Wal-Mart Stores Inc. (NYSE: WMT) last month dropped the price of its Shipping Pass program by $1 a year, to $49, and improved the basic level of service from 3-day shipping to 2-day shipping on qualifying items. That’s essentially the same service level offered by Amazon.com Inc. (NASDAQ: AMZN) at half the price.
Now Wal-Mart is promoting its revamped Shipping Pass program by offering customers who sign up one free month of service.
Wal-Mart has to match as best it can any offer from Amazon if the brick-and-mortar giant wants to compete in the online marketplace. The Shipping Pass program is clearly a me-too offering and is virtually guaranteed to cost Wal-Mart money unless it is an enormous success and the source of vast new sales revenues for the company.
On one hand, Wal-Mart seeks to be the everyday low-price leader. That’s how it prospered and that is still how most consumers see the store.
On the other hand, Wal-Mart is facing a slow- or no-growth period not just in the U.S., but in China and we won’t even mention what’s happening in India. Online sales may be the last, best hope for the retailer to post some growth.
Wal-Mart’s problem is that its very thin margins get even thinner when it the company adds stuff like free 2-day shipping. Amazon has only recently been showing consistent profits after more than 20 years of operation and nearly 20 years as a publicly traded company. Amazon still pays no dividend.
Unless investors are willing to have Wal-Mart stop paying a dividend and post losses year after year for a decade or more, the company has almost no chance to cut into Amazon’s business. Essentially every move Wal-Mart makes smacks of desperation and Amazon can either react with something that adds more pressure on the world’s largest retailer or it can just watch Wal-Mart continue to struggle to catch up.
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