Walmart faces growing pains as e-commerce sales surge 40%

Dive Brief:

E-commerce sales at Walmart were up 40% year-over-year at the end of 2018, but the company still has work to do on making those sales as profitable as the company, and analysts, would like, according to executives on the company's fourth-quarter earnings call.
"Our previous investments in fulfillment centers and systems, plus our acquisitions are helping us drive strong sales, but we need to make more progress to improve profitability," said CEO Doug McMillon. He expects repeat visits to increase, which could boost profits.
CFO Brett Biggs said gross margins were down 21 basis points, largely based on the growth of e-commerce in the U.S. and India along with "price investments in certain markets." Product mix and fulfillment costs deserve part of the blame.

Dive Insight:

"The boundaries between physical and online retail continue to blur and we're in a great position to capitalize on that," said Biggs on the call. Walmart has been in investment mode for at least the last year building up its e-commerce infrastructure from automating warehouse tasks to expanded last-mile capability.

The investments have been so numerous and diverse they have stoked hot takes that the retailer is turning into a tech company — a transformation that seems tenuous given its commitment to low prices.

Delivery has been a major area of investment for the company with many technologies and partnerships in various stages of experimentation.

"We're using a combination of last mile solutions. We're using [crowd-sourced] companies and we have our own platform that's called Spark that we're experimenting with and we're still playing around with some associate deliveries in a small way trying to figure that out. But it's the crowd-sourced delivery platforms they're really helping us achieve scale," said McMillon, who added the company currently has a "breakeven mentality" when it comes to delivery, but the customer response has him convinced the effort is worthwhile.

"They really do like the convenience and I'm excited about figuring all this out ... It looks to me like there's a long runway here where our supercenters can double as fulfillment centers and stores and also generate a great store experience, so it looks promising," McMillon said.

As fulfillment investments start to pay off, executives also see an opportunity in product split — specifically boosting higher margin items like home and apparel on lower margin e-commerce platforms.

"We are still working to optimize our margin mix so that we can achieve the long-term profit profile we want," said Biggs. To do so the company has hired its first-ever Chief Procurement Officer to better wield Walmart's massive purchasing power and scale that comes with 75 million SKUs.