After years of internal debate about how to compete with
Amazon.com Inc.,
Walmart Inc.
boss
Doug McMillon
took the stage at a recent strategy meeting and revealed the centerpiece of his plan to thrive in an e-commerce era: giant stores.
Walmart, he told executives at the meeting, wasn’t going to win by building an unprofitable e-commerce operation or other stand-alone ventures. Instead, its supercenters could be the heart of a web of businesses all working together to attract shoppers and drive profits.
The supercenters are sprawling stores of around 180,000 square feet offering 100,000 products, bathed under LED lights. Groceries, clothes, camping gear and televisions are for sale; customers can also fill medical prescriptions, transfer money or get their hair done. They’re often open 24 hours and are community gathering spots, becoming backdrops for videos of teenage pranks that pop up on YouTube, or a place for senior citizens to take a walk in cold weather.
The re-emphasis on the giant outlets Walmart started building in the 1980s was a change from a strategy laid out just a year ago. Then, at an investor meeting, Mr. McMillon described stores, e-commerce and other businesses as individual ventures serving the Walmart customer in different ways.
Photo:
Rick T. Wilking/Getty Images
In the new view, disparate parts of the business would interact to drive profitable growth. Walmart would capitalize on its customer data to sell online advertising to brands, according to a person familiar with the presentation.
Turning far outside its retail expertise, Walmart plans to build “edge computing” capacity, in which data is processed physically close to where it is being collected, a faster system than sending data to the cloud. That system, spread out among retail locations, could be rented out amid new demand by autonomous vehicles and other systems that may use the technology to process large amounts of data quickly, according to people familiar with the company’s plans.
Added warehouse and shipping capacity could be sold to third-party sellers, to allow more companies to easily sell their wares on Walmart.com. Customers would have a bigger product selection, and Walmart could collect fees for processing and shipping. And online orders for Walmart’s groceries and other items could increasingly be fulfilled by traditional stores, where customers pick up goods.
“The time where people might have been worried that our boxes were too big has long passed,” Mr. McMillon said at an investor meeting earlier this month. “The supercenter footprint and positioning gives us a great opportunity to expand services and help the economics of the model.” Walmart declined to make Mr. McMillon available for an interview.
Photo:
David J. Phillip/Associated Press
Adding to market share
The retailer has largely weathered the shift to online shopping and the rise of Amazon. Sales from U.S. stores and websites open a year have risen for 20 straight quarters, as Walmart added online grocery pickup in store parking lots, cleaned up stores and lowered prices. As other traditional retailers lose customers and fail to compete, Walmart has increased its market share.
The company’s stock has surged nearly 30% so far this year, trading near the highest levels since the retailer went public in 1970.
But the sales gains have been costly. Walmart spent heavily to improve stores and to grow online, and the efforts have been dependent on U.S. stores producing steady profits to fund investments. Walmart executives have been wrestling with the best way to continue, according to people familiar with the situation.
Walmart’s revenue is more than twice Amazon’s, but the pace of Amazon’s profit growth is racing past Walmart’s. Last year, Amazon’s operating income tripled to $12.42 billion, while Walmart’s operating income grew 8% to $22 billion. Amazon’s profits largely come from its cloud-computing arm and nonretail activities, such as advertising.
Amazon Web Services, the cloud-computing business, generated $25 billion of revenue in the first nine months of the year, or 13% of the company’s total, yet it generated 62% of Amazon’s operating income in the period. Ad revenue at Amazon hit over $3.6 billion in the most recent quarter. The company is now the third-largest U.S. seller of digital ads after
Facebook Inc.
and
Alphabet Inc.
’s Google, according to eMarketer.
At Walmart, more leaders are asking, “Where is our cloud?” said one former Walmart executive. “We can’t do this without another revenue source.”
Strategy Shift
Part of Walmart CEO Doug McMillon’s new strategy is focused on growing through supercenters, the giant store format the retailer first opened in 1988. Walmart hopes to generate growth by adding retail services and using the physical locations for new forays into technology, as well as capitalizing on its vast amount of data on shoppers.

Health clinics could draw shoppers into stores, increasing foot traffic, while stores provide a location and data on demand.
Shopper data can be sold to advertisers.
Customers can pick up or return orders to stores, lowering costs for shoppers and Walmart. Popular products and groceries are available for same-day pickup or delivery.
Infrastructure that could be used by autonomous vehicles or local businesses that need fast data processing can be built at stores, generating income.
Digital
entertainment/
Vudu
Ventures that aren’t likely to create profit or growth for the business are phased out.

Health clinics could draw shoppers into stores, increasing foot traffic, while stores provide a location and data on demand.
Shopper data can be sold to advertisers.
