Here's How Wal-Mart Is Reshaping Its Online Business

By Markets Fool.com

Wal-Mart (NYSE: WMT) made it very clear in August that the company understood its e-commerce business needed an overhaul.

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That was obvious when it spent $3.3 billion to acquire Jet.com -- a-not-yet-profitable e-commerce company that had barely reached $1 billion in annual sales at the time of the deal -- and put its CEO, Marc Lore, in charge of all Wal-Mart digital operations. Former WalMart.com president and CEO of Global eCommerce and Technology Neil Ashe was pushed out as part of that deal, signaling Wal-Mart's commitment to overhauling its online operations.

During the company's Q3 earnings call -- just a few months after the Jet.com deal was announced -- CEO Doug McMillon restated his commitment to e-commerce, and underlined its importance by leading off the call talking about the company's digital progress.

To start, I'd like to highlight some recent developments in e-commerce that demonstrate how we're moving faster and making every day easier for busy families. First, we're excited to see Walmart.com gaining traction. From a marketplace perspective, we're scaling fast -- adding 8 million SKUs over the past 3 months alone. E-commerce contributed 50 basis points to our Q3 Walmart U.S. comp, which is our largest contribution yet. It's great to see an improving e-commerce business compliment the momentum we have in our stores.

Wal-Mart reported a global 20.6% increase in global e-commerce sales in Q3. That's an improvement over the 11.8% growth it reported in the previous quarter.

One of the biggest challenges facing Wal-Mart is using its distribution centers to serve stores and online customers. Image source: Wal-Mart.

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What happens next for Wal-Mart e-commerce?

The next challenge for Wal-Mart's digital operations, according to McMillon is integrating it with Jet.com. That's a solvable problem, but a big challenge.

"One of the reasons Jet.com makes sense for Walmart is the common ground we share with basket economics," the CEO said. Walmart's advantage has always been in providing the lowest prices on a basket of goods, and Jet has created a unique way to deliver the lowest cost basket online. When customers build a bigger basket online, the economics work in their favor and in ours."

To make that happen Wal-Mart set up teams to speed integration efforts as soon as the Jet deal was complete. Lore hit the ground running and immediately took over efforts to optimize "our combined fulfillment networks, utilizing our scale in areas like shipping, sharing our assortment and leveraging the strengths of our marketing teams," said McMillon.

WalMart.com and Jet.com will remain separate brands, both under Lore at least on the consumer-facing side. Behind the scenes, the new digital boss will be working to integrate backend operations to leverage strengths and Wal-Mart's network of stores and shipping centers.

"We're moving faster to position the company to win --and we're doing this from a position of increasing strength," the CEO said before moving on to other areas.

Will this work?

While keeping the Jet.com brand seems to complicate things, the deal may still be a good one if it has the right executive in Lore to run its digital operations. The challenge for Wal-Mart has always been that it built its digital fulfillment on top of or adjacent to a system designed to supply stores.

Shipping a single person a new backpack, or $50 worth of cleaning supplies is very different than keeping a box store stocked with inventory. Wal-Mart has tremendous assets in its warehouses, shipping centers, and its stores -- the company has a location within five miles of 75% of the American population. Lore may be the person who can leverage Wal-Mart's existing advantages with the Jet.com infrastructure, to create a company which can rival Amazon's efficiency.

That's a big hill to climb when you consider that Amazon was engineered from the ground up to deliver individual orders. Wal-Mart however has been making strides. Its year-over-year and quarter-over-quarter sales gains point to it moving in the right direction. The physical retailer isn't yet catching up to Amazon.com, but it could narrow the gap between the two.

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Daniel Kline has no position in any stocks mentioned. He mostly shops on Amazon. The Motley Fool owns shares of and recommends Amazon.com. 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.