As a dismal economy pushes customers toward cheaper services and products, retail giant Wal-Mart's (NYS: WMT) new same-day delivery push doesn't make sense at first blush. But a broader look at the expedited service's potential uncovers Wal-Mart's opportunity to expand its online presence.
Wal-Mart announced Oct. 9 that it would charge $10 for same-day delivery service in select locations, starting with several large metropolitan markets.
On the other hand, FedEx (NYS: FDX) announced cuts to its Express air services the same week. The shipping company is often viewed as a gauge of the U.S. economy, so its shift suggests that Wal-Mart's new initiative could be "Returned to Sender." As a result of monitoring customer demand, FedEx is forecasting less shipping and lower demand for faster, costlier options, through 2013.
It's a setup!
There are shortfalls to relying on FedEx's announcement as a signal that all demand for expedited services is down, especially since retailers ship goods to customers. Most likely, companies will continue to use expedited shipping, absorbing costs to attract more shoppers -- making rapid shipping options more of a strategy for boosting sales volume than profits.
With that in mind, Wal-Mart is more likely targeting a larger share of the e-commerce market than anything else; same-day delivery is just the means to an end.
By taking this approach, Wal-Mart can defy economic trends, capitalize on customers still looking for expedited services, and develop a service that will pay dividends (figuratively speaking), as customer demand returns. And history shows that Wal-Mart's not the only retailer to try and cash in on this model.
The e-commerce's take: Been there, done that?
Using same-day delivery as a tool to drive sales is not a new concept for e-retailers. Amazon.com (NAS: AMZN) has offered the service since 2009 to select areas (mainly those near its 40 nationwide distribution centers, and Barnes & Noble (NYS: BKS) has provided customers in Manhattan with the same, since 2000.
Given how long the option's been available, lack of expansion by both B&N and Amazon proves the service is not a profit generator. Amazon CEO Jeff Bezos confirmed this in July, stating that the company would not expand same-day service nationally, since it could not do so economically. Barnes & Noble's VP of e-commerce operations, Kevin Frain, confirmed the same in 2009, albeit less directly, when he stated that the company chose to limit the option to Manhattan because of it's immense customer density - something "necessary to make the service make sense."
However, Frain did say that the service resulted in a much higher return-customer rate by Manhattanites, a good sign for Wal-Mart's quest for more market share.
The actual cost of expedited shipping isn't discernable from Amazon or B&N's SEC filings, so it's difficult to determine its impact on the companies' financials. But where Amazon and B&N had to limit the service, due to a strictly economical approach, Wal-Mart has operational advantages that give it the financial flexibility to look for longer-term opportunities.
Don't adjust your screens ... the high contrast is correct
Wal-Mart began its e-retail experience with the biggest advantage a company could have: being the largest retailer in the country, with operations and margins capable of absorbing expenses from an online venture.
e-Commerce Revenue as a % of Total Revenue
Gross Profit Margin
Net Profit Margin
Barnes & Noble
Source: TTM figures; Companies' most recent 10-Q and 10-Ks.
Wal-Mart's online retail segment has a lot of growing room. Its next step separates Wal-Mart from the e-retailer pack, by capitalizing on advances made as a traditional brick-and-mortar retailer.
Wal-Mart is leaps and bounds ahead of its competitors in two very important ways: its expansive network of stores (Amazon's drawback) and vast customer base (B&N's shortfall). These huge advantages combat the non-economical aspects of offering same-day shipping, by providing logistical efficiencies and a sales cushion:
The new service delivers goods to customers from their local Wal-Mart store, creating impromptu distribution centers. With existing stores acting as warehouses for online sales, Wal-Mart effectively erases the location restrictions Amazon and B&N ran into.
By expanding its presence in the e-retail sphere, Wal-Mart should expect some cannibalization of traditional retail sales, since the consumers most likely to enjoy the new, speedier delivery options will be existing customers. But with the huge contingency of customers visiting its brick and mortar stores every day, any sales stolen by the website won't do much damage to Wal-Mart's overall performance.
Still, the retail giant should take note: Offering same-day delivery service didn't bulk up B&N's operations against Amazon's continued advance into book sales. Wal-Mart still needs to focus on pricing strategies to beat competitors -- expedited shipping will never be more than a secondary driver of sales growth. Correct pricing can lead to more demand for this service, allowing Wal-Mart to charge lower fees, fueling more growth opportunities.
Even though it's not the best determinant of Wal-Mart's success with same-day delivery, FedEx's plans for expedited service cuts can give the retailer some good advice: Be flexible.
As a forward-looking strategy, this may be one of the best moves Wal-Mart can make to increase its online presence. But the retailer needs to continue changing with the evolving market (and economy). Otherwise, the future benefits of the new shipping service could get lost in the shuffle.
With Wal-Mart knocking on its e-retail door, Amazon's status as big bad wolf in the retail world may be in jeopardy. And with its sky-high valuation, most investors are worried it's the company's share price that will get knocked down instead of competitors'. We'll tell you what's driving the company's growth, and how to know when to buy and sell Amazon in our new premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.
The article Will Wal-Mart's Same-Day Delivery Get Lost In The Mail? originally appeared on Fool.com.
Jessica Alling may have an online shopping addiction, but she doesn't hold any positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and FedEx. Motley Fool newsletter services recommend Amazon.com and FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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