The Wal-Mart Empire Strikes Back

The world’s largest retailer is investing heavily in its brick-and-mortar operations and e-commerce to maintain its supremacy — and CFO Charles Holley is at the helm.


When Charles Holley Jr. joined Wal-Mart Stores a generation ago, the company was an Arkansas-based U.S. business that prided itself on taking the pulse of the country better than any other retailer. Memories were still fresh of founder Sam Walton loading up his ancient pickup truck at one of his stores, just like millions of Americans who were showing up at his Walmart Supercenters to cram their own vehicles with enough goods to last for weeks at a time.

“The company culture was, ‘If you buy well, take care of customers and you give them a good value, that’s all you have to worry about,’” says Holley, 59, a tall, burly Texan who has been Wal-Mart’s chief financial officer for the past five years. “And in those days it was probably true.”

Not anymore. Holley’s itinerary for the past several months offers a snapshot of just how much Wal-Mart has changed and why his mandate far exceeds the typical job description for a CFO. In Denver he inspected both traditional Supercenters and a new, state-of-the-art facility that allows shoppers to order online and pick up their purchases without getting out of their cars. In Brazil, Holley tried to fathom why two companies acquired a decade ago still weren’t fully integrated into Wal-Mart’s operation there. And he twice traveled to New York to field questions from skeptical analysts and investors about Wal-Mart’s downward-trending return on investment. “They do mention it to me every once in a while,” he quips.

Of course, Holley also stands apart from other CFOs because he oversees an enterprise whose revenue outstrips the GDP of all but 27 nations. And with a global reach of more than 11,400 stores in 26 countries and sudden immersion in the brave new Internet world, Wal-Mart has developed plenty of GDP-size challenges, which are testing its claim that it still knows what’s best for shoppers.

Though easily the biggest brick-and-mortar retailer the world has ever known, Wal-Mart is battling online giant to maintain its retail supremacy. Wal-Mart is betting on a bricks-and-clicks approach that uses the web to draw more traffic to its stores. But doubts persist that this approach will be enough to overcome the all-out home delivery strategy pursued so successfully by Amazon.

Nor can Wal-Mart any longer feel confident about its dominance among its brick-and-mortar rivals. The so-called convenience revolution has many shoppers abandoning fill-up-the-trunk expeditions to big-box Walmarts in favor of small-basket purchases at their local supermarkets, dollar stores and pharmacies on the way home from work. Wal-Mart is late to the game with its own Neighborhood Markets, which run the risk of cannibalizing its Supercenters.

The Supercenters are still Wal-Mart’s flagships, and Holley insists they will remain so for the foreseeable future. But they must be revitalized if they are to continue generating the bulk of company revenue and profits while fulfilling Wal-Mart’s famous slogan, “Everyday Low Price.”

Nobody would confuse today’s Wal-Mart with the Arkansas company that Holley joined in 1994. Twenty years ago Holley helped pioneer Wal-Mart’s expansion into Canada, Mexico and Great Britain. Since then Walmart International has fanned out into more than a score of other countries and become in its own right the second-largest retail business on the planet. It now accounts for more than a quarter of company revenue. But it must start delivering commensurate profits.

Tackling these multiple challenges and ensuring future growth require multibillion-dollar investments that already are reducing buybacks for shareholders. As Wal-Mart CEO Doug McMillon told investors last October, only eight months after taking the helm: “You want growth and returns. So do we. But for now growth is our focus.” Holley’s task is to convince shareholders that massive investments in e-commerce and brick-and-mortar operations will soon pay off so that meaningful buybacks can resume, perhaps in 2016, after a two-year hiatus.

Amid all this, Wal-Mart’s sheer size and social impact are forcing the company to take the lead on a host of politically charged issues, such as income inequality, gay rights and environmental sustainability (see “Wal-Mart Takes a Social Stand”).

Despite the global dimensions of these tasks, Wal-Mart continues to embrace its provincial roots and image. Holley works out of Bentonville, the Arkansas town (population: 35,635) that Sam Walton chose as ground zero for his retail empire. Mr. Sam, as he is called around there, has been elevated to virtual sainthood since his death in 1992. Across the leafy town square, dominated by a statue of a Confederate officer, the Walmart Museum occupies the former premises of Walton’s 5&10 discount store. Opened by Mr. Sam in 1950, the store is hailed as the precursor of all Walmarts. A museum guide leads a score of schoolchildren past mementos from Walton’s life, including his high school yearbook, the wedding gown his wife, Helen, wore and an assortment of household appliances he sold a half century ago.

Holley works a few blocks south, in the sprawling, one-story, red-brick company headquarters building, which looks like a Wal-Mart warehouse. There a corner office means a view of the parking lot. Some senior executives, including Wal-Mart U.S. CEO Greg Foran, don’t even have a window.

The CFO’s desk is cluttered with documents and souvenirs, including a bronze head of a longhorn steer. Even in Razorback-crazy Arkansas, Holley flaunts his attachment to the University of Texas, where he earned his undergraduate degree in accounting before moving on to the University of Houston for an MBA in finance.

