What is Walmart Plus ?

Walmart+ is an annual subscription service with benefits worth about $1300 per year. Some of the benefits are

• Free shipping on Walmart.com(no order minimums)
• Free grocery delivery ($35 minimum)
• Fuel discounts at partner gas stations
• In-store discounts and rewards
• Paramount+ straming subscription
• Spotify premium for 6 months

Launched more than 2 years ago Walmart+ is helping America's largest retailer's close in on annual ecoomerce sales of about $50 billion or about 12% of its US revenue.

Walmart+ was created to increase customer loyalty, enhance convenience, and gain greater share of wallet among its US customers. In its latest annual report, Walmart specifically calls out Walmart+ as a key component of its strategy to “meet competitive pressures." Competition between the two largest ecommerce platforms in the US has heated up over the last several years, with Walmart trying to catch Amazon in ecommerce and online advertising before Amazon can figure out grocery and in-store shopping.

While Walmart has not publicly reported its numbers, analysts estimate Walmart+ has somewhere between 11 million and 32 million members. While only a fraction of Amazon’s 166 million US Prime members and 200 million globally, it did take Amazon 10 years to hit 38 million. Walmart could reach that in one third of the time. There's likely overlap between Walmart+ and Prime subscribers, indicating customers may not necessarily be loyal to one service. And depending on the consumer, it might make sense to have both.

What role has Walmart+ played and what should we expect going forward?

Walmart seemed to start taking ecommerce seriously in 2016 after its acquisition (and subsequent 2020 wind down) of Jet.com, which allowed the retail giant to acquire fulfillment centers and ecom talent. Since then, the company has experimented with various efforts to take share from Amazon.

Although only 13% of revenue globally, ecommerce is Walmart's fastest growing segment. This, of course, does not come without risks: potentially cannibalizing store traffic, high capital expenditures from technology and infrastructure investments, and competing directly with nearly every other retailer and a list of on-demand players that includes Uber, DoorDash, Instacart, Gopuff, and many others.

Walmart employs a fleet of on-demand drivers through Spark Delivery, the company’s crowdsourced delivery-driver network, and ships ecommerce merchandise from 31 dedicated fulfillment centers and directly from more than 4,000 stores. I'm not sure exactly how Walmart's on-demand tech and operations will ever stack up against the likes of Uber. What we'll most likely see, is Walmart continue leveraging its store footprint as it moves more business online. Hopefully with the right incentives right this time around.

In an inflationary environment amidst what some may define as a recession (the White House not included), Walmart is positioned to resonate with price conscious American consumers. With zero substantiation behind this claim, Walmart's ecommerce business certainly rode pandemic-related tailwinds without much help from Walmart+. Now could be the time to accelerate Walmart+ membership growth, especially in light of Amazon Prime’s price hikes.

Lower Prices, Increase Share of Wallet

For as long as I can remember, Walmart's strategy and positioning has been to build the lowest cost structure and compete on price. I'd expect its approach to ecommerce is similar, especially considering its existing customer base. Given consumers’ sensitivity to Prime's $20 price hike this summer, price increases would probably limit Walmart+ membership growth anyways. It’s worth noting Walmart hasn't lowered the price since launching two years ago, even amid inflationary pressures and supply chain disruptions. It hints Walmart doesn't see the membership as a revenue driver on its own. Its customers already average more than $1,000 spent on Walmart.com per year. And there's plenty of data across membership programs that show they acts as a sunk cost and incentivize where a customer start each purchase journey. In Walmart's case, this can be both in-store or online.

Convenience, assortment, delivery speed, and low prices will continue to drive adoption. A 2018 study found Walmart's prices were 10% cheaper than Amazon, and even more so when comparing grocery products against Whole Foods. We'll likely see Walmart+ further tie in with Walmart's lower price strategy, which will need to maintain a lower cost structure than competitors.

Lower Costs and Higher Adjacent Product Adoption

Walmart has what most large ecommerce companies don't: a massive retail footprint. Walmart has continued optimizing its in-store pickup and delivery operations over the years (via automation and reconfiguring store layouts), especially during the pandemic. Incentivizing customers to pick up orders from a store reduces last mile delivery costs (the most expensive logistics costs), while also driving adoption of adjacent high margin, in-store products. Operating a retail store has high fixed costs, and higher adoption of products like its Pharmacy, other healthcare services, automotive care, and various money-transfer and financial services should boost Walmart's bottom line. Eventually, Walmart can shift most of these products online, boosting their margins even further and likely increasing advertising revenue as well (more below).

We should expect Walmart+ to add more "free" products, discounts, and rewards. For example, its current gas savings equate to roughly 10 cents per gallon. This costs Walmart $2-3 in revenue on a 20-30 gallon tank, which is probably worth it if a customer spends money in a store after filling up. Non-gas spend is typically where gas stations generate most profitability. And in this case, Walmart isn't a 500 square foot building selling snacks and energy drinks, its the largest retailer in the world. As it gets larger, we may expect even more discounts, which ultimately acts as a lever to impact customer acquisition and retention.

Partnering with streaming platforms like Paramount+ avoids the $13 billion in content-related costs Amazon paid in 2021 (up from $9 billion in 2020). And its partnership with American Express Platinum card likely increases adoption with higher income consumers that may not do shop at Walmart otherwise. These discounts and partnerships will likely lead to lower customer acquisition and retention costs than doing so outright.

Grow the Ecommerce Marketplace and Advertising Revenue

Walmart is also building out its Marketplace ecosystem to compete with Amazon. Its launching more seller tools this fall, including advertising and search support. It’s important to note that, despite being 1/3 smaller than its cloud business, advertising likely contributed the same amount to Amazon’s operating income in Q4 of 2021 as AWS. This is probably the most important aspect of all of this. And I'm assuming Walmart has finally figured this out, and they're looking for ways to generate this high margin ecommerce advertising revenue as well.

Increasing the number of transactions that happen on Walmart's app where it can show more ad impressions is likely top of mind. Its search results are already heavily sponsored (the first two pages of a search for "laundry detergent" below is 100% ads), so most new ad revenue will likely come from increasing the time customers spend in its app.

And don’t forget: Walmart tried buying TikTok in 2020 amidst some of the controversy around its parent company Bytedance’s Chinese ownership. The average young TikTok user now spends more time in-app than Instagram or YouTube.

Using Scan & Go to drive app adoption is starting to feel very timely...

Don't Count Walmart Out

Overall, don’t expect the frequent Whole Foods shopper to defect from Amazon Prime to Walmart+. Instead, watch for Walmart to leverage its existing retail network, logistics infrastructure, and in-store services to drive additional revenue across its existing customer base, which generally skews more rural / suburban and lower income than Amazon. Walmart also operates Sam's Club, its "Costco but owned by Walmart" membership model with 600 stores and and 47 million members, most in the US. On a long enough timeline, I wouldn't be surprised to see elements of Walmart+ and a Sam's Club membership start merging together.

If anything, we're watching Walmart take a page out of Sam Walton’s playbook: “I have always been driven to buck the system, to innovate, to take things beyond where they’ve been.” Finally, 25 years after Amazon's IPO, Walmart is finally taking things beyond its stores and onto the internet.