Wal-Mart Seeks External Guidance to Bolster On-Line Presence
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Wal-Mart (NYSE: WMT) has always been considered a relatively safe investment – its mature United States-based segment, with nearly 4,500 Wal-Mart and Sam’s Club locations, and its international segment, which has more than doubled in store size since 2007, have produced revenue streams growing with almost linear precision over the past several decades. The retailer has been able to hold its title as the world’s largest by maintaining an unbeatable level of top-of-mind awareness with consumers, many who frequent Wal-Mart on a daily or weekly basis for their grocery and general merchandise shopping needs.
Wal-Mart is not without its faults, however. Largely through its decision to cut inventory levels to reduce in-store clutter, as well as its temporary shift away from its “everyday low prices” merchandizing strategy, the retailer’s domestic business has experienced a prolonged period of negative or neutral same store sales levels. The past two quarters have seen some positive improvement, albeit the gains were posted on top of historically poor performance.
Some of the largest opportunity that Wal-Mart is missing, however, is not within the in-store experience. Instead, the retailer has skipped, and is now playing catch-up to capture, a meaningful online sales presence. Despite being one of the world’s top Internet retailers by sales volume, online revenues represent a relatively meaningless 2% of its total sales.
Several significant trends have come to characterize Wal-Mart’s different consumer groups. First, its core “bargain shopper” group, comprised of consumers who generally earn less than $50,000 per year, have traded down even further during the recent recessionary period. Other discount retailers including Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR), which both enjoyed significant 40+% revenue increases between 2009 and 2012. Traditional Wal-Mart shoppers would not shift the majority of their shopping dollars to these alternatives, but these retailers did see some residual gains from consumers looking to buy inexpensive goods on cheap shopping runs for small household items.
Similarly, this consumer group has also become increasingly more tech-savvy. Research conducted by Kantar Retail shows that only around a quarter of Wal-Mart customers shopped online at Amazon.com (NASDAQ: AMZN) five years ago, whereas today the figure is more than one half.
Next, Wal-Mart’s more affluent consumers, who traded-down to less expensive Wal-Mart alternatives during the recessionary period, are starting to migrate back to their traditional higher-priced purchases with the general increase in discretionary income levels. The squeeze from both sides has driven the recent less-than-stellar performance.
Wal-Mart management seems to agree that its online presence is lacking. The corporation, since May 2011, has spent more than $300 million in acquiring five tech firms to boost online efforts. Among the acquisitions include Kosmix, a social media firm, and Small Society, a smartphone app creator. Likewise, the retailer has hired more than 300 engineers and code writers to fill new positions in its U.S. and India locations, and has launched programs to allow its customers without credit cards (a meaningful consumer base) to make online purchases. One of these initiatives is Wal-Mart’s in-store pickup option, which allows consumers to shop online without dealing with traffic and crowds and to pay cash when they pick up the goods in-store at a later time.
In more recent news Wal-Mart has elected Marissa Mayer, Google’s (NASDAQ: GOOG) vice president for Local and Maps applications, to sit on its board. Although Mayer’s position cannot be solidified until the election this June, and it is hard to believe that one seat change can be a significant driver for its online business, it is an ideological shift that does show Wal-Mart is becoming increasingly serious about Internet retailing. Mayer, as Google’s first female engineer when she was first hired in 1999, does not have an extensive retail industry experience but is fluent in Google’s search-based technologies and with connecting with local consumers.
A Plus For Google?
Even more curious than how Mayer’s presence on Wal-Mart’s board will help the world’s largest retailer to strengthen its Internet business is if the move could potentially benefit Google. There has been some chatter – whether or not it is a far stretch – that the election of Mayer may allow for a possible integration with the Google Wallet mobile payment service and Wal-Mart’s extensive store footprint.
Google Wallet, which allows consumers to conduct transactions through their smartphones via near field communications (NFC), has been accepted with a rather muted reception thus far. Although the mobile payment industry is expected to significantly over the next several years – Juniper Research estimates it will hit $170 billion in payment volume in 2015, up from $60 billion in 2011 – the hurdle for Google is that there are multiple parties all vying for a meaningful piece of the pie. The success of Google Wallet lies on the unlocking of multiple key milestones:
- First, Google needs the buy-in from national phone carriers. Although it has partnered with the nation’s third largest carrier Sprint it has yet to gain the acceptance from #1 and #2 in AT&T and Verizon due to their co-production of a similar NFC mobile payment technology named Isis. Verizon actually blocked Google’s app from being downloaded on its popular Galaxy Nexus smartphone last December, citing “security concerns.”
- Google also needs acceptance from smartphone users, which are currently being bombarded with multiple mobile payment technology choices. The corporation is missing out on key access to hundreds of millions of smartphone customers with the lack of buy-in from AT&T and Verizon.
- Lastly, because the Google Wallet platform teams with large retailers to present actual payment sites to active users, it needs a large base of relevant, highly frequented retail chains to accept the program and install NFC reader hardware and software in their outlets. Although certain retailers including Macy’s, Subway, American Eagle Outfitters, and Jamba Juice have signed onto the program, this is but a first step in the long process of creating a robust mobile payment system.
Gaining the buy-in from the largest retailer would inject a considerable amount of life back into the Google Wallet program, and could result in the future acceptance by larger carriers and thus the use by smartphone owners on a nationwide basis. This is a hypothetical series of actions and reactions, of course, but it does show that there is potentially more upside for Google in the Google/Wal-Mart tie-in than there is for Wal-Mart.
Motley Fool newsletter services recommend Amazon.com, Google and Wal-Mart Stores. The Motley Fool owns shares of Amazon.com, Google and Wal-Mart Stores. gibbstom13 has no positions in the stocks mentioned above. 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.