January 3, 2005, 12:00 AM

Baby Steps

Wal-Mart is adopting two online initiatives where it can find immediate ROI: innovative digital photo printing and cooperative CPG marketing.

Until now, Wal-Mart Stores Inc. has not made a big splash online. The behemoth of retailing is as large as the next five largest retail chains combined, but its online sales of $723 million, as estimated by Internet Retailer’s Top 300 Guide to Online Retailers, make it only one-seventh the size of Amazon.com.

Now that is starting to change as Wal-Mart realizes the Internet is changing the way people shop. Among Wal-Mart’s online initiatives in the past year are one-hour printing of digital photos that consumers load to Wal-Mart’s web site, store promotions with CPG manufacturers that encourage customers to download music from Walmart.com and a marketing effort to encourage shoppers, especially in big cities, who don’t live near a Wal-Mart store to shop at Walmart.com.

Market events

Analysts say Wal-Mart’s new religion in some areas of web-based retailing was forced upon the company by market-changing events. In response, the company has decided to focus most strongly on online categories that can make the biggest difference to its financial and competitive positions, analysts say. “They’ve chosen which categories and businesses they want to have not just a presence in, but to be at least as good as if not better than what’s available from their competitors,” says Jim Okamura, Chicago-based senior partner with retail consultants J.C. Williams Group.

Nowhere is that strategy more apparent than in digital photos, where the company has an extensive and well-thought-out approach. “They’ve been the largest seller of film and of film processing, so they have to do this to maintain market share,” says Ulysses Yannas, stock analyst who follows the imaging industry as well as Wal-Mart for New York-based investment firm Buckman, Buckman and Reid. “It’s a high-revenue business with margins of 30%-plus. Anyway you look at it, it’s big business, especially for Wal-Mart. It’s revenue they can’t give up.”

Wal-Mart itself doesn’t mince words about the importance of the photography market and its need to evolve with it. “The day people stop taking pictures to print and look at, we’re in trouble,” says Joe Lisuzzo, digital services and marketing manager for Wal-Mart’s photo division.

Ambitious timetable

To capitalize on the broad market move into digital photography, Wal-Mart’s photo division set an ambitious strategy in February 2004 to capture a big part of that market by offering digital camera buffs something that didn’t yet exist: a three-part service that would let them organize and edit their digital photos on the web at Walmart.com, order online for pickup within one hour in any of more than 3,000 stores and offer an option that allowed one customer to pay for the photos and another to pick them up. What’s more, the service was ready in time for the beginning of the ’04 holiday shopping season. “It took a lot of initiative, with a lot of people working day and night on this to make it happen in time for the holiday season,” Lisuzzo says.

Before it undertook such an ambitious initiative, the photo division had to convince Wal-Mart’s senior executives that the plan would not only work but also pay off in profits-not an easy argument to make with a company known to enter markets, like digital music and online rentals of DVDs, after a market has already been proven by other retailers. “They’ve never been innovators in Internet retailing,” says Yannas, who personally holds some stock in Wal-Mart but whose firm has no investment relationship with it.

Wal-Mart entered the digital photography market in 2000 with an online service that delivered printed photos to stores for pick-up in two days and with in-store Kodak kiosks for making copies of printed photos. But last year it realized it needed to take a bold step to stand out in the crowd. With CVS Corp. and Walgreen Co. also offering cross-channel digital photography services, including ordering online for next-day pick-up in stores, Wal-Mart set out to raise the stakes by letting customers order online and pick up in a store within an hour. And because that meant pick-up in any Wal-Mart store nationwide, it decided it would also support sharing of photos among geographically dispersed friends and family members-a move that played into Wal-Mart’s nationwide chain, Lisuzzo says.

Key to success with its integrated, multi-channel photo service was to make it as easy as possible for customers to make and receive prints of digital photos. “With a digital camera, you can take 500 pictures,” Lisuzzo says. “People are taking more pictures than ever before, but are printing fewer pictures than they have before. Our job at Wal-Mart is to figure out a way to give customers options to view and order prints.”

Major challenge

The plan proved a major challenge even for mighty Wal-Mart. To make it work, it had to gather IT and merchandising teams from Wal-Mart stores and Walmart.com, two divisions of Fuji Film U.S.A. and its telecommunications providers to install in just over half a year new software and broadband lines for each of its more than 3,500 Wal-Mart and Sam’s Club stores. “We had to figure out a way to tie this all together,” Lisuzzo says. “We had to be joined at the hip for our customers to be able to do this.”

Wal-Mart had been letting shoppers on Walmart.com load digital photos for home or store delivery since 2000, but the service took two days to get printed photos in the hands of customers. Photos loaded onto Walmart.com would be sent over the Internet to Fuji Color, Wal-Mart’s third-party printer, which would ship the completed prints to customers’ homes or to a Wal-Mart store.

To make prints available for store pick-up within one hour of an online order, Wal-Mart had to deploy new T-1 broadband connections to every Wal-Mart and Sam’s Club store, plus install new network switches and software to let each store’s photo lab accept digital photo downloads from photo database servers maintained by Fuji.

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