Wal-Mart Is Using Its Stores to Battle Amazon

By Timothy Green Markets Fool.com

Retail giant Wal-Mart (NYSE: WMT) has gotten aggressive in the past year when it comes to e-commerce. The $3.3 billion acquisition of start-up Jet.com last year, while expensive, put Jet CEO Marc Lore in charge of Wal-Mart's entire e-commerce operation, and it gave the company a brand that has worked well with younger customers.

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Lore has wasted no time in his new position, rolling out free two-day shipping for orders above $35 in February, a direct blow to Amazon (NASDAQ: AMZN) Prime. Wal-Mart has also been pushing its online grocery service, which allows customers to order online and pick up at their nearest store for free. The company is even testing a convenience store concept centered around online grocery.

Image source: Wal-Mart.

Wal-Mart now plans to offer customers discounts for picking up online orders in its stores. Announced in April, Wal-Mart's Pickup Discount initiative gives online shoppers a choice between free two-day shipping or a discounted price in exchange for picking up the order at their local Wal-Mart store. The discounts can be significant: one example provided by Wal-Mart is a $23.99 Lego set that is $2.55 cheaper if in-store pickup is chosen.

Wal-Mart's strategy to compete with Amazon is to provide the absolute lowest prices, along with enough convenience to combat Amazon's unending push toward faster delivery. Leveraging its stores in order to provide discounts on online orders is something that Amazon can't match, and it's likely just the first step in the company's quest to bring online prices down for its customers.

A simple idea to save customers money

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Wal-Mart will begin offering pickup discounts on thousands of online-only items on April 19, with that number expanding to over 1 million items by the end of June. Wal-Mart already has the infrastructure in place to efficiently deliver large quantities of products to its stores, including 6,700 trucks. Getting an online-only item to a store is far cheaper for the company than shipping it directly to the customer, and that allows Wal-Mart to pass on those savings by offering a pickup discount.

This initiative is in the same vein as Jet.com's various money-saving features. Jet offers customers discounts for waiving free returns and opting to pay with a debit card, and its smart cart system lowers prices when multiple items are located in the same distribution center. All of these features should eventually make their way to Walmart.com, in one form or another.

Jet's underlying concept is to identify exactly where costs enter the e-commerce supply chain and find ways to reduce them, passing on the savings in the form of lower prices. That's exactly what Wal-Mart's new pickup discount initiative accomplishes. Wal-Mart has dominated brick-and-mortar retail by driving costs down in order to offer the lowest prices. It's now looking to do the same in e-commerce.

The battle is heating up

Wal-Mart isn't going to be able to out-Amazon Amazon. The e-commerce giant is focusing on getting products to its Prime customers as quickly as possible, expanding its Prime Now service and testing delivery by drone. Convenience is the name of the game at Amazon.

Wal-Mart, on the other hand, is focusing much more on driving prices down. Convenience is still important, and its free two-day shipping initiative is a critical piece of the puzzle. But Wal-Mart's path to victory in e-commerce requires it to beat Amazon on price, plain and simple. Utilizing its existing infrastructure to reduce prices for its online customers is one way to do that.

I expect to see more initiatives coming out of Bentonville that aim to bring online prices down. Wal-Mart's e-commerce sales soared 29% year over year during the fourth quarter, driven by Jet and online grocery. Free two-day shipping and pickup discounts should help drive sales even higher this year. Wal-Mart will need to grow online sales at a breakneck pace in order to eventually catch up with Amazon, but its e-commerce push over the past year gives it a fighting chance.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.