March 13, 2023
Last week, Stratably broke down the share of sales growth projected to come from online channels for Amazon, Walmart, and Target:
But what can we learn if we segment sales growth by fulfillment model?
The more precisely we can understand “eCommerce” the better. Meaning, when we talk about eCommerce share of total sales or eCommerce growth, what exactly do we mean and what can that tell us about how to do business?
How retailers define online sales
Retailers disclose anything purchased online, regardless of how it’s fulfilled, as an online sale. That’s what the chart above illustrates.
An online sale according to this definition includes:
- Ordered online and shipped to the home from a dedicated eCommerce fulfillment center or node
- Ordered online and shipped to the home from a store
- Ordered online and picked-up in store
- Ordered online and picked-up in the parking lot of store
Omni-channel retailers, particularly Walmart and Target, are quick to point out how important their stores are to their digital business as they fuel the latter three ways an online sale occurs.
It’s a vision of omnichannel retailing that leverages their existing base of physical stores that improves sales/SF and arguably reduces last mile delivery costs compared to shipping items from a far-flung fulfillment center.
Analyzing by fulfillment model
When we analyze sales growth by fulfillment model, the chart above transforms into a stark contrast in strategy.
- Amazon doesn’t change much because Whole Foods & Fresh stores aren’t growing rapidly nor are they significant contributors.
- Target’s digital strategy looks radically different from Amazon, with 97% of its projected dollar growth in ’23 coming in the form of in-store sales or store-enabled digital orders.
- Walmart fits somewhere between these two, with 80% of projected dollar growth coming from in-store sales or store-enabled digital orders.
This chart tells us a great deal about their strategy.
For Amazon, it means there is no catalyst on the horizon for its physical store business. 6% is probably generous too.
- Whole Foods has had anemic growth, and any that has come is largely a function of inflation.
- Fresh stores are paused because the pace of that roll-out was never going to work.
- It recently announced plans to shutter eight Go stores.
But, despite all its struggles on the physical store front, it’s “pure online model” sure is working. We estimate it will overtake Walmart in the U.S. after growing the equivalent of four Best Buy’s in three years.
Instead of a big marketplace push, stores are central to its strategy and it’s betting that a curated approach will ultimately drive customer loyalty. Target’s curated marketplace is insignificant from a top line perspective and its last mile delivery has coalesced around store-based fulfillment.
Target appears focused on building a “brand flywheel” around curation, quality and value, while Walmart builds a “sales flywheel” with selection at the core, mirroring Amazon’s approach.
Walmart’s somewhere in the middle. It’s had a big push into the marketplace, adding 50 million items Q/Q in 4Q alone for a total of 400 million items, with just 2.5% of these items from 1P sellers according to Supplypike’s analysis of Walmart’s supplier growth forum.
However, we estimate only 20% of its projected dollar growth is expected from pure online sales, with marketplace sales accounting for just a small part of that amount. 3P sellers and agencies tell us that assortment is growing, but the sales volume just isn’t there yet.
Part of this is consumers’ lack of awareness that they can buy anything on Walmart.com. The other part is that Walmart prioritizes relevance, and therefore store-focused brands, when it comes to paid placement and pinning on the site.
A pure online model is tough to build
Here’s an understatement - it’s very challenging to build an Amazon-like business!
The limited sales traction to-date of Walmart’s marketplace is one example of that, as is Kroger’s Ocado-powered CFC model that has yet to impact its top-line results in any meaningful way.
Kroger acknowledged during its last earnings call that it won’t come close to meeting its goal to double digital sales any time soon. It’s tough to conclude anything other than customer acquisition must be very challenging as it expands into markets where it has no physical presence.
So perhaps Target is avoiding a years-along expensive distraction, smartly recognizing just how tough it is to build a reputation around offering anything and everything, and accepting the limitations of not having a fulfillment capability that is needed to attract Amazon-FBA sellers.
But, if Walmart is successful with its marketplace, that means it, along with Amazon, will offer consumers enormous selection and fast delivery. The concern for Target in this scenario is that curated selection will be seen as limited selection by the consumer, a weakness characterized as something else. Sort of like when a retailer uses terms like “cozy”.
This will then lead to a slow bleed overtime as consumers migrate more and more to where they can buy anything and get it fast, accelerated by compelling membership programs that lock-in loyalty. There simply won’t be enough juice to squeeze in out-executing on curbside pickup in this scenario.
The dynamic with selection and competition
Amazon has the most selection and the most competition on its site. Target, relative to Amazon or Walmart, has the least selection and arguably the least competition on its site. Walmart is somewhere in the middle, with ambitions to look a lot more like Amazon than Target three years from now.
Competition means a fight over visibility, which is expressed nowadays through more expensive customer acquisition via retailer advertising. With this logic, brands will be spending more for visibility on Amazon’s site compared to Walmart or Target, all else equal.
Look no further than Walmart, which is pedal-to-the-metal on a marketplace push as an indirect way to drive advertising.
But competition also means more than just a fight over placement, promotion, and price. Brands compete on product too.
In other words, brands can lean into pure online models by creating incremental assortment that covers every possible use case, meeting unstated or unfulfilled consumer needs that would have otherwise never been met because of constraining store shelves.
Thus, as brands think about each of these retailers, the differences in competition and selection today and in the future must be taken into consideration.
Have your cake and eat it too
There’s a lot of critique leveled at doing business with Amazon. It’s highly competitive and increasingly expensive, and there are fears its pushed ad load too far. Yet, it continues to grow faster than its peers and by our estimates is the largest distribution channel in the U.S. From a results perspective, one might conclude…it’s working!
Brands meanwhile can sell on Target in a more curated environment, enjoying less competition and corresponding benefits to profitability. In other words, Target’s a great partner.
But there’s not as much incremental assortment opportunity and growth has been slower. Longer term challenges might appear too if Target’s margins fall under greater pressure because its ad business can’t reach greater scale since there are just too few of bidders and/or compound growth ends up languishing because consumers see curation as a negative.
Walmart is somewhere in the middle today.
Grocery brands in particular love Walmart.com as its pick up model has enabled the ability to sell a $1.50 item online, the corporate strategy has protected found-in-store brands from more fierce marketplace competition, and growth has been strong.
But Walmart’s unabashedly trying to change the competitive dynamic to look something more like what’s found on Amazon, with all the control and profitability challenges that entails.
It is confident its marketplace is key to the growth of its business and that it will power Connect and Data Ventures. It has indicated it doesn’t care who owns the inventory, it just wants to help the consumer. In other words, it wants to create a store-supported Amazon, something Amazon itself has been unable to create.
Brands could realistically expect resulting margin pressure to follow. Just like how margins on the Amazon account have declined for brands over the last five years on average, they should expect similar profitability challenges with Walmart in the coming years.
Becoming best in class at assortment expansion, supply chain efficiency, and digital customer acquisition will be paramount for brands to offset this pressure.
All (!) of this to say, strategy is about trade-offs.
Each of these accounts has strengths.
The need to lean into the strengths of each, set the right expectations internally, and plan accordingly for three-to-five years out has never been more important.