My question for Wal-Mart is this: is a segment that generates 1.7% of revenue worth all of the attention? Capital allocation is essential is any business, and if a firm is spending its money efficiently, profits will be maximized. If year after year, a segment fails to produce, it may be time to accept that the segment is a side business that isn’t worth an excessive amount of money or time.
Discount retailer Tuesday Morning Corporation (NASDAQ:TUES) is an extreme example of a retailer who embraced this reality. In July, Tuesday Morning Corporation (NASDAQ:TUES) shut down its website so that more focus could be placed on the firm’s core of 850 stores. The website generated just 1% of Tuesday Morning’s $812 million in revenue for the year ending in June, so management decided that focus needed to be placed on the 99%. The company’s stock hasn’t significantly responded to the news, so investors seem to be alright with the decision.
Wal-Mart shouldn’t go as far as shutting down its website, but the firm should indeed focus on its core: retail stores that offer consumers the lowest prices in the US. This proven strategy works year after year, as evidenced by Wal-Mart’s sales growth:
Now what?
So what should Wal-Mart do with Walmart.com? I think the website can be an asset if used correctly. Wal-Mart should stop fighting a losing battle with Amazon and instead focus on an area of the web that Amazon doesn’t dominate just yet: groceries.
According to Todd Hale of research firm Nielsen, online sales of food, groceries, and other everyday items are growing annually by almost 20%. I think Wal-Mart should set its sights on this market and open fire. Although Amazon has a bit of a head start, its grocery business AmazonFresh only exists in Seattle and LA. And as I outlined in a previous post, I don’t think Amazon is in the grocery business to profit on groceries.
Conversely, Wal-Mart has the infrastructure and presence to take the budding industry by storm. With over 3,000 Supercenters, Wal-Mart is the number one grocer in the US. Consumers already buy Wal-Mart groceries in stores, so why not buy them online as well? Wal-Mart should start on the East Coast, using its infrastructure and supply chain already in place to deliver groceries and other consumer products directly to customers. Currently, Wal-Mart delivers non-perishables, but I think the company should expand into a full line of online groceries.
Final thoughts
Wal-Mart isn’t going anywhere. The world’s largest retailer will be a force for years to come. But Wal-Mart needs to concede that it can’t beat Amazon, and shift focus to retail stores and online groceries.
If you can’t beat ’em, don’t waste your money.
The article This Company Is Fighting a Losing Battle originally appeared on Fool.com and is written by Randy Holcombe.
This article was written by Randy Holcombe and edited by Chris Marasco and Marie Palumbo. Chris Marasco is HeadEditor of ADifferentAngle. None has a position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay.
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