February 1, 2017
Pressured to accelerate growth in online sales, Wal-Mart announced it is abandoning its fee-based ShippingPass subscription-based program, which promised free delivery of over 2 million different items within three to five days when shoppers spent at least $50 with the brick-and-mortar juggernaut. Instead, the company now promises delivery within two days and has lowered the minimum purchase requirement to $35. The company began testing ShippingPass in May of 2015.
The move marks Wal-mart’s latest salvo aimed at the wildly successful Amazon Prime program. Prime members pay an annual $99 fee to enjoy free two-day shipping on eligible purchases, plus such wide-ranging benefits as unlimited streaming of movies and TV shows with Prime Video. Such perks make it difficult for competitors to wrestle loyal customers away from Amazon. Apparently, Wal-Mart deemed it necessary to raise the stakes in order to siphon users away from Amazon.
Explaining the change in a company news release, Marc Lore, President and CEO of Walmart U.S. eCommerce, explained, "In this day and age, two-day shipping is really just table stakes. We don't think it's necessary to charge a membership [fee] for it." While it remains to be seen whether the shift in strategy will prove successful, the move is understandable. Amazon Prime’s U.S. membership exceeds 50 million, according to Cowen and Co. And Kantar Retail estimates that about one-third of Wal-Mart shoppers are Prime members, so top prospects for conversion.
Kantar reports that free two-day shipping is the leading reason Prime members renew their subscriptions. Now that Wal-Mart will provide similar two-day delivery for free, on orders of $35 or more, Wal-Mart might finally be poised to gain ground on Amazon. The narrow breadth of Wal-Mart’s product array might represent a major drawback, however. Whereas Wal-Mart will offer free-shipping on 2 million products, Amazon boasts that over 40 million items are Prime-eligible.
Even if Wal-Mart is successful in luring online shoppers away from Amazon, it’s not clear that the firm’s profit margin will necessarily grow as a result. Accelerating online sales at some retailers have caused profit margins to contract. Lore suggested the minimum purchase requirement, which encourages shoppers to build bigger baskets (i.e., buy more items), should help guard against margin erosion. This was the concept behind Jet.com – the company Lore founded that relied on a pricing algorithm that incentivized shoppers to add to their baskets. In August, 2016 Wal-Mart announced it agreed to acquire Jet.com for approximately $3 billion in cash plus $300 million in Walmart shares.
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