Walmart goes from defense to offensive

Five years ago, Walmart (NYSE: WMT) made a big leap in e-commerce.

The retail giant said it acquire Jet.com for $ 3.3 billion. The move was generally panned by critics, who dismissed it as an “acqui-hire” to gain the services of Marc Lore. Lore would head Walmart’s e-commerce division until last month, but the acquisition also kick-started rapid growth in an area where the company had fallen behind.

Walmart’s U.S. e-commerce sales jumped 79% in fiscal 2021 – the year just ended – after growing 37% in fiscal 2020, and generated over $ 50 billion in revenue last year, not counting the Sam’s Club. Walmart is now the largest e-commerce seller in the country behind Amazon, and growing faster than its main rival.

Much of this growth is due to the expansion of its grocery pickup and delivery service, leveraging one of its main strengths as the nation’s largest grocer. The chain now offers grocery pickup from 3,750 stores and delivery to 3,000 stores, the vast majority of its store base, leaving little room for expansion.

Image source: Getty Images.

This effort to develop the retailer’s e-commerce business was a necessity. Before CEO Doug McMillon took over in 2014, Walmart had paid little attention to e-commerce, essentially ceding online retailing to Amazon (NASDAQ: AMZN) – but as Amazon grew, Walmart’s physical sales became vulnerable and it became essential for Walmart to defend its business by aggressively expanding its own e-commerce operation.

Walk on gas

Having successfully grown this business, Walmart is now focusing on offensive play, relying on higher margin services in ecommerce and elsewhere. These include its third-party market, where the company has partnered with Shopify and improve his e-commerce profit margins, posting triple-digit revenue growth in the third quarter. Following Amazon’s lead, the company also launched third-party processing a year ago, another way to generate profit through low-margin online sales.

The company also operates advertising for its online platform, in the same way that Amazon has done. Walmart integrated its advertising business internally and renamed it Walmart Connect. It plans to dedicate more space in its stores to advertisements and share its valuable buyer data with brands with the goal of increasing its advertising activity tenfold over the next five years, up from around $ 1 billion in the year. last year. More recently, he has partnered with The commercial counter, one of the leading programmatic advertising companies, to offer ad buyers more transparency and benefits, such as store-level precision in location targeting, which even takes into account weather signals, enabling advertisers to react to events such as storms. Trade Desk built the platform specifically for Walmart, and tech giants like Google and Facebook have shown how profitable digital advertising can be. If Walmart can generate $ 10 billion in ad revenue, that could translate to $ 3 or $ 4 billion in profit.

Amazon’s advertising business has also grown rapidly, reaching $ 20 billion in revenue in 2020 and reporting a 66% increase in revenue in the last quarter. Amazon is now the third digital advertiser behind Google and Facebook.

See bigger

The big box giant is also aiming beyond traditional retail and even e-commerce – in the results release, the company touted its investments in healthcare. With its existing store footprint, the company sees an opportunity to supply health clinics like drugstore chains CVS and Walgreen to do. And in fact, Walmart already has one of the largest pharmaceutical companies in the country.

Walmart opened its first Walmart health clinic in September 2019. The company now has over a dozen health clinics and sees an opportunity to both drive traffic to its locations and leverage its footprint. its stores because it has locations within ten miles of 90% of the US population. Walmart also expects to play a major role in delivering COVID-19 vaccines across the country, especially to underserved rural areas.

Last October, the company launched a licensed insurance brokerage firm, Walmart Insurance Services, which will help people enroll in health insurance plans. Combined, these initiatives show that Walmart wants to be a major player in healthcare, providing prescription drugs through its pharmacies, healthcare through its new clinics and even insurance through its brokerage.

The other big new industry the company is exploring is financial services. Last month, the company launched a new fintech start-up in partnership with Ribbit Capital which has invested in Robinhood, Credit Karma and To affirm, and Walmart plans to enter into partnerships and acquisitions with other leading fintech companies. Walmart’s release didn’t provide many details, but financial services is another area where the company has significant opportunities given its customer base. He has also had success with PhonePe, FlipKart’s digital wallet, and CEO McMillon said that one in five people in India now uses the app.

With its customer base consisting of many unbanked and underbanked customers, Walmart can have an integrated audience for a new financial service product.

And after

The stock fell 6% on releasing the earnings report because investors were cold on Walmart’s forecast for the current year, which simply calls for single-digit revenue and profit growth. But the company is on the brink of some revolutionary growth opportunities and is going beyond its traditional business model.

Investments in e-commerce to protect its retail business have paid off. And having capped its store base, management is free to seek new sources of growth. By leveraging its large store and customer base, Walmart has the potential to make significant inroads into a number of new industries – and the company is promising significant investments, with $ 14 billion in capital spending planned for this year. , up from $ 10.3 billion last year. .

While his numbers may not impress investors this year, it would be a mistake to ignore the long term strategy and the disruptive potential in new industries here.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Mariel Baker

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