If the world’s largest bricks and motor retailer is serious about competing with Amazon as it has suggested by testing free shipping club, then it may have to spend more than the previously announced investment target on big distribution centers and other costs for its plan.
The importance of growing online is highlighted by the sluggish quarterly results which were released on Tuesday.
After a slight drop in quarterly sales, online revenue grew 17 percent globally in the first quarter ended April 30. But the investment in e-commerce shaved 2 cents off the retailers earning per share that is equal to the cost impact in the quarter of its move to raise wages for entry level workers across the US.
Most of the analysts see advantage in investing in e-commerce, because of high growth rates.
As Wal-Mart prepares to test a free shipping program aimed at undercutting Amazon price, the prospect of competing with rival that spends heavily on investment has raised some concerns.
Brian Yarbrough, retail analyst at Edward Jones said, “They continue to try to grow e-commerce which is good because it is growing. But it comes at a cost.”
Wal-Mart plans to open four large dedicated fulfillment centers this will be added to 11 facilities in operation already and dozen conventional distribution center refitted to help in the online push.
The company would invest $1.2 billion to $1.5 billion on e-commerce this year.
The biggest plus in its plan is a network of 4,500 stores.
It is using 80 for distribution, accounting for fifth of its online deliveries on a unit basis.
Last year the company has booked $12 billion in online revenues.
It would cost $20 million to $40 million dollars each to convert conventional distribution centers to handle e-commerce. Building a large scale fulfillment facility from scratch can cost $150 million.
Converting conventional distribution centers to handle e-commerce probably costs $20 million to $40 million dollars each, while building a large-scale fulfillment facility from scratch can cost $150 million, estimates.
To catch up Amazon it could run into billions of dollars.
Steven Osburn, director at Kurt Salmon specializing in supply chain said, “However, finding ways to use their existing infrastructure better is a much cheaper way to go about it.”
Even then Wal-Mart would need at least 5 to 10 more dedicated fulfillment centers.
Osburn said: “You are still probably talking a billion dollars plus in investment if this catches on.”
Shipping costs are another concern. Amazon could be losing $ 2 billion a year on shipments to members of its Prime Program, which offers free shipping on most items for a $99 annual fee.
Wal-Mart is offering free shipping with three days in its pilot program for a fee of $50, half the cost of Prime.
Mulpuru believes that it would be hard for Wal-Mart to put a big dent in Amazon’s market share, but it can make gains by capitalizing on its strong points such as its strong relationships with packages goods makers and in groceries.
David Cheesewright, head of Wal-Mart’s international division pointed out to the company’s strong position in online groceries in Britain as know-how that could be leveraged elsewhere.
Cheesewright said, “I think particularly in the area of grocery, where product knowledge, understanding of the fresh supply chain, operational excellence, is going to be a key part of being successful in that space.”