Walmart Got a Lot Wrong Before Getting It Right
Originally published as part of, “The Day Before Digital Transformation” by Phil Perkins and Cheryl Smith
In the early 2000s, Walmart’s online business was lagging. It was late to the eCommerce market as its executives protected their booming physical-retail business. When it did step into the digital space, talent was disbursed throughout the business. Walmart started Walmart.com inside the organization in 2000. It was not led from the top, so it became a distributed effort that did not make much progress throughout the decade. Although Walmart’s total sales were $419B in 2011, its $5 billion in online sales that year paled next to upstart Amazon’s $48 billion that year. [i] The company knew it needed to do something different. Walmart’s own vision for eCommerce was failing, so it made its first fateful decision: to start down a path of chasing Amazon rather than creating and following its own vision.
Wal-Mart Stores (the official name at the time) decided that it needed to pull its digital talent together and move it outside the organization, away from its Bentonville, Arkansas, headquarters. Instead of leading a digital transformation from the top, it put it off to the side. It moved Walmart.com to Silicon Valley.
Although the Walmart leadership team smartly realized the need to build their own internal digital capability instead of outsourcing it, they did not adopt a digital mindset. Walmart had sent its eCommerce business to Silicon Valley, but “[t]he only thing Silicon Valley about Walmart was that we had an office in Silicon Valley,” said one of Walmart’s executives.[ii] Walmart.com used a number of outsourced, off-the-shelf systems to power key parts of its website. Worse, Walmart’s 27 worldwide subsidiaries used incompatible technologies, and the sites did not connect seamlessly with the stores or with Walmart’s legendary supply chain.
After a number of false starts, Walmart decided it would be easier to attempt to bolt acquisitions onto their existing organizations than transform them from the inside. Acquisitions can accelerate a transformation, but they should not be the strategy. Walmart’s first notable acquisition was the AI company Kosmix.[iii] The Kosmix team for many years had been part of Amazon and other Silicon Valley start-ups. Kosmix’s expertise lay in simplifying the sprawl of the web for users; its artificial intelligence algorithms were novel because they tried to understand what a user wanted rather than just match a query text word for word.
Despite cultural differences, Kosmix’s transformation into Walmart Labs was relatively smooth. Walmart Labs began launching new innovations, such as a new online search engine of the product database, a gift-recommendation app called Shopycat that Walmart.com launched on Facebook before the 2011 holidays, and a clever retail application that used spikes in social network chatter to predict demand for out-of-the-ordinary products.
Walmart Labs had major successes, but they suffered the challenges of trying to transform from the outside. Despite increasing online revenues by 30% in 2013, outpacing Amazon’s rate of growth, it was too far behind Amazon’s volume compared to their existing retail stores. The retail store represented most of the company’s existing investments, so they would have final decision making on all changes. The retail side of Walmart was skeptical of the entire dot com effort and decided not to share live retail data with their online subsidiary. However, after Walmart Labs correctly predicted that cake pop makers and juicers would be popular that holiday, the established side of Walmart was intrigued enough to begin sending more retail data to the online buyers.
But it was too little, too late. The Kosmix leadership team stayed for about a year—enough time to get the website fixed and a few new online applications developed. After they left, the new leaders of Walmart.com began to refocus their research and development efforts on applications that drove customers back into their biggest investments: their stores.
(Interesting note: Jeff Bezos, the CEO of Amazon at the time, had part ownership in Kosmix, so he is one of the few outsiders that made money on the Kosmix sale to Walmart.)
