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Walmart's Secret Weapon to Fight Off Amazon: The Supercenter — Update

By Sarah Nassauer 

After years of internal debate about how to compete with Inc., Walmart Inc. boss Doug McMillon took the stage at a recent strategy meeting and revealed the centerpiece of his plan to thrive in an e-commerce era: giant stores.

Walmart, he told executives at the meeting, wasn't going to win by building an unprofitable e-commerce operation or other stand-alone ventures. Instead, its supercenters could be the heart of a web of businesses all working together to attract shoppers and drive profits.

The supercenters are sprawling stores of around 180,000 square feet offering 100,000 products, bathed under LED lights. Groceries, clothes, camping gear and televisions are for sale; customers can also fill medical prescriptions, transfer money or get their hair done. They are often open 24 hours and are community gathering spots, becoming backdrops for videos of teenage pranks that pop up on YouTube, or a place for senior citizens to take a walk in cold weather.

The re-emphasis on the giant outlets Walmart started building in the 1980s was a change from a strategy laid out just a year ago. Then, at an investor meeting, Mr. McMillon described stores, e-commerce and other businesses as individual ventures serving the Walmart customer in different ways.

In the new view, disparate parts of the business would interact to drive profitable growth. Walmart would capitalize on its customer data to sell online advertising to brands, according to a person familiar with the presentation.

Turning far outside its retail expertise, Walmart plans to build "edge computing" capacity, in which data is processed physically close to where it is being collected, a faster system than sending data to the cloud. That system, spread out among retail locations, could be rented out amid new demand by autonomous vehicles and other systems that may use the technology to process large amounts of data quickly, according to people familiar with the company's plans.

Added warehouse and shipping capacity could be sold to third-party sellers, to allow more companies to easily sell their wares on Customers would have a bigger product selection, and Walmart could collect fees for processing and shipping. And online orders for Walmart's groceries and other items could increasingly be fulfilled by traditional stores, where customers pick up goods.

"The time where people might have been worried that our boxes were too big has long passed," Mr. McMillon said at an investor meeting earlier this month. "The supercenter footprint and positioning gives us a great opportunity to expand services and help the economics of the model." Walmart declined to make Mr. McMillon available for an interview.

Adding to market share

The retailer has largely weathered the shift to online shopping and the rise of Amazon. Sales from U.S. stores and websites open a year have risen for 20 straight quarters, as Walmart added online grocery pickup in store parking lots, cleaned up stores and lowered prices. As other traditional retailers lose customers and fail to compete, Walmart has increased its market share.

The company's stock has surged nearly 30% so far this year, trading near the highest levels since the retailer went public in 1970.

But the sales gains have been costly. Walmart spent heavily to improve stores and to grow online, and the efforts have been dependent on U.S. stores producing steady profits to fund investments. Walmart executives have been wrestling with the best way to continue, according to people familiar with the situation.

Walmart's revenue is more than twice Amazon's, but the pace of Amazon's profit growth is racing past Walmart's. Last year, Amazon's operating income tripled to $12.42 billion, while Walmart's operating income grew 8% to $22 billion. Amazon's profits largely come from its cloud-computing arm and nonretail activities, such as advertising.

Amazon Web Services, the cloud-computing business, generated $25 billion of revenue in the first nine months of the year, or 13% of the company's total, yet it generated 62% of Amazon's operating income in the period. Ad revenue at Amazon hit over $3.6 billion in the most recent quarter. The company is now the third-largest U.S. seller of digital ads after Facebook Inc. and Alphabet Inc.'s Google, according to eMarketer.

At Walmart, more leaders are asking, "Where is our cloud?" said one former Walmart executive. "We can't do this without another revenue source."

Beginning in 2016, Walmart moved aggressively onto Amazon's e-commerce turf. It purchased, an unprofitable startup created to underprice Amazon on millions of items. Jet's founder Marc Lore and much of his staff took over Walmart's wider e-commerce operations. The company soon took "Stores" out of its corporate name as "a symbol of how customers are shopping us today and how they'll increasingly shop us in the future," Mr. McMillon said at the time.

