't do delivery from stores. We didn't deliver groceries. We didn't have [direct-to-fridge delivery service] Walmart InHome, and we didn't have Walmart+,” he said. “So, our ability to serve customers… in a more flexible manner than what we could have 13, 14 years ago is pretty dramatic.”

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