Wal-Mart's Focus on Lower Prices Won't Help It Compete With Amazon

By Adam Levy Markets Fool.com

Back in January,Wal-Mart (NYSE: WMT) made some changes to its e-commerce management team to align its physical store and online store strategies. The company was telegraphing plans to use its physical store locations to improve its online shopping experience and compete with Amazon (NASDAQ: AMZN). Wal-Mart took its first step recently, announcing plans to discount select items customers opt to pick up in stores instead of having them shipped to their homes.

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Wal-Mart and Amazon have been engaging in a bit of a price war recently, particularly in consumer packaged goods. While Amazon is fine losing money on a few items to improve its overall customer value, Wal-Mart has taken to putting pressure on suppliers to lower prices. Reducing shipping costs by shipping to stores and passing on the savings to customers is a smart way to compete with Amazon on price. But it's unclear if it will give Wal-Mart a real edge over the e-commerce giant.

Image source: Wal-Mart

The Jet.com playbook

Wal-Mart purchased Jet.com last year and put its CEO Marc Lore in charge of Wal-Mart's e-commerce division. In Lore's corporate bio, he says Jet.com innovated around pricing "by optimizing the underlying economics of online shopping and unbundling the embedded retail costs that drive up price." Lore is extending that same philosophy to Walmart.com.

With a huge fleet of trucks making shipments to Wal-Mart's 4,672 U.S. stores around the clock, the incremental cost of shipping a few extra items to stores is minimal. As a result, online orders on those items have effectively no shipping costs. And shipping is one of the biggest costs of online commerce.

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Last year, Amazon spent over $16 billion on shipping customer orders around the world. It actually loses money on shipping, which is partially due to Amazon Prime memberships and partially due to its free shipping option on order over $35. Those losses are often made up for in Amazon's product pricing.

Reducing shipping costs by taking advantage of pre-existing infrastructure is something for which Wal-Mart is particularly well positioned. It's also something Amazon.com can't compete with. However, Amazon may go ahead and match Wal-Mart's discounted prices anyway and just take a loss.

But price isn't everything

While price can be deciding factor for many shoppers -- especially with the ease of online price comparison -- it's not the only thing driving buying decisions. A big part (if not the main part) of what made Amazon into the online retail giant it is today is its customer-centric focus. Amazon does everything it can to make its customers happy.

If you have to drive to a store in a couple days to pick up the order you just made online, that's not a great customer experience. To be sure, there are many shoppers that will sacrifice the time to save a few bucks, but the convenience of shipping to the door may be worth paying more for. That's why 70 million or so people pay Amazon around $99 a year for Prime: convenience.

Wal-Mart is working on the convenience of its e-commerce efforts, too. It recently started offering free two-day shipping on 2 million products from its website. Still, that pales in comparison to the 50 million Prime-eligible items on Amazon.

Discounts won't attract new customers

Another important aspect of Wal-Mart's strategy is that it's unlikely to attract customers away from Amazon. As mentioned, Amazon shoppers are loyal because of the excellent customer experience, not because of price. In fact, products on Amazon are often more expensive than at competing retailers. Typical Wal-Mart shoppers are much more price conscious.

Perhaps that's the point, though. If Wal-Mart shoppers are going to be making a trip to the store anyway, they might as well get a discount on their online orders. (Discount eligible items are not regularly sold in stores.) Then they can pick up everything else when they get their online order. On the flip side, it won't bring very many new customers into Wal-Mart stores.

While Wal-Mart's discount plan is creative and presents good value to customers that already regularly shop at Wal-Mart stores, it's unlikely to steal away customers from Amazon. Wal-Mart still needs to work on improving the convenience of its online store in order to see significant growth in sales.

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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.