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Don’t waste another dime on bloated channel reporting and vanity metrics.
Don’t waste another dime on bloated channel reporting and vanity metrics.
Walmart ecommerce sales grew 12% in Q2, while advertising was up 30%.
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.”
The company is pulling back after breakneck pandemic expansion. Will it sacrifice the shopping experience along the way?
Amazon is in a period of rebalancing.
The company has long scaled at a relentless pace as it sought to not only provide a marketplace for commerce, but the infrastructure that enabled it, as well. Amazon found another level of overdrive over the last two years, as demand spiked to unseen heights during the pandemic and the company tried to build to keep up.
This wasn’t necessarily a period that saw the kind of invention that Jeff Bezos made an existential tenet of the company, but it nonetheless seems to be shaking out as a cycle that included risk and fallout.
In this case, the risk was not a new device like a smartphone or a move to bend the future to Amazon's will like drone delivery. Rather, it was an expansion that took its already-vast operations to new heights.
Nowhere was this more evident than the company’s logistics network. As CEO Andy Jassy described it to analysts Thursday on an earnings call, the company doubled the size of a fulfillment network it took a quarter-century to build in two years. It also built out a last-mile delivery network that was the size of UPS, which is one of the top two carriers in the U.S.
In 2022, all of that expansion ran into 40-year-high inflation, war in Ukraine and a pullback in demand for goods amid reopening. The company first admitted the problem: It had overbuilt.
But the solution is not to tear down. It had to keep expanding as only Amazon does, while still cutting back in a period of “belt-tightening,” as executives have put it.
That’s evident in watching developments out of the logistics network alone. Amazon pulled out of some areas, and canceled plans to expand into some new warehouses. Yet, as Business Insider reported, it still added 79 million square feet – a footprint that is equal to half of next-closest competitor Walmart’s entire distribution network. It is also expanding Buy with Prime, a new program that will allow direct-to-consumer brands to offer Prime benefits, and, by extension, access to Amazon’s logistics network. Another service, called Amazon Warehousing and Delivery, is designed for upstream storage, necessitating more space to be made available in the network.
At the same time, it will seek to keep doing more for consumers.
Jassy indicated as much when he was prompted to outline his priority areas. Beyond cost-cutting, he said speed is the second highest priority for Amazon. As if to conform this, he said later in the call that one-day shipping is getting off the ground in North America.
Selection is another priority area. At Amazon, that phrase translates to a few things, but top of mind is “expanding the third-party seller marketplace.” Third-party sellers accounted for 59% of sales in Q4. Beyond sales, Amazon’s work with the sellers who post their products on the marketplace is also lucrative for the company. Amazon allows these sellers to tap its logistics network to offer Prime through the Fulfillment by Amazon program. Its business segment called third-party seller services grew 20% year-over-year in the fourth quarter, right in line with the massively profitable cloud computing division Amazon Web Services.
Price, Jassy said, is another area of importance, especially with the consumer pullback on discretionary purchases being observed amid inflation.
“I think pricing being sharp is always important,” Jassy said. “But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw.”
Finally, Jassy cited a priority of improving the customer experience. He said Buy with Prime would give subscribers the ability to use their benefits across the web, and noted that virtual try-on for shoes brings change to the shopping experience.
But it’s in this area that the tradeoffs that may be happening under the surface may rear their head again. GlobalData Managing Director Neil Saunders noted that online shopping generally is becoming “more difficult" on Amazon.
“While the Amazon marketplace is far from a terrible place to shop, it has become more complex and cluttered with a multitude of products, delivery options, and prices levels for shoppers to sift through,” Saunders wrote in note released at the time of the earnings call. “The result is that impulse buying has dropped and that more people are migrating away to other retailers. This is not yet a serious problem as erosion has only happened at the margins, but it is something Amazon will need to address and arrest to prevent further decline.”
Taking a rhetorical step further, the journalist John Hermann wrote this week that a “junkification” of Amazon is taking place, while arguing that “everything is going according to plan" for the company.
He placed the growth of the third-party seller marketplace at the center of this trend. But it also comes as Amazon grows its advertising business, with many taking note of a growing number of ads on the platform. The company also wants to keep growing Prime, and is now using content such as Lord of the Rings and NFL’s Thursday Night Football as key acquisition channels. Both had “record” signups of new Prime members, CFO Brian Olsavsky said.
“We see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website,” he said.
It will have to do each of these things at once, while entering a period that will require it to be “more targeted with its growth ambitions,” as Saunders put it.
"Since its inception, Amazon has had a culture of throwing dollars at many different things to see where they led and what they could learn," Saunders said. "That approach worked well for a younger, fast-growth business. It works far less successfully for a more mature entity. In our view, management deserves credit for recognizing this and quickly responding. However, the shift requires a lot of care because Amazon needs to find a new balance between being ambitious and innovative and being more frugal with its spending – which will be very challenging."
Jassy said the changes of the pandemic made its logistics a "different network." That may be true of the whole company. Rather than an isolated cycle of overbuilding and pulling back, this may prove to be a period that changes Amazon altogether. The bets will still be there, but the risk will be magnified with fewer dollars that don't pay off to go around. As hinted by the logistics buildout of the pandemic and even Buy with Prime, they also may look more operational.
Less delivery robot, more delivery optimization.
As Jassy put it: “We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term.”
The recipients of those investments will say a lot about where it wants to head in this next year.