How Walmart’s Retail Success Hobbles It Online

Commentary about business and finance.
Oct. 21 2013 3:28 PM

Bentonville Blues

Why Walmart’s e-commerce efforts will almost certainly fail.

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Customers shop at a Walmart store on Aug. 15, 2013, in Chicago.

Photo by Scott Olson/Getty Images

Walmart has finally decided that it’s time to take e-commerce seriously. So seriously that it’s no longer counting on its ability to hire skilled programmers and induce them to move to Bentonville, Ark. Instead, they’ve opened an office in Silicon Valley, which was profiled over the weekend by Claire Cane Miller and Stephanie Clifford in the New York Times. Breaking with the company’s traditional middle American frugality, the @WalmartLabs has the fancy food (“white asparagus panna cotta with house-smoked salmon tartar, morel mushroom macaroons and charcuterie from a whole pig”) and whimsical perks (“treadmill workstations and foosball tables”) that are the hallmark of the high-tech industry. The Times even reveals that Walmart’s Silicon Valley outpost has conference rooms named for Rihanna and Justin Bieber.

But it’s very unlikely that Walmart will ever be able to catch Amazon in the e-commerce space. Not because Walmart doesn’t recognize the importance of the Web, or because Walmart can’t learn how to open a hip Silicon Valley office. Walmart’s dilemma is both simpler and harder to fix. Walmart’s real problem is that it’s an incredibly successful physical retailer.

Superficially, this looks like a formidable advantage in the online retailing game. E-commerce isn’t just about ordering things on the Web—it’s about delivering them to the real world. Walmart already has important relationships with suppliers. Walmart has a strong brand and millions of loyal customers. Walmart has a network of warehouses around the country and extensive experience with wholesale and retail logistics. Best of all, Walmart has all these stores. The company boasts that two-thirds of the American population lives within 5 miles of a Walmart. And with the introduction of new urban-format stores into central city areas, they’re acting rapidly to increase the reach of a chain that’s already fairly ubiquitous.

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The idea is that current stores can serve as forward operating bases for the physical last mile of retail. Walmart already has jumping-off points for delivery that are integrated into the global supply chain and are much closer to a customer’s house than a typical Amazon fulfillment center. Add enough technologists to build a truly excellent website, and the entire firm should be able to use its existing infrastructure to be a real e-commerce competitor.

That’s the theory, at any rate. But if that theory were right, shouldn’t Barnes & Noble have been able to use its extensive network of forward-deployed books to catch Amazon in the online book retail game? Shouldn’t BestBuy.com have become the place to order electronics on the Internet? Can it be that none of the competitors Amazon’s already faced down had the same plan that Walmart is now trying to execute?   

Incumbents tend to fail in the face of technological change simply because the existence of a large and successful pre-existing business in a related field of endeavor is actually a huge handicap. Take the idea of same-day grocery delivery. Amazon wants to get in this business. Existing grocers have, obviously, considered this idea, but nobody has figured out how to do it profitably. For Amazon, though, lack of profit isn’t necessarily a problem. Since Amazon basically isn’t in the grocery business right now, adding a zero-margin grocery delivery business wouldn’t hurt anything the company is currently doing. And even without profits, adding such a business would help the company in many ways. It would increase customers’ level of engagement with the Amazon site and the Amazon brand, and the infrastructure used to deliver the groceries could deliver other products as well. Of course Amazon would have to figure out to how do this without incurring huge financial losses. But they have no reason to see a clear path toward short-term profits. 

Now imagine the same scheme at Walmart. Why would you want to launch a zero-margin grocery delivery service that will poach customers from the existing profit-making business? Won’t Wall Street kill you if your margins fall? Even if you patiently explain on the earnings call that the falling profits are part of a deliberate strategy to take on Amazon, the headline is still going to read: “Walmart Earnings Fall in the Face of Competition With Amazon.” It takes a CEO and a board of directors with nerves of steel to deliberately undermine the existing product for the sake of the brand’s long-term future.

Nerves of steel are great. But it would be genuinely irresponsible to embark on new adventures without giving some consideration to the impact on existing businesses. At a minimum, people in charge of what you already have will want to hash things out in meetings. People in charge of the new sectors will need to attend these meetings. Top-level executives will have to mediate. All this meeting and mediating is going to slow things down. Worse, by slowing things down, it’s going to tend to drive away the kind of people who are intrinsically motivated to innovate and evolve as quickly as possible.

None of which is to say that it’s impossible for Walmart to succeed here. Amazon could stumble somehow, and in that case, Bentonville’s timely investment in technology could easily pay off. But if Walmart fails—which won’t be surprising—retrospectives will be written about how they blew the e-commerce trend by failing to recognize the importance of the Internet. But the truth is they’re faced with an inherently difficult problem, one in which their apparent advantages aren’t advantages at all. As the basic technology of retail continues to change, Walmart’s status as the world’s largest retailer is their biggest obstacle to success.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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