Infrastructure that could be used by autonomous vehicles or local businesses that need fast data processing can be built at stores, generating income.
Customers can pick up or return orders to stores, lowering costs for shoppers and Walmart. Popular products and groceries are available for same-day pickup or delivery.
Digital
entertainment/
Vudu
Ventures that aren’t likely to create profit or growth for the business are phased out.

Shopper data can be sold to advertisers.
Health clinics could draw shoppers into stores, increasing foot traffic, while stores provide a location and data on demand.
Customers can pick up or return orders to stores, lowering costs for shoppers and Walmart. Popular products and groceries are available for same-day pickup or delivery.
Infrastructure that could be used by autonomous vehicles or local businesses that need fast data processing can be built at stores, generating income.
Digital
entertainment/
Vudu
Ventures that aren’t likely to create profit or growth for the business are phased out.

Customers can pick up or return orders to stores, lowering costs for shoppers and Walmart. Popular products and groceries are available for same-day pickup or delivery.
Same day
pickup/
delivery
Health clinics could draw shoppers into stores, increasing foot traffic, while stores provide a location and data on demand.
Shopper data can be sold to advertisers. Infrastructure that could be used by autonomous vehicles or local businesses that need fast data processing can be built at stores, generating income.
Ventures that aren’t likely to create profit or growth for the business are phased out.
Digital entertainment/Vudu
Beginning in 2016, Walmart moved aggressively onto Amazon’s e-commerce turf. It purchased Jet.com, an unprofitable startup created to underprice Amazon on millions of items. Jet’s founder Marc Lore and much of his staff took over Walmart’s wider e-commerce operations. The company soon took “Stores” out of its corporate name as “a symbol of how customers are shopping us today and how they’ll increasingly shop us in the future,” Mr. McMillon said at the time.
Mr. Lore and his team poured investment into e-commerce operations by lowering prices online, spending more on marketing and prioritizing faster shipping. Mr. Lore pushed Walmart to better integrate its store and online activities for shoppers, according to people familiar with the situation. The team also scooped up smaller e-commerce sites, including women’s apparel company ModCloth, outdoor retailer Moosejaw and men’s apparel brand Bonobos.
Online sales grew, but losses mounted amid the high costs. Last fiscal year, U.S. online operations lost around $2 billion—more money than planned for the second year in a row, according to people familiar with the figures. Though the e-commerce unit has long lost money, failing to hit targets was problematic for a company obsessed with frugality that finely calibrates its financial goals, said some of these people.
A Walmart spokesman declined to comment on e-commerce losses.
The website, selection and shipping speeds still need to improve, Mr. McMillon said at the investor meeting earlier this month. “I would have thought we would have been further along in e-commerce,” he said. “We’re not pleased. We’d like to go faster.”
Photo:
Walmart
By the end of last year, executives in the e-commerce unit heard from Mr. McMillon, Mr. Lore and other leaders that it was time to aggressively cut spending, according to people familiar with the situation.
“It was a whipsaw effect from one year to another,” said a former executive on the e-commerce side of the business. “In the beginning it was all about growth, how can you win share away from Amazon,” the person said. “Now it’s about profit.”
Earlier this year Hayneedle, the online furniture seller that Jet.com acquired, cut a third of its staff. Bonobos laid off workers. What remained of Jet’s headquarters staff was folded into the rest of Walmart. Modcloth was sold. Walmart has told Bonobos and Moosejaw they need to stop losing money, according to people familiar with the situation. Walmart is also exploring a sale of Vudu, the video streaming service it bought in 2010, according to a separate person familiar with the situation. The unit faces challenges as competitors from
Netflix Inc.
to Walt
Disney Co.
invest heavily to produce their own content.
Borrowing from Disney
Walmart saw that a bright spot in e-commerce was directly tied to its stores: more than half of the 40% growth in U.S. e-commerce sales last year came from expanding online grocery pickup or delivery service run out of stores, according to people familiar with the figures. At the same time, it was seeing results from its push to improve stores, snagging shoppers from other traditional chains.
At the recent strategy meeting, Mr. McMillon told top executives that giant stores could be the base for new ventures like fast delivery, health clinics and other services, according to the person familiar with the meeting.
The concept borrowed from a famous 1957 sketch that laid out Walt Disney’s blueprint for growth at his film production company, Mr. McMillon said during the meeting, according to the person. The drawing detailed how cartoon movies could feed profits in other businesses, such as television, comics, toys and theme parks; and how those operations, in turn, could prop up the film studio. As some movie studios struggled at the time, Disney continued to grow by using the interconnected profit formula.
Walmart’s stores could also act as a base for potentially profit-making technology infrastructure or business-to-business services.
In edge computing, computing power is physically close to where data is being collected—in contrast to cloud computing, in which computing power is located in distant server farms, slowing down processing.
