(Reuters) - Walmart Inc is asking vendors to supply it with more merchandise priced at $10 and up, as part of a major push to finally turn a profit at its online business, according to four people with knowledge of the matter.
The new focus at the world’s largest retailer is on dry grocery products such as sauces, soaps and general merchandise items such as toys and home furnishings, the sources said.
Walmart’s goal is to see higher profit margins selling these more expensive items given the built-in cost of delivering goods purchased online, according to the people familiar with Walmart’s new strategy.
Shipping Gillette Mach 3 Disposable Razors at $6.97, for example, costs the same as Gillette Fusion5 ProGlide Men’s Razor Refills at $12.97.
In meetings last week with suppliers including Procter & Gamble Co, Unilever PLC, Kimberly-Clark Corp and Clorox Co, Walmart’s e-commerce chief Marc Lore said Walmart.com wants to focus on merchandise priced at least $5 and preferably, more than $10, the people said.
“Walmart has started to understand it cannot make money if they offer the lowest prices online on every item and then spend $4 or $5 trying to ship it over,” said one supplier present at the meetings. “It is not sustainable and more importantly their shareholders won’t allow it.”
Walmart’s directive to suppliers marks a shift in strategy. The retailer for years has squeezed suppliers for pennies to drive the lowest prices for shoppers, both online and at its brick-and-mortar stores. Walmart will continue to press for bargain-priced items to sell at its 4,700 stores. But in addition, it will now implore suppliers to provide it with more expensive goods for sale online.
Walmart does not disclose profit margins for individual products. But it tends to sell lower-priced merchandise at retail prices that are extremely close to its wholesale cost, and seeks to profit by selling large quantities of that merchandise across its brick-and-mortar stores.
Because Walmart.com offers free two-day shipping to draw in buyers, turning a profit on items that retail for $5 or $10 is difficult.
Consider a $3.50 tube of toothpaste. A supplier may incur $2.50 in costs to manufacture, transport and store it, selling the toothpaste to Walmart at $3 wholesale. The margin to Walmart on such an item is 50 cents if a shopper buys it at the store. But add $2 of shipping costs to get that toothpaste from Walmart’s distribution centre to the home of a Walmart.com shopper, and the transaction is a loss to Walmart.
The same tube of toothpaste in a different package, bigger in size, may sell for $6.50. It may cost the supplier $3, and Walmart may buy it wholesale at $3.75. When Walmart.com incurs the same $2 shipping cost to send it out to a shopper’s home, the retailer makes a profit of 75 cents.
This new emphasis on more higher-priced goods at Walmart.com comes after the retailer acquired Jet.com in 2016 and is investing billions of dollars to make its online business more competitive.
Walmart declined to comment on the meetings, but affirmed its commitment to “Every Day Low Prices” and offering the best prices online.
“We are constantly looking for opportunities to expand our assortment with new items, and want to ensure that the items we add to the assortment are a great value but also make economic sense for the channel,” a Walmart spokeswoman said.
Two people present at the Walmart meetings in Bentonville, Ark. - who were not authorized to speak on the record - said Walmart wants to avoid selling products online at a loss like rival Amazon.com Inc, where there is much less of a focus on retail profit. Seattle-based Amazon profits on many but not all transactions, depending on price-matching, an order’s size, shipping speed and other factors.
While Amazon has pressured suppliers for discounts usually given to bigger retailers, a person familiar with the matter said, it has been happy to sell popular items at cost or even at a loss if it means winning customers’ loyalty over the long term.
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Amazon has a diverse array of profitable businesses to offset its retail losses, including commissions for third-party sales on its site, advertising sales and a business handling large enterprises’ computing needs in the cloud.
Amazon accounted for 43.5 percent of U.S. e-commerce sales in the 12 months to October 2017, compared to Walmart’s 3.6 percent, according to digital research firm eMarketer.Walmart.com has tripled the items it sells to 70 million in the past year. It is looking to grow that fast, as it plays catch up with Amazon’s more than 300 million products for sale.
Walmart.com already had begun to raise prices on some items sold online last year. By now enlisting suppliers to provide it with higher priced goods, it is taking that strategy a step further.
The move to offer more $10-and-up merchandise for sale online carries significant risk if bargain hunters reject the push and seek lower-priced goods elsewhere. A majority of Walmart’s low-income customers still tend to shop at its brick-and-mortar stores.
But the retailer, with $485 billion in annual sales, is trying to attract a slightly more affluent audience to Walmart.com.
For some suppliers, Walmart’s directive will entail going back to the drawing board and coming up with new items to sell on Walmart.com. That, in turn, will require planning and investment in new product design, packaging, marketing and sales. One Walmart vendor said that more than 95 percent of its merchandise currently for sale on Walmart.com is priced between $3 and $8.
Procter & Gamble, Kimberly-Clark and Unilever declined to comment. Clorox did not respond to requests for comment.
“They are no longer saying ‘give us the lowest priced product for dot com,’” said one person present at the meetings, referring to Walmart.com. “They want items that retail for more than $10; those are the products that make money for them online.”
Additional reporting by Jeffrey Dastin in San Francisco and Martinne Geller in London; Editing by Vanessa O'Connell and Edward Tobin