In mid-January, Amazon opened the doors to a single-location convenience store, Amazon Go, not far from the company’s Seattle headquarters. The store is designed to be so automated that shoppers don’t need to stand in line at a cash register to check out.
Almost immediately after the grand opening, lines of Seattle-ites eager to go inside began forming on Seventh Avenue.
A few days earlier Walmart, abruptly announced it was closing 63 locations of its Sam’s Club discount stores—including one located just a few miles north of Amazon Go. Ten of the former Sam’s Club stores would be transformed into distribution centers for Walmart’s online business.
As the world’s largest retailer, Walmart saw more than $485 billion in revenue in its latest fiscal year. That still dwarfs Amazon’s $177 billion in 2017 revenue. But Amazon’s share of US e-commerce is a massive 43.5 percent, according to eMarketer, with Walmart claiming only 3.6 percent. And Amazon is moving aggressively into the brick-and-mortar realm, with 13 bookstores, the Go convenience store in Seattle, same-day merchandise pick-up locations, and, of course, 477 Whole Foods grocery stores.
But don’t buy into the narrative that these two companies are gladiators battling to the death. Walmart has been increasing its online revenues at a double-digit pace (24 percent in the most recent quarter, down from 50 percent in the quarter before that), and Amazon is on track to grow from $100 billion in revenue to $200 billion faster than just about any predecessor—including Walmart and Apple. Amazon and Walmart are both going to be just fine. If they’re fighting over anything, it’s to acquire promising e-commerce startups and bigger companies that can help expand their reach, and to win over customers from wheezing brick-and-mortar competitors that aren’t able to invest in innovation. (Is anyone bullish on the future of Macy’s or Sears?)
In 2018, Amazon’s big question is whether success in the digital sphere can translate into physical stores. (At Whole Foods stores, there have already been reports of product shortages.) And for Walmart, with its legendary logistics skills, the question is whether all of its e-commerce acquisitions are truly starting to create a new culture of innovation at the company—or are just disparate entities that won’t affect how things work at Bentonville, Arkansas-headquarters.
“Walmart has the physical footprint that Amazon would love, and at the same time, I think Amazon has the digital footprint that Walmart would like,” says Joseph Feldman, senior managing director at Telsey Advisory Group, a research and brokerage firm focused on the consumer sector.
Walmart is also reaching out to new markets beyond its suburban and rural base by acquiring online brands like Jet.com, Bonobos, and ModCloth. The acquisitions have also helped Walmart pull in talent and new capabilities, while adding some icing to its overall e-commerce revenues.
“Walmart has the physical footprint that Amazon would love, and at the same time, I think Amazon has the digital footprint that Walmart would like” — Joseph Feldman
Bringing Amazon DNA into Walmart
In 2011, Walmart acquired the Silicon Valley search and social media startup Kosmix. The deal injected a few strands of Amazon DNA into the giant retailer: Kosmix co-founders Anand Rajaraman and Venky Harinarayan previously started Junglee, an early e-commerce search firm purchased by Amazon in 1998.
At the time of the Kosmix acquisition, Walmart’s online operations lagged behind Amazon’s in rolling out new features, Rajaraman says. He was approached by Eduardo Castro-Wright, then CEO of Walmart’s global e-commerce business.
“He reached out to us with an interesting proposition, where he suggested that Walmart was starting to get serious in e-commerce, but had a lot of catching up to do,” says Rajaraman, now a founding partner at Palo Alto venture capital firm Milliways Ventures.
Walmart announced that Kosmix’s founders would lead a new e-commerce innovation center in the Bay Area. To recruit talented engineers wary of working for a far-off discount retailer without much tech “mojo,” the unit was branded as Walmart Labs. Early press highlighted the division’s startup-like culture, complete with weekly catered lunches and ping-pong tables. A cheeky office signpost noted the distances to San Francisco and Bentonville.
“If we had to scale up the e-commerce effort, we had to hire and bring on a lot of talented engineers, and they would need a new brand name to come and work at, as opposed to Walmart,” says Rajaraman.
Walmart Labs contributed some of its engineers’ code to open source projects, something more commonly done by employees of Google and Facebook. Many Labs projects were tested with massive data sets from the Walmart mothership, which may have lured engineers interested in a big challenge.
“Our scale is a key consideration factor,” explains Jeremy King, CTO of Walmart US. “Innovators know that any idea will ultimately have to scale to thousands of stores and millions of clicks.” King joined Walmart Labs when it was first formed in 2011, after stints at eBay and LiveOps, a provider of cloud-based call center technology.
King continues, “The breadth of our technology environment can also be a challenge—groceries, photos, pharmacy, money center, auto shops, fishing licenses, optical, custom bakery, etc. Walmart stores and websites have a vast array of services we provide to customers. But the same factors are also a huge advantage. Where else can you experiment and scale in the same organization? It’s what engineers live for.”
Internally, the growing Labs team worked to help customers find products more easily on Walmart.com, which initially sported a less-than-reliable search engine.
