Baby Steps
Wal-Mart focuses its web strategy where it can make the most difference
By Paul Demery
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.
In addition, Wal-Mart’s store and online IT departments integrated the POS systems for Walmart.com and for each store’s photo lab, a project that took about two months and mostly involved building a secure messaging system between the POS systems, says Karl Bedwell, director of specialty systems for the Wal-Mart stores division. “We wanted our customers to have a choice of where they pay,” he says. A mother in Michigan could pay online for photos of her children, and choose to have the photos printed at a Florida Wal-Mart store, where Grandma and Grandpa could pick up the printed photos pre-paid, he adds.
But Wal-Mart wasn’t satisfied with just offering one-hour store pick-up for online orders; it also wanted to give customers an entirely new online digital photo experience on their home computers. Working with Fuji Film E-Systems, another division of Fuji Film U.S.A., it co-developed software to let online customers use their home computers to load digital photos, edit them, organize them into albums, and order prints for home delivery or store pick-up within one hour or the conventional two-day store pick-up service, all without having to toggle between different software applications, Lisuzzo says.
Strong response
In late October, eight months after the project’s launch, Wal-Mart and its web sites, Walmart.com and SamsClub.com, went live with the one-hour store pick-up service. Customers have responded better than expected, Lisuzzo says. “We’re seeing about 80% of online orders now picked up at stores, with about 60% of those being one-hour pick-ups,” he says. “The response from customers has been incredible. The initial numbers tell us this was the right thing to do.”
So far, the company has been pleased with the return, Lisuzzo says. “We took the lead in this because we saw the photo business as a way for us to differentiate from our competitors,” he says. “The company realized this would offer a good return on investment and so was willing to support it. The company is very supportive of things that put Wal-Mart in the lead, and this is definitely an initiative that puts us ahead of the competition.”
A side benefit, Lisuzzo adds, is that the increased store traffic to the photo section has resulted in a hike in digital camera sales.
While the digital photography offering has been the most dramatic success in Wal-Mart’s multi-channel strategy, it is developing other initiatives to take advantage of its size, its clout and the web. One of the most innovative is the deal it struck last year with Gillette Co. to include coupons for song downloads at Walmart.com in Gillette products not normally associated with music: Duracell batteries, Oral-B electric toothbrushes and Mach3Power battery-operated razors. Digital music coupons range in value from one to three downloads, depending on the value of the purchased product.
The promotion allows Wal-Mart to extend digital music offers throughout its stores. Since batteries are merchandised in several store sections, for instance, shoppers see digital music promotional signs in multiple departments as well as in checkout lines. Wal-Mart is still evaluating the success of the cross-channel promotional program with Gillette and will soon decide whether to launch similar promotions with other product categories, a spokeswoman says.
Tires online
A further area where Wal-Mart is protecting its base with a web strategy is with store pick-up of contact lenses and pharmaceutical prescriptions ordered online. Analysts say that is helping Wal-Mart maintain its stores’ market share in those areas as it faces steep competition from the ever-widening chains of CVS and Walgreen, both of which have retail web sites that let customers order online for home delivery or store pick-up. CVS operates more than 5,000 U.S. stores; Walgreen operates more than 4,500. In addition, pure-play online retailer Drugstore.com lets customers order online for pick-up at more than 3,000 RiteAid stores.
Wal-Mart is also moving into other areas online where it makes sense. For instance, customers can order automobile tires online for free shipping to a Wal-Mart Tire & Lube Express location. Customers don’t need to schedule installation, the company says, they can just show up and expect their tires to be installed.
To further promote online shopping, Wal-Mart distributed pre-Thanksgiving shopping fliers featuring exclusive offers on Walmart.com in several markets, including New York, Chicago and San Francisco that don’t have Wal-Mart stores. On the day after Thanksgiving, Walmart.com had 1.4 million visitors, making it the third most-visited shopping site behind eBay.com, with 5.4 million visitors, and Amazon.com, 2.6 million, according to Nielsen/NetRatings.
Although Wal-Mart’s online presence is still far from its potential for generating sales, its strategy of taking steps toward being a more effective Internet and multi-channel retailer will eventually pay off, analysts say. “They’ll continue to build synergies through their stores and Walmart.com,” Yannas says. “They keep trying until they succeed. They’re relentless.”
paul@verticalwebmedia.com
paul@verticalwebmedia.com
