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Walmart's Going After Another Pillar of Amazon's Business

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Fulfillment by Amazon has been huge for the e-commerce giant. Can Walmart replicate its success?

Walmart (NYSE:WMT) has aggressively gone after Amazon.com's (NASDAQ:AMZN) Prime shipping services over the past few years. It first created a ShippingPass subscription service, but after seeing limited interest, it rolled out free two-day shipping on a couple million items with no annual fee. After Amazon announced plans to move Prime from two-day standard delivery to one-day delivery, Walmart announced its NextDay service and accelerated its rollout over the next few months. It's also expanding its $98 same-day delivery program focused on groceries: First it'll expand geographically, then the company will expand its product selection.

But Prime is just one of the "pillars" of Amazon's business, as its management likes to call them. Another big pillar of its retail success is the Fulfillment by Amazon service it offers third-party merchants. That's something Walmart's head of e-commerce, Marc Lore, says Walmart plans to pursue.

Pushing the flywheel

Amazon has developed a flywheel where Prime membership growth fuels the number of merchants using Fulfillment by Amazon, which in turn fuels sales and Prime membership growth. Third-party merchants are attracted to Amazon's massive customer base and can't afford to miss out on a sale, because they don't offer Prime shipping. The easiest way to provide Prime shipping is to use FBA.

Lore is looking to build a similar flywheel at Walmart. Specifically, he notes, the $98-per-year membership for unlimited same-day delivery of fresh and frozen groceries is at its core a way to get customers used to shopping with Walmart.com. "We don't have a reason, necessarily, to say 'Oh yeah! I'm gonna use Walmart.com,'" he said in a recent interview with Recode.

He doesn't expect the service itself to be very profitable, particularly in the early stages. He does, however, believe it can lose less money than competitors, including Amazon, delivering fresh and frozen groceries the same day customers order them thanks to its massive physical store footprint.

Ultimately, he expects to generate positive margins from the sale of longtail general merchandise items at scale -- that is, items customers don't buy very often but which carry higher markups than everyday items. It'll start selling more of those when it expands its $98 Delivery Unlimited service to include nearly everything it sells in its Supercenters and as customers become more familiar with Walmart.com.

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