MORGAN STANLEY: Here's what Walmart needs to learn from Amazon

Walmart
  • Shares of Walmart lost 10% last week after reporting an unexpected e-commerce slowdown.
  • The Wall Street panic points to growing anxiety over Amazon’s dominance in the grocery marketplace.
  • Morgan Stanley says the big-box retailer should look to Amazon for how to keep innovating.

Walmart stunned Wall Street last week with disappointing earnings related to an unexpected slowdown in e-commerce growth.

To keep its online sales growing at a healthy pace and fix its fulfillment issues, Morgan Stanley says Walmart should look to Amazon for answers.

“In Q4 ’15, Amazon endured execution issues related to greater than expected Fulfilled By Amazon demand. FBA fulfillment centres approached “full” capacity and operated inefficiently, leading to incremental costs (more labour and expedited shipping, slower picking & packing),” analyst Brian Nowak said in a note to clients Monday. “Following this misstep, AMZN meaningfully expanded its fulfillment center base to meet demand, increasing its FC count from ~100 to ~150 in two years.”

Walmart CEO Doug McMillan said a “majority of this slowdown was expected” as the retailer completes the integration of its $US1.3 billion Jet.com acquisition. However, he did admit that a smaller chunk was related to operational issues and keeping up with more demand.

“WMT’s systems/infrastructure were not equipped to handle seasonal demand,” Morgan Stanley’s Nowak continued. “Whereas AMZN’s Q4 issues resulted in cost pressure, WMT’s resulted in lost sales.”

How will Walmart shore up its infrastructure to keep up? Any solution will require more spending, according to Morgan Stanley.

“WMT’s execution issue suggests 1) its infrastructure is inadequate or 2) it has yet to harmonize its omni-channel assets (3,600 Supercenters, 22 e-commerce dedicated FCs), particularly during peak demand season,” Nowak said. “Ultimately, we think any solution will result in increased spending, either through software, logistics or new fulfillment centres.”

The bank currently has an “in-line rating” and a price target of $US99 for Walmart shares – 6% above where the stock opened Monday.

Walmart is up 28% in the past year, but well off its record high of $US109 hit in January.

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