How Walmart Can Start Competing Online

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Walmart recently lost $20 billion in market cap in one day, in part because its leadership admitted it needs to invest more into its e-commerce operations. Walmart isn’t the only retailer struggling with selling on the web — most brick and mortar stores are, too. In 2013, Target even told the Securities and Exchange Commission that “digital sales represented an immaterial amount…of total sales.” With Amazon having such a big head start – claiming a customer base of 244 million in 2014, it’s hard to see how brick-and-mortar retailers can catch up.

All brick-and-mortar chains, not just Walmart, have struggled because they haven’t sufficiently adapted to the fact that retail on the web is a harsher environment compared to what they face on land. Success on the web is achievable, but it requires adopting strategies from other industries such as airlines and credit cards, which also operate in a more cut-throat,

environment.

The top priority for all brick-and-mortar chains should be to capitalize on their biggest asset – customers who visit their stores and connect with their brand. The top goal should be to persuade in-store shoppers to also purchase from the retailer’s web site.

When you think about it, internet retail today is similar to the airline market before frequent flyer programs were introduced. (They were popularized by American Airlines in 1982). In those days, airline travel was a commodity – passengers selected flights primarily on convenience and price. Similarly, today there’s nothing overly compelling to sway where customers shop online, except for convenience, selection, and price. A website redesign, promises of better service, or even matching Amazon’s prices won’t be game-changers for Target.com.

Frequent flyer programs transformed once-homogeneous airlines into differentiated entities – and similar loyalty programs can do the same for web retail. I’m amazed at how loyal my friends who travel frequently are to their preferred airlines. (I’m more of an “only take the nonstop” guy.) They take less convenient flights or pay more – all to gain reward points. Frequent flyer programs have differentiated a commodity product in a manner that engenders loyalty. Analogously, an ambitious loyalty program can convince shoppers who regularly frequent Walmart, for instance, to shop on Walmart.com. A rewards program is the long overlooked incentive that can convince in-store shoppers to remain true on the web.

Smaller chains, not just large ones such as Walmart, can benefit from loyalty programs. Bed Bath & Beyond, for instance, can do what small airlines do: ally itself with other larger reward programs. And there’s room for creativity – similar to airlines, retailers should offer bronze, silver, and gold status (each level providing enhanced benefits) to provide additional incentives to concentrate purchases at one retailer. Borrowing from the credit card industry, all programs should also allow customers to redeem points on a variety of products, services, and experiences – this enhances the value of collecting points.

The beauty of loyalty programs is they are enhanced by a network of store locations. More locations provide more opportunities for customers to accumulate points. Making loyalty programs a key differentiator leverages a unique competitive advantage – physical stores – of brick-and-mortar chains.

Sears Holdings, it should be noted, does have a loyalty program in place. Its Shop Your Way members earn reward points based on the dollars they spend. Although Sears has struggled, it’s telling that 74% of eligible sales were made to Shop Your Way members.

Wal-Mart has in place both a “Savings Catcher” app as well as a “Scan & Go” app. The first automatically price matches purchased products; the second provides discounts and/or expedited checkout. Both programs have been described as loyalty programs. For clarity, these apps provide additional reasons to shop at Wal-Mart, but don’t offer reward incentives specifically designed to convert in-store shoppers to devotees of its web operation.

For traditional retailers, the goal of implementing loyalty programs should be to increase profits by boosting e-commerce sales. But even if profits drop, brick-and-mortar retailers may still win. Walmart, for instance, has a forward price-to-earnings (p/e) ratio of 13, while Amazon’s is 94. This difference in valuation is due to Wall Street viewing Amazon as a growing e-commerce company, while judging Walmart as a stodgy land-based behemoth. If Walmart makes strides in e-commerce, it can doubly benefit. First, it’ll likely be rewarded with a higher p/e ratio (by becoming perceived as more of an e-commerce company), which translates into a higher stock price. Just as important, Amazon will be punished with a lower p/e ratio due to fears of slowing growth. This will pressure CEO Jeff Bezos to raise prices to maintain the stock price.

The internet has revolutionized retail. And while it’s easy to be dazzled by its “newness,” e-commerce is in essence an old school commodity market. The same time-tested tactics that have worked in similar situations will work for internet retail. In the 20th century, commodity retailers such as department stores, supermarkets, and gas stations used S&H Green Stamps (customers earned “stamps” for purchases which could be exchanged for products) to successfully differentiate themselves. Similar loyalty programs can accomplish the same now in the 21st century for Walmart as well as all brick-and-mortar chains.