Walmart's War On The Competition

Walmart.com (NYSE:WMT) began to offer free shipping today on many items such as electronics, toys and jewelry. Most of the products in the program are not available in stores.

The gambit is clearly meant to take market share from Amazon.com (NYSE: AMZN), Target (NYSE: TFT), Best Buy (NYSE: BBY) and smaller competitors. Walmart.com has an advantage. It is the second most visited retail website in the US after Amazon, which means it has a huge and ready audience for its offer.

The action may be good for sales, but is it good for margins? Or does it matter? Walmart’s online sales are a tiny percentage of the company’s overall  revenue, so the financial effects of the plan will be minimal.

Amazon was caught in the “free shipping” trap two years ago. Its offer cut margins sharply and this damaged net profits, something its investors did not appreciate.

Walmart may be taking the old gamble that it can lose money on every sale and make it up on volume. Although that is impossible, Walmart stands to gain a great deal compared to its rivals, even if it ultimately pushes its US online operations into the red. Retail holiday sales in America are expected to be anemic for the third year. Walmart can make a land grab online, masked by its $400 billion in global revenue. Its rivals are small enough so that they do not have that advantage. Companies such as  Best Buy could lose both margin and sales particularly if they move into the “free shipping” business on their own.

Walmart can do nearly anything it wants to pick up holiday sales \ in the US. Free shipping costs are way too modest to hurt the company financially, but it does allow the world’s largest retailer another chance to badly hurt its rivals.

Douglas A. McIntyre