Where’s Wal-Mart

As it squeezes out local competition and seizes control of a widening variety of product categories and services, Wal-Mart Stores Inc. is well on its way toward a stated goal of global retail domination. That may have independent retailers and its national big-box store competition on the run, as well as those, like the grocery segment, whose territory has been invaded only more recently.

But e-retail leaders aren’t likely to feel more than a pinch from Wal-Mart.com for now, experts say. That’s because, though the world’s largest corporation may be shooting for the moon, its web site remains bound by the market dynamics of Earth, like the fact that online shoppers don’t buy paper towels— the kind of low-price commodity that’s historically brought shoppers into Wal-Mart.

But that doesn’t mean Wal-Mart doesn’t have a web strategy or that it is ignoring the newest retail distribution channel. Rather, it means, analysts say, that Wal-Mart is looking beyond selling at a broader spectrum of how the web site can contribute. Just as it used technology and innovation to become the world’s largest retailer, Wal-Mart is using the web for many other purposes.

The web has assumed a primary utility to Wal-Mart in areas that retailers who are more narrowly focused on maximizing online transactions have viewed as secondary benefits. Walmart.com offers Wal-Mart the ability to extend inventory, test new products and categories at relatively little expense, educate consumers about higher-priced products it sells, strengthen customer relationships and further leverage ad dollars it’s already spending offline.

Positioning

“Since the height of the Internet euphoria, people have started thinking more rationally about what they need the Internet to do and what it can do, given where they are positioning themselves in the landscape,” says Mary Brett Whitfield, analyst at retail consultants Retail Forward Inc. “It’s much more about overall positioning in the marketplace than it was in 1999. Wal-Mart is approaching what they do online appropriately, given who they are and what their unique selling proposition is.”

Wal-Mart doesn’t break out web sales from consolidated sales results, but it’s a safe bet that with total sales of about $245 billion and the web accounting for perhaps 2% of all U.S. retail sales, online sales’ contribution barely amounts to a blip on the corporate radar screen. Retail Forward estimates that in 2002, Wal-Mart’s online sales were about $135 million. Contrast that with Amazon.com, which sold more than $3 billion online in 2002, or even department store retailer J.C. Penney, which sold $324 million online last year, according to Retail Forward.

A number of factors come together to keep Wal-Mart from being a web powerhouse. The first is that with store sales that beat everyone else’s, they don’t have to lead online to stay on top. Another is that the commodities on which Wal-Mart made its low-price reputation don’t sell profitably online. And shoppers don’t need to go online to research them because they don’t require research. Further, affluent consumers who got online first and spend the most while there don’t overlap with Wal-Mart’s less affluent core customer base, of which perhaps 65% are now online, according to Wal-Mart’s estimate, and 70% according to Retail Forward’s estimate. By contrast, 83.3% of frequent shoppers at the more upscale Target stores are online, Retail Forward says.

“I have a hard time imagining that the Internet will ever be as important to Wal-Mart’s business as it is to the businesses of companies like Sears and Circuit City,” says Jupiter Research Inc. retail analyst Ken Cassar. “At the end of the day, the Internet will always remain a small percentage of total retail. As such, it’s not really necessary that Wal-Mart be the dominant online retailer.”

Utilitarian site

It’s no surprise then that Walmart.com is utilitarian, especially compared to the Amazons and Lands’ Ends of the world who lead on the web with tools and technology that dazzle. While sites like Sharper Image, Polo.com and QVC.com experiment with rich media, feature visually arresting product imagery and even offer on-demand product video, the online arm of retail’s low-cost leader does not. Product photos can be enlarged for detail, but the site does little to romance merchandise presentation. Virtual model or wardrobe selection features? The web site doesn’t offer the apparel available in Wal-Mart stores. With a few exceptions, Wal-Mart hasn’t positioned Walmart.com as a destination site for people who don’t already shop Wal-Mart stores. “It has more than the basics, but it doesn’t have all the bells and whistles,” Whitfield says.

