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Walmart is going after Amazon in a new way and borrowing a strategy from Target

Dominick Reuter   

Walmart is going after Amazon in a new way — and borrowing a strategy from Target
  • Walmart is leaning more into its 4,700 US stores to fulfill orders for its growing e-commerce business.
  • It's a strategy that rival Target has been laser-focused on for a decade, with notable success.

Some rivalries are about more than winning against one opponent.

A good competition also teaches each player lessons that can be used in other matchups.

As Walmart and Target seem to borrow — or steal — strategies from each other, a striking similarity between the two is their approach to e-commerce.

Specifically, Walmart's latest round of renovations shows its commitment to fulfilling more of its e-commerce orders from its retail stores — an approach Target has prioritized with great success for years.

But more than battling one another for digital supremacy, the big-box brands likely have their eye on a larger fish in the online pond: Amazon.

To be sure, Walmart is still the bigger company by almost every key metric. The Arkansas-based retailer is the world's largest private employer and its annual revenues have propelled it to the top spot in the Fortune 500 for 10 straight years.

But in the world of online sales, no one comes close to Amazon's preeminence. The company's e-commerce business made nearly $220 billion in North American sales last year, eclipsing Walmart's $53.4 billion and Target's $20 billion.

Now it seems that Walmart has determined that the best way to gain digital ground on Amazon is to borrow some pages from Target's playbook.

Digital sales still depend on physical merchandise in physical locations, and this is where the competition looks like it's heating up.

In the US, Amazon's fulfillment network is made of some 1,300 facilities (plus about 500 Whole Foods locations). Target has nearly 2,000 stores, plus some 55 supply chain facilities.

Walmart CFO John David Rainey highlighted the difference in scale in his remarks at Morgan Stanley's retail conference on Wednesday.

"The most expensive part of delivery is the last mile," Rainey said. "That's where our physical footprint of 4,700 stores in the United States that are within ten miles of 90% of Americans gives us an enormous advantage."

Walmart also owns some 200 distribution facilities across the US that keep the whole operation moving along.

Although Walmart was technically ahead of Target in what's now called omnichannel (Walmart launched its "Site to Store" service in 2007), the company has experimented with just about every iteration of order fulfillment available.

The Bullseye retailer meanwhile has been laser-focused on refining the approach it launched a decade ago and currently refers to as "stores-as-hubs," in which store inventories are used to fulfill online orders.

That may sound like a simple or foregone conclusion to the fulfillment puzzle, but for large retailers it's anything but. Costco for example elected to build a separate fleet of warehouses to handle dot-com orders.

Walmart has dedicated e-commerce warehouses too, but the company's "store of the future" redesigns now feature more space than ever before devoted to the sorting and shipping of digital orders.

If that sounds familiar, it might be because Target's recent store modernization effort also reallocated more square footage to processing web and app sales. Target says its stores fulfill 95% of digital orders.

Tapping into their considerable physical retail presence offers Walmart and Target the opportunity to meet or exceed Amazon in one metric that founder Jeff Bezos cared a lot about: speed.

It has taken Amazon a phenomenal level of investment and innovation to locate its facilities in places where it can reliably offer next-day delivery in the US.

Amazon recently improved its speed by shifting from a national fulfillment network to a regional model, as well as expanding its same-day delivery sites, an Amazon spokesperson told Business Insider.

But while you can get two-hour delivery from Whole Foods, Target and Walmart routinely offer two-hour delivery on just about anything in their stores.

To make things even faster, Walmart is taking another cue from Target with the expanded use of sorting facilities to route shipments in high-density markets. These centers collect parcels from multiple stores before sending them on routes for delivery.

Going into the holidays, Amazon is the most popular online retailer for gifts, with two-thirds of US consumers saying they'd shop the site.

Amazon's spokesperson also pointed out the company's extensive product selection — some 300 million items available with Prime shipping and tens of millions available next-day or faster.

Walmart placed a distant second, followed by Target to round out the top three in JungleScout's most recent Consumer Trends Report, though the pair placed first and second among in-store retailers.

It remains to be seen in the coming years whether Walmart embracing a smaller rival's fulfillment strategy will help close the lead with its larger one.

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