Walmart's online grocery services drive e-commerce growth strategy

Walmart announced today that it was partnering with Uber, Lyft and Deliv to begin testing last-mile grocery delivery services.

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Discount retail giant Walmart held its annual shareholders meeting in Fayetteville, Arkansas on Friday, where a bevy of corporate executives took to a glittering stage to tout Walmart's various triumphs over the last year.

The big one, of course, is Walmart's online grocery ordering and pickup service, which the retailer says is growing in usage at a rate of 25 percent every month.

Walmart has expanded online grocery services to 40 markets since first launching the program in a handful of U.S. cities last year, with an additional 14 expected by the end of this month. By the end of July, Walmart will nearly triple the number of stores and markets that offer the service.

Out of Walmart's total e-commerce growth, which CEO Doug McMillon bemoaned was too slow during the retailer's first quarter earnings report last month, online grocery has stood out for its enormous potential. It's also one of Walmart's primary focal points as the company looks to meld its mobile app, website and brick-and-mortar stores into one seamless shopping experience.

In fact, Walmart announced today that it was partnering with Uber, Lyft and Deliv to begin testing last-mile grocery delivery services. Walmart expects to start the pilot program within the next two weeks in Denver and one additional, unspecified market. This is on top of a smaller pilot program in Miami between Sam's Club and Deliv, which started in March.

That said, it's clear Walmart has figured out how it can leverage its massive brick-and-mortar footprint -- where 75 percent of the U.S. population lives within five miles of a Walmart store -- to bring down costs and expand online grocery services more rapidly than the rest.

But by Walmart's own account, curbside pickup makes the most sense for its core customer base, where low cost merchandise is valued more than convenience. What's more, Walmart's delivery pilot is an experiment through and through, which signals that the retailer hasn't figured out whether the economics of the program make it worthy of a national expansion.

"I don't know if these tests will work, but I am glad we are trying them," McMillon said during a question-and-answer session on Friday. "Like in the case of Deliv, hybrid blends and tests need to be a part of our strategy and I am happy to experiment with things that may not work out."

In some ways this puts Walmart behind some of its key competitors -- namely Amazon and Target -- which are also piloting an array of e-commerce grocery initiatives.

Amazon has been testing its subscription-based AmazonFresh grocery delivery service in urban markets including Seattle, Brooklyn, Philadelphia and multiple regions in California. It's also expanded its delivery options through its one-hour delivery service PrimeNow.

Target, meanwhile, has turned to startups Curbside and Instacart to roll out local pickup and delivery services in select markets around Minneapolis, San Francisco, New York and New Jersey.

Even Walmart's international chain Asda has made route-based grocery delivery work in the U.K., but Walmart admits much of that success is due to the area's compressed geography compared to the U.S.

"It's very difficult to make route-based delivery work in the U.S.," said Michael Bender, executive vice president and COO of Walmart Global eCommerce. "In fact, we don't think it will work in the U.S."

Walmart tested route-based delivery in San Jose and Denver, but Bender said this new on-demand approach in partnership with Uber, Lyft and Deliv is expected to bring greater benefit for customers and more efficiency for Walmart.

Either way, it's still the early days of online grocery for Walmart and its competitors. But if Walmart can figure out the economics and how to scale to a nationwide delivery system, it will be a game changer in the industry.

Yet even without widespread delivery services, Walmart is well positioned to find massive success in curbside grocery pickup. The program gives Walmart a nearly unmatched differentiator from other retail grocers, and it could be enough to lure consumers away from chains like Kroger and Publix when it comes to buying groceries in the digital age.

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