Retail consultants point out that Walmart.com’s toy offering, for example, while having the basics and some hot items, doesn’t offer a selection that comes close to rivaling what Toys “R” Us and KB Toys offer online. But with Wal-Mart owning an estimated 20% of the U.S. toy market through store sales, the web doesn’t have to drive Wal-Mart’s success in toys. Its role relative to toy sales is not to bring in new shoppers by offering a killer assortment that outstrips the competition’s, but to afford convenience: another way to purchase the items already popular in its stores.

And that’s typical of how Wal-Mart uses its web site: to complement store sales and extend their reach and scope. It’s a shift from the thinking that characterized e-commerce only a few years ago, when web sites attached to brick-and-mortar operations strove for independence and possible IPOs.

Wal-Mart was no exception. Late in 1999, the company announced plans to spin off Walmart.com, which had launched in 1998, into a separate entity, the better to ride the rising e-commerce wave. At the time, the notion was simply to replicate as much of the store as possible, as quickly as possible, on the web site. But soon enough, multi-channel retailers began to realize that independence wasn’t always the best route to success, and by July of 2001, Wal-Mart had acquired its online operation and rolled it back into the fold. In the meantime, it had re-designed Walmart.com and pared down its product offerings from everything in the stores to what made sense to present on the web.

Now, Walmart.com seeks to integrate with stores as tightly as possible. Today, says a Walmart.com spokeswoman, Wal-Mart uses its web site strategically to add value to its store offering, whether added value is in the form of a broader assortment of merchandise than in stores, expanded product categories or services that can easily be accessed online though not necessarily in stores. “Those areas are where we’ve been focusing our energies online,” the spokeswoman says.

Take books. The average Wal-Mart store carries 1,000 to 1,500 titles, but Walmart.com offers more than half a million of them, working with an outsource supplier that ships direct, as it does in several categories. Ditto the more than 13,000 movie titles and 80,000 music recordings at Walmart.com, which beats the stores’ assortment hands down.

Wrapping in content

Furniture requires lots of space for display in stores, but since space is virtually infinite online, Walmart.com offers an expanded selection that includes large pieces such as sofas, loveseats and mattresses that aren’t available in stores. Similarly, big screen TVs are a growing category online because while the stores have only a few models on display, Walmart.com offers several.

Toothpaste and mouthwash may be no-brainers that sell on price alone. But where it matters, Walmart.com develops content to wrap around products that represent more expensive and/or considered purchases that can then be purchased online or off. To promote the sale of its Keepsake Diamond engagement rings, for instance, Walmart.com offers a jewelry configurator that lets customers design their own ring. And thanks to content assets purchased from the defunct Garden.com, shoppers can get information on garden plants that will thrive in their part of the country by entering their ZIP codes under Walmart.com’s garden tab, while in-season, live plants can be ordered online or purchased at the store. The site also offers a digital camera buying guide.

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New categories

In addition to supporting the sale of selected bigger-ticket items by letting consumers research them online, Wal-Mart has used the web to expand into new product categories. Computers at Wal-Mart can be purchased only online. Wal-Mart worked with computer manufacturer Microtel and web developer Lindows earlier this year to bring Walmart.com shoppers a computer with an open-source Linux-based—and therefore less expensive—operating system pre-installed. Shoppers can even buy the OS as a stand-alone, but only on the web. “Computers are not a major thrust at Wal-Mart’s brick-and-mortar stores, but they are one of the primary categories Wal-Mart sells online,” Cassar says. “The Internet will help it get its foot in the door in certain categories that are only a small percentage of its offline business.”

Online’s incursion into new territory doesn’t stop at products. A pilot DVD rental service debuted online last October, after the company tracked industry figures quantifying consumers’ shift to the DVD format. To its existing online photo development service, Walmart.com also last year added online prescription fulfillment and optical services, as well as a tire service in which tires can be ordered online for installation at designated Wal-Mart stores.

While the site steers clear of categories such as inexpensive health and beauty aids, and the groceries responsible for much of the company’s growth over the past several years, a greater number of items and services in many categories are now available online at Wal-Mart than off. The newer web offerings align with a larger corporate focus in which Wal-Mart seeks to grow by continually testing the outer limits of what consumers are willing to allow Wal-Mart to be, according to Retail Forward.