“Often searches would bring up completely irrelevant things,” says Rajaraman. “One of the first things we did was build a new search engine from scratch, which worked much better than the old one, and would surface the right products if Walmart had them. That improved conversion significantly from before.” The Labs team also built confidence in the replacement search engine by using a common technique in the software industry: redirecting small numbers of website visitors to the new tool at first, and documenting which one of the tools performed better.
Whether customers can efficiently find what they’re looking for is still a major data point the company tracks, King says.
“Our internal metrics track key drivers of customer satisfaction along the journey: do we have the product people want, can they find it, does it display all the information they need, is it priced right, and delivered with a great experience?” says King. “This is consistent with what we do in stores as well, where we track key drivers of customer satisfaction for an in-store journey.”
Rajaraman, who left the company with Harinarayan in 2012, says Labs leaders also promoted the idea that it’s okay for some experiments to fail. These experiments involved social media shopping tools, gift options, and product subscriptions. But one successful change involved automatically adjusting online prices based on supply, demand, and other data, rather than having them set manually by humans.
“If you’re going to expand the catalog from tens of thousands of items to millions of items, it becomes hard to manually price everything,” Rajaraman says. “We created algorithms for pricing, and I think that ended up having a huge impact.”
One challenge was shifting marketing dollars from traditional ads promoting the Walmart brand and overall low prices to online listings promoting specific products to specific shoppers. But those ads generated real-time performance data, and allowed budgets to be adjusted based on that performance.
“In performance marketing, it’s very different, because if you can pay a dollar, get a customer, and make a profit of more than a dollar in that customer, then you can have an infinite budget,” says Rajaraman. “We had to spend a lot of time educating [our colleagues] and, to be honest, I don’t think we were completely successful in our efforts by the time I left.”
One former Amazon and eBay executive gives Rajaraman and King credit for what they’ve established with Labs, but says that it will “probably not be enough to overcome the gap with Amazon. Labs is not acquiring the top Google, Netflix, or Amazon talent, though they have acquired some decent Valley tech talent.”
Picking Up the Acquisition Pace
In August 2016, Walmart paid $3.3 billion for another startup built by someone with an Amazon pedigree: Jet.com. Co-founder and CEO Marc Lore had previously built and sold Diapers.com to Amazon, and stuck with Amazon for about two years after that transaction.
Lore was put in charge of Walmart’s domestic e-commerce division, and industry observers say it’s likely that he was influential in some of Walmart’s big ticket purchases that followed, including the $310 million buyout of Bonobos, the online men’s retailer, and the acquisition of womens’ apparel site ModCloth, announced in March 2017.
“I don’t think any of these other subsequent moves would have happened without his leadership and being involved,” says Dave Knox, managing director at WPP Ventures and the author of the book Predicting the Turn, which focuses on the relationship between startups and established companies.
Since Lore joined Walmart in September 2016, online sales numbers have been on the rise. In May 2017, the retail giant reported that online sales had leapt by 63 percent in the prior quarter. The spurt comes as the company has dramatically increased the breadth of its online products to more than 67 million items, up about one-third from the previous quarter. It has also rolled out new online offerings, like free shipping on orders of $35 and up.
“We anticipate e-comm growth will remain robust given [the] expansion of initiatives and tests, as well as continuing to learn from Mark Lore and the team at Jet,” wrote analysts from financial firm Cowen & Co. in an August 2017 report.
In the early years of Labs, Walmart also picked up more than 12 digital startups, from search provider Adchemy to fashion app Stylr.
“The past five or 10 years, there’s been a sense that Walmart hasn’t been serious about e-commerce and has let Amazon steal the march,” says Neil Saunders, managing director of the retail unit at research firm GlobalData. “I think that has changed now, though.”
In earnings conference calls, Walmart’s CEO has spoken of acquisitions as a source of “expertise” in categories of products. And Saunders says Walmart has increasingly been giving acquired businesses more latitude to keep their existing practices and culture in place, while gingerly easing successful features into its overall operations.
Walmart has begun to allow acquired businesses to keep some elements of office culture, different from Bentonville’s, says Saunders. He points to reports that the company backed away from cracking down on events like after-work happy hours at Jet.com’s main office in Hoboken, NJ.
“That may sound quite obvious, but that’s really quite brave for Walmart, because they’ve never really operated that way,” he says. “I think they’ve recognized they need to give divisions more autonomy, more of their own decision-making power…”
Pano Anthos says that the acquisitions “signal to Wall Street that Walmart executives are rethinking their whole brand concept.” Anthos is the managing director of XRC Labs, a retail accelerator based in New York. But he adds that “those businesses add zero to their bottom line. They’re pebbles in an ocean.”
The former Amazon and eBay executive with whom we spoke questions whether assembling a portfolio of brands like Jet, Bonobos, and ModCloth creates “any synergy with things like fulfilment, customer service, and technology.” Besides, he says, “ModCloth will never link back to Walmart. The ModCloth customer won’t go to Walmart. It’s like Gap buying Prada—one has nothing to do with the other. They’re just window-dressing.”