Mr. Lore and his team poured investment into e-commerce operations by lowering prices online, spending more on marketing and prioritizing faster shipping. Mr. Lore pushed Walmart to better integrate its store and online activities for shoppers, according to people familiar with the situation. The team also scooped up smaller e-commerce sites, including women's apparel company ModCloth, outdoor retailer Moosejaw and men's apparel brand Bonobos.

Online sales grew, but losses mounted amid the high costs. Last fiscal year, U.S. online operations lost around $2 billion--more money than planned for the second year in a row, according to people familiar with the figures. Though the e-commerce unit has long lost money, failing to hit targets was problematic for a company obsessed with frugality that finely calibrates its financial goals, said some of these people.

A Walmart spokesman declined to comment on e-commerce losses.

The website, selection and shipping speeds still need to improve, Mr. McMillon said at the investor meeting earlier this month. "I would have thought we would have been further along in e-commerce," he said. "We're not pleased. We'd like to go faster."

By the end of last year, executives in the e-commerce unit heard from Mr. McMillon, Mr. Lore and other leaders that it was time to aggressively cut spending, according to people familiar with the situation.

"It was a whipsaw effect from one year to another," said a former executive on the e-commerce side of the business. "In the beginning it was all about growth, how can you win share away from Amazon," the person said. "Now it's about profit."

Earlier this year Hayneedle, the online furniture seller that acquired, cut a third of its staff. Bonobos laid off workers. What remained of Jet's headquarters staff was folded into the rest of Walmart. Modcloth was sold. Walmart has told Bonobos and Moosejaw they need to stop losing money, according to people familiar with the situation. Walmart is also exploring a sale of Vudu, the video streaming service it bought in 2010, according to a separate person familiar with the situation. The unit faces challenges as competitors from Netflix Inc. to Walt Disney Co. invest heavily to produce their own content.

Borrowing from Disney

Walmart saw that a bright spot in e-commerce was directly tied to its stores: more than half of the 40% growth in U.S. e-commerce sales last year came from expanding online grocery pickup or delivery service run out of stores, according to people familiar with the figures. At the same time, it was seeing results from its push to improve stores, snagging shoppers from other traditional chains.

At the recent strategy meeting, Mr. McMillon told top executives that giant stores could be the base for new ventures like fast delivery, health clinics and other services, according to the person familiar with the meeting.

The concept borrowed from a famous 1957 sketch that laid out Walt Disney's blueprint for growth at his film production company, Mr. McMillon said during the meeting, according to the person. The drawing detailed how cartoon movies could feed profits in other businesses, such as television, comics, toys and theme parks; and how those operations, in turn, could prop up the film studio. As some movie studios struggled at the time, Disney continued to grow by using the interconnected profit formula.

Walmart's stores could also act as a base for potentially profit-making technology infrastructure or business-to-business services.

In edge computing, computing power is physically close to where data is being collected--in contrast to cloud computing, in which computing power is located in distant server farms, slowing down processing.

More devices such as drones, autonomous cars and sensors collect large amounts of data that could be processed by edge-computing systems.

It takes around a quarter to half a second for data from a device to reach the cloud. That length of time "doesn't sound like a lot, but if you are in your car and it's trying to recognize a ball rolling out in the street or a kid running behind the ball," that might be a decision that needs to be made faster, said Rob High, chief technology officer for IBM Edge Computing, who isn't working with Walmart on the project.

Hypothetically, autonomous car makers could contract with Walmart to do on-the-fly, fast calculations in cars driving through town, hopping on and off various stores' systems. Around 90% of Americans live within 10 miles of a Walmart, the company says.

5G rollout

Mr. High said the rollout of faster, wireless 5G networks could allow more edge devices in a given area to be connected at once, making the technology more useful.

Walmart executives have met with large telecom companies to discuss allowing the firms to install 5G antennas on the roofs of stores for a fee or to provide access to faster network connections, said a person familiar with the talks.

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December 21, 2019 06:20 ET (11:20 GMT)

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