Minor ad budget

With universal name recognition, Wal-Mart doesn’t spend a high percentage of its revenues on advertising. “It’s about 0.3% of revenues. With a sales base of about $250 billion, that’s $750 million in actual numbers,” says research firm Morningstar Inc.’s Tom Goetzinger. “It might sound like a lot, but it’s next to nothing.” Much of that figure goes into Wal-Mart’s warm and fuzzy image-enhancing television advertising, but it’s Wal-Mart’s monthly circulars, distributed mostly via inserts to some 90 million households, that get shoppers into their local stores for specific promotions.

Mention of Walmart.com in the circulars is carefully tied only to what’s available online. “It’s not even mentioned on the commodity pages or the apparel pages, but on the baby page where they’re selling strollers and car seats, they tell customers to find more car seats and cribs at Walmart.com,” says Whitfield. “They can’t show everything they have in the flier, so they are using the web to augment what they can show by telling people to look, even decide, online, then go to the store.” It’s an example of what has become a winning strategy for multi-channel retailers, says Retail Forward: educating consumers about what’s worth going online for versus when it pays to go to the store.

“The circulars are a particularly effective form of advertising in terms of cost of sale, because once they get someone into the store, the ads are so much cheaper,” says Goetzinger. “If I crank out just as much in circulars, but my total sales base is $25 billion, that 0.3% becomes 3%. Once Wal-Mart gets people to the store, the average ticket is going to dwarf the ad cost of getting that person into the store.”

Supporting role

The web has a supporting role in that dynamic because two years ago, Wal-Mart extended the reach of the already widely-distributed fliers at virtually no cost by putting them online. Much of that traffic takes the next step toward purchase by using the site’s store locator, a feature that in total gets about 1 million uses per month, Wal-Mart says. The web also delivers e-mail marketing messages to registered Walmart.com customers based on a combination of customer history, target audience and seasonal promotions.

While the web site seeks in part to entice shoppers into Wal-Mart stores, the stores return the cross-channel favor, the company says. “Our stores are a big venue for letting people know that Wal-Mart is online,” the spokeswoman says. “For instance, before Valentine’s Day, we had signage in our stores letting shoppers know they could order flowers at Walmart.com and have them shipped directly to that special someone. That’s something the stores don’t do. But Walmart.com can, and that is something we were able to convey through the stores.”

Though the web isn’t a big contributor to Wal-Mart’s total sales, it’s likely to grow in that regard in a way that mirrors the web’s growth in the rest of retail. “Wal-Mart has certainly not tapped out the U.S. market. But to maintain historical growth they are likely going to need to attract a more affluent customer, and that means their product base is going to need to become increasingly appealing to those consumers,” notes Cassar.

Toward that end, greater expansion online into consumer electronics, which it appears the company is already doing, could be a good fit. The educated electronics buyer can find detailed product information from a number of sources online and off before he buys. With that research in hand, and manufacturers’ product specifications being identical across all retail outlets, price remains the only differentiator. Shoppers look for what they want where it’s cheapest, and chances are it will be Wal-Mart or Walmart.com.

Wal-Mart also is expanding into some slightly more upscale items of apparel, for example, such as through an agreement that brings Levi-Strauss clothing into the stores. “Wal-Mart’s goal is to have a 30% market share of everything they sell, and they only have that in a handful of things. So they are eyeing everything,” Goetzinger says. After building its grocery sales over the past decade, apparel could represent the next big push for the company. If it gets the offering right on the customer side, analysts say, the company would have a major advantage given the supply chain efficiency it already commands in other areas.

But what would such moves means for Walmart.com? After all, it pulled an earlier apparel offering off the web, and except for gift baskets containing specialty foods, groceries aren’t available online.

Nailing it

The likelihood is that if Wal-Mart can figure out a way to realize a sufficient percentage in moving those—or any other goods—online, there’s little to stop it from doing so over time.

“As long as they can take care of the fulfillment, most other categories should be easily transferable onto the web,” says Goetzinger. “Their scale makes them extremely efficient with all of their costs. They have an incredible ability to leverage their IT to generate more sales and productivity.” And while it may not represent a great deal more in the way of a percent of total revenue, the web will increase its contribution.

And that’s what should concern any online retailers who think they are immune to Wal-Mart’s growing dominance. “At some point,” Goetzinger adds, “they will nail it.”

mary@verticalwebmedia.com