Can Wal-Mart's Spending Spree Help Close the Gap With Amazon?

By Jeremy Bowman Markets Fool.com

Wal-MartStores, Inc.(NYSE: WMT) may be the most uncool brand in the world.

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The retail giant has been routinely mocked by late-night comedians. A website, peopleofwalmart.com, is known for showing unflattering photos of Wal-Mart shoppers. The company has been deemed undesirable in many of America's coastal cities, and it's been the regular target of protests for paying low wages, using anti-competitive tactics, and violating labor laws.

Wal-Mart, of course, has never tried to be cool. While most large retailers are based in thriving cities, Wal-Mart still calls Bentonville, Arkansas home, the corner of the world Founder Sam Walton hailed from. The company dresses its employees in drab smocks, and its slogans, "Always low prices," and "Save money. Live better," make no bones about its value proposition. It's not here to impress you or wow you with its style or selection. It's here to sell you dirt cheap products, like $2 t-shirts, with the help of its economies of scale and global supply chain.

Other low-priced rivals have found ways to stand for something in addition to savings.Amazon.com(NASDAQ: AMZN) is known for tech innovation and top-notch customer service.Target(NYSE: TGT) has its "cheap chic" cache thanks to partnerships with brands like Lilly Pulitzer. And even warehouse giantCostcoWholesale(NASDAQ: COST) is known for free samples and its unique "treasure hunt" shopping experience.

After years of basing its reputation on low prices and nothing else, however, Wal-Mart may finally be changing. Under CEO Doug McMillon, the company has raised wages, come out against an Arkansas anti-LGBT law, and focused more on clean stores and fully stocked shelves, acknowledging that store image, and not just low prices, is an important driver of performance.

Those investments have cut into profits, but have also caused comparable sales to increase nine quarters in a row, bucking the broader trend in retail.

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Wal-Mart has also been making investments in e-commerce, expanding its grocery pickup program and offering free two-day shipping on orders of $35 or more.

Image source: Wal-Mart.

More importantly, the company has been busy making acquisitions, buying Jet.com for $3.3 billion last summer, and has made three smaller deals more recently, swallowing up Shoebuy, Moosejaw, and Modcloth. It's not a surprise that Wal-Mart has its checkbook out and ready. After years of neglecting e-commerce, the company has fallen a distant second behind Amazon, and it's finally recognized the need to scale up quickly in the online channel in order to compete.

The recent acquisitions have been driven by Jet.com founder and current Wal-Mart chief of U.S. e-commerce Marc Lore, who wants to bring the energy of a start-up to the retail behemoth. But building a wide-ranging online presence may be harder than simply making a series of bolt-on acquisitions.

No school for cool

Each one of those websites Wal-Mart bought has its own set of loyal shoppers different from the typical Wal-Mart shopper. Jet, for instance, courted young, urban, early adopters. Moosejaw, an outdoor brand, sold to rock jocks and other adventurers, and women's clothing site Modcloth was a favorite among hipsters.

Those folks aren't a natural fit with Wal-Mart's stodgy brand, and some have been disappointed with the news. A number of ModCloth shoppers took to social media to protest the deal. One commenter said:

I have to say I'm really disappointed that ModClothis now part of the Walmart family. I don't believe Walmart has their workers' interests at heart and so I can sadly no longer purchase from ModCloth.

But just as the deals reflect Wal-Mart's need to branch out, they are also a sign of how difficult it is for small e-commerce companies to make it in a cutthroat environment dictated by Amazon. Like the e-commerce leader, these online businesses tend to have few, if any, profits. According to The Wall Street Journal, ModCloth sold to Wal-Mart for less than the value of the venture capital and debt it had raised, a sign of the challenges the business was facing going it alone.

It's nothing personal

Wal-Mart's strategy is nothing new. Corporate giants often target independent business when they're struggling for growth.McDonald'swas a majority owner ofChipotlefor eight years before spinning it off.Coca-Cola has purchased brands like VitaminWater and Zico Coconut Water, and AB/Inbevhas gone on a shopping spree for craft beer brands. Even Ben & Jerry's, as crunchy a mainstream brand as any other, eventually sold toUnilever.

The brouhaha over Wal-Mart's takeover will likely fade, but management shouldn't ignore the backlash, especially since Lore has said that he will aim for more such acquisitions. Wal-Mart can help back operations like supply chain and shipping, but the parent should also focus on refreshing its own brand, as its reputation as a corporate bully becomes a bigger liability with every new deal. Just as the company is seeking to update its own e-commerce business, it must do the same with its image.

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Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, and Costco Wholesale. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.