To really move the needle, this executive continues, Walmart would need “to make a serious-sized acquisition online—maybe an eBay. Something to that scale. Jet was tiny, and it was a very expensive purchase for the very little that they got.”
In March 2017, Walmart announced a new Bay Area startup incubator called Store No. 8, named for an early store where founder Sam Walton often tested new ideas. It recently co-sponsored a contest for virtual reality shopping startups and ideas.
And, says Knox at WPP Ventures, the company sponsored a virtual reality demo and Walmart-branded lounge area during 2017’s South by Southwest conference, looking to start building more awareness in the entrepreneurial ecosystem.
“I think that was a really unique genuine way, from a very subtle standpoint, to have engagement with that community and start saying, ‘We’re looking for a different sort of partnership—not just a PR stunt where people go pitch on stage,” he says. “They also realize [that] to have a chance to even play in the acquisition game, it takes those relationships, and [Walmart] being the first phone call when opportunities present themselves.”
“The ModCloth customer won’t go to Walmart. It’s like Gap buying Prada—one has nothing to do with the other. They’re just window-dressing.”
— Pano Anthos
Bringing Innovation to Brick and Mortar
Walmart is also looking to innovate by combining its network of brick-and-mortar stores with digital commerce, just as others, including Amazon and eyeglass merchant Warby Parker, are expanding their networks of in-person shops.
“I think Walmart has an enormous advantage with its stores, because it can potentially deliver faster and in a more cost-effective way, and sometimes in a more convenient way, than Amazon can,” says Saunders. “I think by using those stores much more effectively as points of distribution, points of collection—I think that really can drive some success.”
Walmart Labs is now part of the e-commerce division headed by Lore. The division has recently expanded its focus to physical stores, and building new services that bridge online and offline.
“We’re testing associate delivery of Walmart.com orders in a few stores and by the end of the year, we’ll have approximately 100 automated pickup towers in stores across the US, where customers can pick up their [online] orders within a matter of minutes,” Walmart CEO Doug McMillon said in an August 2017 earnings call. He also highlighted a new “Easy Reorder” feature, which allows consumers to request a home delivery or in-store pickup for frequently purchased items.
“The new game is about speed of delivery—speed of getting it to the customer as fast as they want and when they want,” says Feldman at Telsey Advisory Group.
And Labs still operates with a degree of independence that enables it to consider ideas that are a bit more radical than those that might come out of the mainline business units, says Saunders.
“Walmart and the Labs part should be separate, because the Labs need to have fresh thinking,” he says. “It’s a very different part of the business.”
While the company may be reluctant to change how its brick-and-mortar business operates all at once, that reticence is slowly being shed as the industry evolves, Saunders says. “I think in Walmart, the culture is changing, and I think the culture is moving to one where people are not so afraid to shake things up, where change is welcomed and new ideas are welcomed,” he says.
The Next Phase
Anthos at XRC Labs concurs: “Culture is a slow thing to change, but Walmart’s is changing much faster than it ever has.” Still, Anthos says, everything at Amazon “from top to bottom is about ‘let’s test and learn.’ Walmart’s test and learn model is not nearly as agile across the board.” Still, Anthos, a former entrepreneur himself, says he is impressed that Walmart has been able to persuade the founders of the startups it has acquired recently to stick around, including Lore and Bonobos founder Andy Dunn. In 2017, the company also hired Jenny Fleiss, co-founder of the Rent the Runway, an apparel rental startup in New York, to run a project within Walmart’s Store No. 8 division.
Anthos says he’s watching two things closely. One is the widespread deployment of Amazon’s Echo intelligent speaker, which now sells for as low as $40. “Amazon clearly has changed the game with Alexa,” he says. “Voice is the new user interface — the new mobile.” The second is whether Walmart will launch a membership-based free shipping program to compete with Amazon Prime.
Others, like long-time e-commerce executive James Keller, are tracking Amazon’s growing investment in bricks-and-mortar retail locations. Keller currently runs Print Syndicate, a Boston startup.
“Stores are absolutely not going away,” Keller says. “It’s also very clear that Amazon views the storefront as a very important part of the overall value proposition. We’ve seen a number of investments like Whole Foods and the Amazon bookstores. I think there’s more of that to come.”
Amazon is also building a business that’s less dependent on human workers, with its cashier-less Amazon Go store in Seattle, and a continuing investment in advanced robots for its distribution centers. There are roughly 45,000 robots roaming Amazon warehouses, and an annual design challenge encouraging startups and academic institutions to imagine how robots can become more dexterous and capable. Amazon also continues to hire engineers and managers for Prime Air, the division working on delivery drones. Amazon generates twice the revenue per employee as Walmart.
Amazon and Walmart are investing heavily to own the future of shopping, online and in the physical world. The two are pushing each other to turn weaknesses into strengths, while other web merchants and traditional retailers need to not only be creative about their strategies to remain relevant, but committed to executing them.
“Retailers that don’t have strong and sustainable differentiation on product or price will struggle,” says Keller, “if not be outright steam-rolled.