Photo:
Ross Mantle for The Wall Street Journal
More devices such as drones, autonomous cars and sensors collect large amounts of data that could be processed by edge-computing systems.
It takes around a quarter to half a second for data from a device to reach the cloud. That length of time “doesn’t sound like a lot, but if you are in your car and it’s trying to recognize a ball rolling out in the street or a kid running behind the ball,” that might be a decision that needs to be made faster, said Rob High, chief technology officer for IBM Edge Computing, who isn’t working with Walmart on the project.
Hypothetically, autonomous car makers could contract with Walmart to do on-the-fly, fast calculations in cars driving through town, hopping on and off various stores’ systems. Around 90% of Americans live within 10 miles of a Walmart, the company says.
5G rollout
Mr. High said the rollout of faster, wireless 5G networks could allow more edge devices in a given area to be connected at once, making the technology more useful.
Walmart executives have met with large telecom companies to discuss allowing the firms to install 5G antennas on the roofs of stores for a fee or to provide access to faster network connections, said a person familiar with the talks.
The retailer is already adding computing power to its stores to process data from new technologies such as robots that clean floors, sensors that alert staff when a freezer is too warm and systems that use cameras to visually track the pace of sales. Walmart executives think there will be excess capacity to sell, according to people familiar with the plans.
Walmart may not go through with the plan to use edge computing to generate profit, and some executives have expressed skepticism internally about pursuing the effort, said a person familiar with the situation.
The Walmart spokesman declined to comment.
In May, Walmart hired a former Google and Amazon executive as global chief technology officer, a newly created position that reports directly to Mr. McMillon.
Suresh Kumar
previously spent about four years at
Microsoft Corp.
working on cloud infrastructure.
Share Your Thoughts
What do you think of Walmart’s strategy to make supercenters the heart of a web of businesses working together to drive profits? Join the discussion below.
Last year, former Walmart International CEO
David Cheesewright
began researching artificial intelligence and technology that might help Walmart boost profits or save money, according to people familiar with the situation.
Mr. Cheesewright met with a range of AI and other experts and led sessions for other executives to educate them on his findings. By the end, he had compiled a list of 20 ideas, including edge computing.
As another way to boost profits, Walmart is working to sell more of its vast trove of data on hundreds of millions of shoppers who buy online or use credit cards in stores, and to use that data to sell more advertising.
In February, at a conference with suppliers, executives openly discussed plans to create an advertising network that could help brands like
and Tide target online ads based on Walmart shopper data. It was a service that Walmart had previously relied on a unit of
PLC to sell.
The advertising effort has had a bumpy start, according to a former executive in the Walmart Media Group. Technical snafus after the business was brought in house caused many ads that had been sold to not appear online, according to former executives familiar with the situation and executives at consumer goods companies.
Walmart’s advertising business is growing, said the Walmart spokesman. “As you would expect when you’re building a complete in-house media business, we’re learning and iterating along the way.”
Walmart.com is now working to grow faster, but more profitably. The company plans to add e-commerce warehouse capacity to have more of its products available for next day delivery, according to a person familiar with the situation. Like Amazon, Walmart also plans to invest in more capacity to offer fulfillment services and warehousing for third-party merchants—the outside companies that list their goods on Walmart.com.
Photo:
Michael Nagle/Bloomberg News
At Amazon, the majority of merchandise comes from outside sellers, who pay Amazon fees to list or ship products. That has fueled rapid growth while also causing problems, with some customers and sellers saying Amazon’s marketplace is peppered with knockoffs or unsafe products.
Amazon said it prohibits the sale of counterfeit products and requires all products sold to comply with applicable laws and regulations, according to an Amazon spokeswoman. “Safety is a top priority,” she said.
On an earnings conference call last month, Mr. McMillon said Walmart needed to improve profits at its e-commerce operations. The company moved several Bentonville, Ark.-based Walmart veterans into e-commerce leadership roles earlier this year, including
Ashley Buchanan
as chief merchant and
Steve Schmitt
as finance chief.
Earlier this year, Mr. Lore raised eyebrows around the office by alternately wearing two black baseball hats with white lettering reading either “innovator” or “operator,” according to people familiar with the situation.
In a meeting, wearing the “operator” hat, Mr. Lore jokingly explained the hats as a way to convey to everyone that he and the team could operate the business effectively as well as push Walmart to try new tactics, according to some of the people.
Mr. Lore wore the hats a couple of times to emphasize to his team the need for dexterity on both fronts, said the Walmart spokesman.
“He was like, I’m both,” said one of the people familiar with the situation. “And if you are confused look at my hat.”
Write to Sarah Nassauer at sarah.nassauer@wsj.com
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