What Walmart has wrong about ecommerce

By Jayne Scuncio February 25, 2018

This story was written by Zuora CEO and Founder Tien Tzuo for VentureBeat.

 

This week investors held a collective freakout over the fact that Walmart’s online sales grew at just 23 percent over the fourth quarter of 2017, down from 50 percent the previous quarter. They tanked Walmart’s stock by 10 percent, its biggest one-day decline in several decades.

While I also happen to be bearish on Walmart, I think its investors are missing the bigger picture here. E-commerce accounts for less than four percent of Walmart’s business. This is a company with much bigger problems.

Unlike the rest of Wall Street, I do not agree that Walmart’s problems begin and end with Amazon. The Walmart-versus-Amazon battle is typically framed as a clash between an ascendant e-commerce business and a dying retail industry, but that’s nonsense.

Selling products to strangers doesn’t cut it anymore. To succeed in retail today you need to start with the customer, not the product. You need to flip the script. Let me explain.

Nearly every American spent money at a Walmart last year. The vast majority of us live within 20 minutes of a Walmart store. The company has almost 5,000 retail locations, over two million employees, and over 140 million customers.

But let me ask you a simple question: What was the last thing you bought at Walmart? Walmart certainly can’t tell you. Got any receipts handy? Once you walk past the cash register at Walmart, you’re gone.

Walmart is still essentially a product company. It has decades of institutional experience with supply chains, transport logistics, and inventory management. It knows how to buy and sell products. That worked fine for a long time. It doesn’t anymore.

In the old product model. You built a product, put it into as many channels as possible, and hoped there were customers waiting at the end of those channels. In the new service-based model. You start with the customer, understand their wants and needs, and then wrap your service around that customer via relevant channels. No more pushing units to strangers.

Now let me ask you another question: What was the first thing you bought on Amazon? It’s sitting right there in your order history. Go ahead, open up a new browser tab and look it up. I bought “The Seven Habits of Highly Effective People” and “Inside the Tornado: Marketing Strategies from Silicon Valley’s Cutting Edge” on January 11, 1997.

Amazon is beating Walmart because it knows its customers. That’s the reason. Plain and simple. So does this mean e-commerce is bound for glory, and retail is doomed to failure? Will it be all retail apocalypse and zombie malls from here on out? Of course not.

Right now, there are at least a dozen new companies in the midst of opening hundreds of new retail stores. And why are they doing this? Because the stores they currently have are making money hand over fist.

You’ve probably heard some of the names: Allbirds, Casper, Birchbox, Boll & Branch. According to real-estate data company CoStar Group, these online-first stores have increased their retail space tenfold over the last five years. Warby Parker is averaging $3,000 per square foot of retail space, which is almost as good as Tiffany’s (!).

Why is this happening? Well, one reason is that it’s really hard to operate as a standalone e-commerce vendor. Almost two thirds of all online sales are owned by just 15 giant e-commerce marketplaces. RetailNext CEO Alexei Agratchev recently told me:

“As an ecommerce vendor, you have really high variable costs around shipping and returns. On the other hand, Amazon is an amazing logistical machine, and they’re not even running at a profit most of the time. … And the other question is, how do you really differentiate yourself online? Anything you do on your website, a competitor can steal pretty easily. But you can actually create really cool experiences in stores.”

As a result, retail is changing in all sorts of interesting ways. Take a look at b8ta, a new personal technology chain. It has hip, minimalist stores that let you try out the latest gadgets. What’s even more interesting is that b8ta doesn’t make any money from product sales. Product manufacturers pay a subscription fee for access to its customer base.

And as for those malls? Well, the ones that are doing well are doing really well. As old retailers are replaced by new online-first stores that are doing two to three times more business, the malls benefit from the increased foot traffic and attract better brands. Everyone wins.

Again, it’s never been just about e-commerce versus retail. It’s always been about flipping the script — starting with the customer as opposed to the product sale, and wrapping both your e-commerce and your retail channels around that customer experience.

Walmart is a product company that still views its e-commerce efforts as a distinct channel, a separate line of business. That’s not too surprising, considering the vast majority of its e-commerce business has been bought, not built: Jet.Com, Bonobos, ShoeBuy.Com, Moosejaw.Com, etc.

Walmart tried to buy its way in. But it doesn’t seem to be working out. The leopard can’t change its spots.