Walmart’s year-over-year numbers began to consistently turn negative in 2015. (They began to turn negative in 2013 but recovered slightly 2014). But by January 1, 2016 YoY net income was -10% and EBITDA -7.6%.[iv] In September 2016 Walmart made a large risky bet to bolt on another company. It agreed to the largest-ever acquisition of an eCommerce organization at the time: a $3.3 billion purchase of a fast-growing online shopping site called Jet.com. Expanding on this investment in June 2018, Walmart announced it would hire 2,000 additional employees into Walmart Labs to improve the organization’s online grocery shopping platform.[v]
In 2019 Walmart total worldwide sales were $514.4B of which $16.55B were online sales. Amazon’s total worldwide online sales (excluding Amazon Web Services) were $245.5B. And Walmart.com lost more than $1 billion that year. This loss had to be accounted for in an organization whose culture is a positive bottom line—always. But the Walmart.com leadership team had aggressively pitched to the organization’s management and board that Walmart needed to spend billions a year on new warehouses if it was going to seriously compete online with “the Everything Store” and its speedy delivery offerings. Amazon had 110 fulfillment centers in the US, while Walmart had 20 at most.
Walmart’s in-store selection also was not large enough to use stores to fulfill online general merchandise orders at a scale that would rival Amazon’s product catalog. Building the online version of the Everything Store required millions more products, and that meant two things that Walmart’s existing infrastructure did not support: dozens more eCommerce warehouses and a lot more merchants and brands selling through Walmart.com.
They had to choose:
- Continue their “split the army” approach, which pulled resources from the core business to pursue its strategy of trying to catch up with Amazon via a separate organizational unit,
- Commit to a “Hail Mary” approach and substantially increase investment in its eCommerce business,
- Change to a “head in the sand” approach and continue business as usual, or
- Shift its thinking to a true digital transformation.
Looking back over Walmart’s attempts to compete with the then start-up Amazon, it took several actions that have been found to be detrimental to successful digital transformation at an organization. It established Walmart.com by assigning individuals inside various units to work together but without strong leadership from the top. When the loosely held confederacy concept showed little progress, the company decided to pull the resources together and move them off-site to Silicon Valley, home of the most successful digital start-ups in the world. When the air and water of the geographic location did not appear to make much of a difference, the company purchased a start-up that had software Walmart needed and created Walmart Labs, bolting the team onto Walmart.com. While the Lab made some excellent strides in the right direction (as proven with the increase in revenue when the software went live), because it was an ‘acquire and bolt’ strategy the valuable software and ideas that resulted did not become part of the overall Walmart culture. As soon as the ‘outsiders’ from Kosmix left, the established Walmart values took over but without bringing a Walmart-specific digital strategy to the table. Eventually outside leaders were brought in, again, to attempt to replicate Amazon’s business model and success, but the massive investments made were losses.
Walmart’s approach is common among companies attempting a digital transformation. They acquire capabilities to mirror their competitors without formulating their own vision. They try to bolt a digital transformation onto the existing business. Transformation must happen from the inside by established leaders if the successful digital change is going to take place. By ignoring their existing investments, their existing strengths, their existing values, and their existing leaders, they gave no power to their transformation efforts.
[i]“Walmart’s Evolution from Big Box Giant to eCommerce Innovator,” Farhad Manjoo, Fast Company Magazine, November 26, 2012.
Although one of our authors has firsthand experience with technology-related actions that have taken place at Walmart over the years, we rely heavily on the research performed for this article for specific numbers and timelines. It is an excellent review of Walmart’s technology history, even though we draw slightly different lessons learned and conclusions. We footnote separately in our text specific quotes and numbers taken directly from the article.
[ii] “Walmart’s Evolution from Big Box Giant to eCommerce Innovator,” Farhad Manjoo, Fast Company Magazine, November 26, 2012.
[iii] “Walmart’s Evolution from Big Box Giant to eCommerce Innovator,” Farhad Manjoo, Fast Company Magazine, November 26, 2012.
[iv] “Walmart Financial Statements 2005-2020,” microtrends, www.microtrends.net. Walmart YoY net income and EBITDA numbers only began to recover in 2020.
[v] “Walmart’s Evolution from Big Box Giant to eCommerce Innovator,” Farhad Manjoo, Fast Company Magazine, November 26, 2012.