Walmart Stores Inc. (NYSE: WMT) is hoping to regain some of its lost momentum and give itself some float by launching a subscription shipping service similar to Amazon Prime. The Information reported that the service now code named Tahoe will be launched sometime this summer.
Few details about the service are available, but it will apparently cost $50 a year compared to Amazon Prime, which costs $99 a year, Mashable reported. Beta testing of the service, which will provide unlimited free shipping for more than one million items available on Walmart.com, will begin with a select group of clients late in the summer, Walmart spokesperson Ravi Jariwala told Mashable.
Naturally, some of you are wondering why Walmart would take the step of offering such a service. The two most likely answers to that question are float and customer commitment.
Searching for Float
For those of you who missed Value Investing 101, float is a steady stream of cash that a company can tap for a wide variety of purposes without taking any real risks.
Warren Buffett’s classic example of float is the premiums that policyholders pay to insurance companies. Another popular kind of float is newspaper, magazine or cable television subscriptions. Subscriptions are an almost perfect form of float because they come with even fewer strings attached than insurance premiums.
Shipping subscriptions could give Walmart a lot of float if its service were to become popular. Amazon Inc. (NASDAQ: AMZN) has around 20 million Prime subscribers; if Walmart were to sign up that many subscribers, it would give itself $100 million a year in float. One obvious use for that float would be to expand Walmart’s ecommerce operations.
Okay, $100 million is small potatoes for Walmart, a company that reported revenues of $485.65 billion on January 31, 2015. Yet it shows the potential leverage Walmart can give itself from such a service.
Buying Customer Commitment
The second and far more important asset Walmart hopes to accumulate and leverage with subscriptions is customer commitment. A customer that buys a subscription makes a commitment and an obligation to a company. A person that buys a Walmart subscription will be more likely to buy from Walmart because he or she has made a commitment.
This strategy has certainly worked for one of Walmart’s most successful and aggressive competitors, the king of club stores, Costco Wholesale (NASDAQ: COST). The only way you can shop at Costco is to buy a membership for around $55 a year.
Costco reported a quarterly year to year TTM revenue growth figure of 4.36% on Feb. 28, 2015, in contrast to Walmart, which reported a figure of 1.43% on Jan. 31, 2015. These revenue figures, which are based on sales, show that Costco’s sales are growing faster than Walmart’s. Amazon reported an even more astounding revenue growth figure. It reported a year to year TTM revenue growth rate of 15.08% on March 31, 2015.
What Is Walmart Worried About?
Those numbers have certainly impressed Walmart, which is hoping to regain some of its lost momentum by adopting Amazon and Costco’s successful strategy. That strategy has definitely paid off for Amazon, which saw its TTM revenue grow by $13.66 billion between March 2014 and March 2015.
Amazon reported a TTM revenue number of $78.12 billion in March 2014 that grew to $91.97 billion a year later. The ecommerce giant now looks poised to see its revenues exceed $100 billion for the first time sometime this year.
Those numbers worry Walmart because they mean Amazon is on course to develop the kind of leverage that gives Walmart an incredible amount of power over suppliers. It is not just Amazon developing such power either; Costco’s revenue grew by $7.75 billion over the past year, rising from $107.89 billion to $115.64 billion between February 2014 and February 2015.
Walmart’s executives are clearly hoping that they will be able to generate some of the same kind of momentum that Amazon and Costco have. This, of course, brings to mind another all important question: Can Walmart beat Amazon at its own game?
How Would a Walmart Subscription Compare with Amazon Prime?
Walmart does have some serious advantages over Amazon in the subscription arena. For starters, it has the ability to offer some products Amazon does not, including prescriptions, through its service (from Walmart’s pharmacies).
Walmart also has all those stores around the country and the world that could serve as neighborhood fulfillment centers. They could serve as bases for Walmart to Go delivery or as a location for lockers from which customers can pick up orders. Walmart has been experimenting with such lockers in Canada and the United Kingdom lately.
Walmart’s service will be cheaper, but it will not offer streaming video or photo storage. Although, Walmart might sell insurance and financial services, two fields Amazon has so far avoided. Walmart currently offers car insurance and many financial services products through its stores, including checking and prepaid cards.
My take is that Walmart will try to establish itself in a slightly different space than Amazon Prime, perhaps as an alternative for those that simply want to order stuff online. It could find a large market in rural areas where people have to travel long distances to stop. One way it will do this is to add some exclusive products, such as Persil laundry detergent.
That means Walmart is much more likely to take customers from smaller online retailers such as Staples, Sears and Best Buy than Amazon.com with its services. It is also more likely to attract working class customers that are not interested in all the perks Amazon is offering.
If Walmart rolls out this subscription service in a smart way, it could position itself as the anti-Amazon. Despite Amazon’s popularity, I have a feeling that there is a strong desire for an alternative out there. Not everybody likes Amazon or uses all of its services; there are a lot of people that would just like to shop online and avoid shipping charges.
The smart way to achieve that goal would be to heavily test the service and quietly roll it a little at a time. That way it could work out the bugs and build up momentum. Knowledgeable observers know this is Walmart’s historic strategy: quietly developing new markets and capabilities then allowing them to grow organically rather than staging bold publicity campaigns. That is how Walmart has been able to expand Walmart Neighborhood Market with little fanfare.
That means Walmart’s subscription service could be a real game changer. One has to wonder how Amazon and smaller retailers like Sears Holdings (NSYE: SHLD) will respond to it.