Wal-Mart Still Can't Keep Up With Amazon

By Adam Levy Markets Fool.com

One of Wal-Mart's (NYSE: WMT) biggest focuses over the past year has been reigniting its growth in e-commerce. It's taken several initiatives, including acquiring Jet.com for about $3.3 billion in August.

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But the acquisition, as well as a partnership with Chinese e-commerce giant JD.com (NASDAQ: JD) haven't been able to push Wal-Mart's online sales growth rate past Amazon's (NASDAQ: AMZN). That's despite the fact that Amazon's online sales base was about seven times larger at the end of 2015.

As more and more consumer spending moves from brick-and-mortar retail to digital storefronts, Wal-Mart's ability to grow revenue depends heavily on its e-commerce sites. But Amazon -- with its Prime membership flywheel -- is proving extremely difficult to overcome. Here's how Wal-Mart's e-commerce platform performed in 2016, what's driving its growth, and what Wal-Mart is doing to compete in 2017.

Image source: Wal-Mart.

A quick look at the numbers

Wal-Mart's U.S. e-commerce sales growth outpaced Amazon's fourth-quarter North American sales growth, and Wal-Mart was sure to tout that in its earnings release. Wal-Mart's U.S. e-commerce sales improved 29% in the fourth quarter, and gross merchandise volume increased 36.1%. That's better than Amazon's 22% increase in North American sales.

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But instead of presenting global e-commerce sales and gross merchandise volume growth in its fourth-quarter release, as it has done in all three of its previous earnings reports, Wal-Mart only provided U.S. growth. It saved the global numbers for the earnings call. The table below should make it fairly evident why.

Calendar Quarter

Wal-Mart e-Commerce Revenue Growth

Wal-Mart e-Commerce GMV Growth

Amazon Retail Sales Growth

Q1 2016

7%

7.5%

25.6%

Q2 2016

11.8%

13%

28.8%

Q3 2016

20.6%

16.8%

26.7%

Q4 2016

15.5%

17.5%

20.6%

Data source: Company's quarterly reports and earnings calls.

Wal-Mart's global e-commerce revenue returned to deceleration after only a couple of quarters of acceleration. That fourth-quarter number includes its first full quarter of Jet.com sales, as well. Additionally, Wal-Mart's reported growth percentages are on a constant-currency basis (Amazon's are not), so it's seeing a slight benefit from its overseas sales as the dollar strengthens.

What's impacting Wal-Mart's online sales

There are several major factors that impacted Wal-Mart's online sales last year. Here's a quick rundown of the highlights.

  • Acquisitions: While Jet.com may be at the top of Wal-Mart's acquisition list, the retailer made a few other acquisitions recently, as well. It purchased Hayneedle before its acquisition of Jet.com. Additionally, it bought ShoeBuy and MooseJaw earlier this year. On the company's fourth-quarter earnings call, CEO Doug McMillan said the acquisitions "gave us immediate expertise and capabilities in new, more upscale categories of merchandise."
  • Online grocery: Wal-Mart significantly expanded its online grocery ordering service in 2016. By the end of the third quarter, online grocery was available in over 100 markets. That's up from 20 markets at the end of 2015.
  • Third-party sales: The outsized growth in gross merchandise volume (particularly in the U.S.) is evidence that Wal-Mart's marketplace business is growing faster than Wal-Mart's own online sales. That's good news, as revenue from those sales is generally higher margin than first-party sales. The growth of Amazon's third-party sales (up 43% year over year) has been a significant profit driver for its retail operations.
  • Divestment of Yihaodian: Wal-Mart previously operated Chinese e-commerce site Yihaodian, but sold the company to JD.com last year in exchange for a 5% stake in the Chinese e-commerce giant. That's having a negative impact on Wal-Mart's e-commerce sales in China.
  • Partnership with JD.com: As part of the Yihaodian deal, Wal-Mart developed a close partnership with JD.com. "The strategic alliance with JD.com will continue to expand our presence throughout the country and offer customers new and exciting products through our flagship sites on JD's platform," CFO Brett Briggs said on Wal-Mart's fourth-quarter earnings call. Wal-Mart also increased its stake in JD.com to 12.1% earlier this year.

Wal-Mart continues to make new efforts in 2017, such as its recent announcement to offer free two-day shipping on select items. That's a shot directly at Amazon. Despite all of its initiatives and acquisitions, however, Wal-Mart's sales growth is still lagging Amazon's globally. That points to the huge moat around Amazon's operations, which is led by Amazon Prime.

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Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.