On a summer day in 1998, a longtime Walmart technology employee named Robert Davis marched to the office of then-CEO David Glass with a request that he now believes could have altered the future of the retail industry.
At the time, Davis had been leading a small innovative team inside Walmart that had been successfully experimenting with selling merchandise online since 1993. Davis believed that Walmart had the technology, logistics, and merchandising prowess to lead in this burgeoning space, but he needed buy-in from division leaders to successfully grow the online shopping business.
“What I wanted David to do was convene the troops and say, ‘We gotta figure this out,’” Davis told me a few years ago when I interviewed him for my 2023 book Winner Sells All: Amazon, Walmart, and the Battle for Our Wallets.
In his telling, then-CEO Glass, who died in 2020 at the age of 84, denied his request and predicted that Walmart’s online store would never register more annual sales than the largest location of Sam’s Club, a Walmart subsidiary. It was a lack of faith in the future of e-commerce that haunted Davis for years.
“I’ll take it to my grave how big of a mistake it was and how impactful it would have been to retail if we had done what I was advocating,” he told me.
Fearing that Walmart was making a fatal error, Davis soon followed some other top company leaders to Amazon, where he would work for more than a dozen years before retiring to a log cabin deep in the woods of Washington state. With Davis’ departure, Walmart’s e-commerce efforts went dormant.
Davis’ failed attempt to convince Glass of the power of online retail instantly popped into my head on Thursday when Walmart announced that its e-commerce division had turned a quarterly profit for the first time, more than 30 years after he and a small team of Walmart colleagues began tinkering with a new sales channel for hawking merchandise to customers.
Walmart turns an e-commerce corner
On a call with Wall Street analysts on Thursday, Walmart executives rattled off reasons for finally getting over the e-commerce profitability hump. More online customers can actually make deliveries cheaper, CFO John Rainey said: “[T]hink about the opportunity to deliver a package to five houses on a street versus one house on a street. And so as we grow, we continue to spread those costs over more volume.”
Supply chain efficiencies have also brought down costs. And a third of Walmart’s online customers have been willing to pay a fee for express delivery speeds instead of expecting the perk for free. Walmart also fulfills more and more online orders out of its local stores instead of distant warehouses, which is typically a more cost-effective way of selling. It’s even one that Amazon executives long feared in the earlier days of the online shopping boom because of Walmart stores’ proximity to large swaths of the U.S. population.
And crucially, Walmart has ramped up online advertising and data business lines in recent years. Those are included in the e-commerce division’s financial results and organically carry much higher profit margins than the business of packing and shipping dog food and deodorant.
All of these recent advancements, however, can’t erase the what-ifs of decades of mostly self-inflicted e-commerce ineptitude. In large swaths of the 2000s and 2010s, key Walmart leaders were laser-focused on e-commerce profitability when many believed they should have been more concerned about investing in e-commerce growth instead. That perspective is why Walmart.com leaders in the mid-2000s were flabbergasted when they began listening to Amazon earnings calls.
“We’re like, ‘Wow, $2.5 billion that they’re going to invest in one quarter, and we’re getting jammed up about…losing $20 million,” a former executive told me in 2022 during an interview for my book.
The innovator’s dilemma
Walmart’s innovator’s dilemma raged inside the retail behemoth’s Bentonville home office for many years, with top executives fearing the cannibalization of their profitable, well-oiled, brick-and-mortar machine by the cash-needy online retailing operation.
These fears played a role in what now seems like the inexplicable slowness of utilizing Walmart supercenters as mini-warehouses that could also fulfill online orders—what has now become a key avenue to bringing down e-commerce shipping costs and delivery speeds that can actually beat Amazon.
To be sure, the company and CEO Doug McMillon did eventually make a concerted effort to prioritize e-commerce, like when it acquired Jet.com—but really its CEO, the serial entrepreneur Marc Lore—for $3.3 billion in 2016.
Lore’s heavy spending on new e-commerce service launches and startup acquisitions helped change the narrative of Walmart as a digital dinosaur, but it also rankled longtime store leaders whose business line and bonuses were negatively impacted by steep e-commerce losses. Those executives quietly played a more crucial role in Walmart’s fast-growing online grocery business than some press and analysts seemed to grasp. Lore’s massive compensation package, plus the price tag of the Jet acquisition, didn’t help. Former Walmart US CEO Greg Foran occasionally referred to Lore as “the $3 billion man” in conversations with colleagues. It wasn’t a compliment.
Ultimately, it was the COVID pandemic—and the skyrocketing demand for online shopping it incited—that ended up forcing Walmart to go all in on utilizing its massive store footprint to boost e-commerce.
“Literally over a period of like three or four weeks, we started being able to ship out of 2,500 stores because we had to,” Walmart’s former supply chain chief Greg Smith told me in a 2022 book interview.
Walmart is finally enjoying profitable e-commerce success. But the road it took to get there should serve as a cautionary tale for others about the dangers of the innovator’s dilemma, and pitfalls of institutional comfort allowed to fester for far too long.
This story was originally featured on Fortune.com
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