Walmart to challenge Amazon Prime with $50 shipping service

Walmart (NYSE:WMT) will begin testing a frontal assault on Amazon Prime this summer, offering unlimited free shipping at a rate equivalent to half of Amazon's (NASDAQ:AMZN) $99 annual price.

The Walmart service will cost $50 annually for delivery in three days or less, reported USA Today. Amazon delivers in two days or less, including Sundays using the U.S. Postal Service. Walmart will not deliver on Sundays and will not match Amazon's other Prime membership benefits such as free streaming of video programming, free music streaming, and free or deeply discounted books on its Kindle electronic reader platform. Amazon Prime is a potent loyalty tool for the online merchant.

"We've heard from customers that they want shipping that's predictable and they want it to be affordable," said Walmart spokesperson Ravi Jariwala.

Walmart now offers free shipping on online orders of $50 or more, or customers can place their order online and then pick it up in a Walmart store for free, an offer Amazon cannot match. Initially the new shipping service test will be made available by invitation only, Jariwala said, adding that the service will include more than 1 million products, ranging from toys and apparel to electronics and home goods. Amazon Prime offers an estimated 20 million items.

"The customer feedback is really going to determing how the program evolves," Jariwala told CNNMoney.

Jariwala would not divulge when the program might be open to all shoppers.

"Frankly we're surprised it took Walmart this long to launch any sort of loyalty program," Matt Nemer, senior analyst for Wells Fargo, wrote in a note to investors, in which he mentioned the success of other membership programs, including Amazon's and Costco's.

"Walmart will have heavy lifting ahead to catch up with Prime, which we believe will continue to push the envelope on shipping speed and add new services," he said.

Walmart also refused to reveal details on how it will fill the online orders or how they will be delivered, but Jariwala told Slate that Walmart works with "a number of different carriers."

Walmart is accelerating its e-commerce investments and indicated last fall that there are plans to spend another $1.2 billion to $1.5 billion on them this year. The company also plans to continue building new fulfillment centers to expedite online order delivery, while offsetting these costs by adding fewer square feet to its stores.

The retailer now has a grocery delivery service in five markets, as well as its "site to store" program for free pickup of online orders. The company has said that a third of its online orders "somehow touch the store."

How will the new program do? Walmart's program may be less appealing than Amazon's because it lacks many of the perks that Amazon Prime members appreciate, such as free video streaming, e-books and music, Nemer told Internet Retailer. "Prime is about so much more than shipping."

Although Walmart has waited a long time to launch this kind of program in response to Amazon, it could be an attractive alternative to the much higher cost of Prime membership. "They're definitely late to the game but they're catching up in online sales in general so it's not entirely impossible that this is a viable competitor to Amazon," said Sucharita Mulpuru, Forrester Research VP and principal analyst. "They'll have to offer a lot more than free fast shipping though because Barnes & Noble has been doing something similar for its members and it hasn't moved the needle much in their business."

These kinds of programs lose money, said Steve Banker, service director of supply chain managementa at ARC Advisory Group. "Prime has been a great tool for acquiring customers and getting existing customers to spend more. But it is a money loser," he said. "I've seen analyst estimates that Amazon loses at least $1 billion annually on Prime-related shipping expenses. It might be somewhat less costly for Walmart if they can leverage their stores to ship some substantial portion of e-commerce orders, because the stores are closer to customers than Amazon distribution centers. However, this drives up picking and packing costs because you can't do fulfillment as cheaply in a store." 

For more:
-See this USA Today article
-See this CNNMoney article
-See this Slate article
-See this Internet Retailer article

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