Holley can offer up impressive Wal-Mart statistics. Revenue in the fiscal year ended January 31, 2015, rose $9.4 billion from the year before, to $485.6 billion, while net income inched up by $300 million to $16.2 billion. For the 42nd consecutive year, the company raised its dividend, which increased most recently by four cents, to $1.96. “It may not sound like much, but with interest rates close to zero, that’s an attractive yield,” Holley says.

On the downside, share repurchases fell to $1 billion last year, compared with $6.7 billion and $7.6 billion, respectively, in the previous two years. Wal-Mart’s share price had dropped to $70.93 on June 30 after starting the year at $86.27, even as the S&P 500 index rose 1.09 percent. Of longer-term concern is the downward drift of Wal-Mart’s return on investment from 18.6 percent five years ago to last year’s 16.9 percent. “No investor is okay with that,” says Paul Trussell, a New York–based analyst who covers Wal-Mart for Deutsche Bank.

When asked about these concerns, Holley springs up from his desk and heads to the board on the wall to illustrate why he thinks there is little cause for alarm. He draws a top line for last year’s ROI and below it a line showing an average 14.5 percent internal rate of return for launching new Walmart stores at the company’s current 7 percent cost of capital. “I would do that all day,” he says. “Is that clear enough?”

The CFO’s argument hasn’t impressed some investors, who believe the biggest challenge facing Wal-Mart and other big-box retailers is taking place online. “Consumers are voting with their wallets in favor of purchasing all sorts of products online,” says Peter Dixon, who manages the $1.2 billion Fidelity Select Consumer Discretionary Portfolio. “It’s tough to point to any brick-and-mortar and say they have figured out a way to gain competitive advantage from their large number of stores.”

Joe Fath, who manages the $64.3 billion T. Rowe Price Growth Stock Fund, has reduced his exposure to big-box general merchandise retailers. “For most of them the future is a melting ice cube,” he says. “They will continue to lose market share, and their return on invested capital will continue to deteriorate.”

Some shareholders with longer-term investment horizons believe Wal-Mart will weather the Amazon assault in the U.S. and continue to draw new shoppers from emerging markets. “There are still 7.2 billion people out there with basic needs to be met in a modern retail environment that Wal-Mart can provide,” says Bob Coleman, an analyst with Gardner, Russo & Gardner, a Lancaster, Pennsylvania–based investment manager that has held Wal-Mart stock since the early 1990s.

Wal-Mart is adamant that its foremost priority is to regain a winning aura for its U.S. Supercenters. These 3,427 stores, each averaging 182,000 square feet, account for more than half of total revenue and about two thirds of operating profits. There is a Supercenter within ten miles of 90 percent of the U.S. population.

When Sam Walton unveiled the first Supercenters in the 1980s, they proved to be the great disruptive innovation in postwar retailing, quickly overtaking the Montgomery Ward, Sears Roebuck and Woolworth stores that defined American retail in earlier decades. Walton followed this breakthrough with Sam’s Club, a chain of membership-only retail warehouses, each averaging 134,000 square feet. At the end of the last fiscal year, they numbered 647 in the U.S. and accounted for 12 percent of company revenue and 7 percent of operating income.

It wasn’t only their size that made Wal-Mart’s stores so formidable. The company was one of the first general merchandise retailers to build an information technology infrastructure that tracked every item in every store everyday and ordered new inventory based on daily demand. “The vendors could look into the Wal-Mart inventory and know exactly what sold,” says Michael Exstein, a New York–based analyst for Credit Suisse. “There was no more guessing.”

Wal-Mart pioneered deals with domestic and foreign manufacturers, guaranteeing them bulk purchases in exchange for meeting specifications favored by shoppers. And then Wal-Mart sold the goods at prices few competitors could match. Rural and suburban families drove miles on “trip missions,” loading their pickups and SUVs with supplies. Having Wal-Mart as the anchor tenant ensured the prosperity of any shopping center.

But tastes began to change as the 20th century drew to a close. “Convenience” became the buzzword in retail. Working couples and single parents no longer had the patience to hunt for parking spaces and fight the crowds at Supercenters. Wal-Mart’s fleet of stores seemed designed for another era.

“Think of a navy with big aircraft carriers and battleships that was built to fight the last century’s wars,” says Craig Johnson, president of Customer Growth Partners, a New Canaan, Connecticut–based research group tracking 50 retailers. “The war nowadays is being fought by more-nimble companies with smaller stores. No need to make the big schlep to Walmart anymore.”

Wal-Mart executives have been unusually frank about the Supercenters’ problems. At an April meeting with investors and analysts, U.S. CEO Foran conceded that many customers had been turned off by cluttered stores, missing products on shelves, hard-to-locate employees, slow checkouts and food that wasn’t always fresh. “I will often hear customers say to me, ‘The product looked good yesterday, but the day after, I opened the fridge and I can tell you that apple or strawberry or mango was not good enough to eat,’” Foran said. That’s a painful admission considering that groceries account for 56 percent of Wal-Mart’s revenue.

Correcting these problems isn’t cheap. This year the company expects to invest as much as $13 billion in store renovations, e-commerce and technology. To improve service in the Supercenters, some 500,000 “associates,” as Wal-Mart calls its employees, received wage hikes to at least $9 an hour this past April and will get at least $10 an hour starting next February — at a $1 billion cost to the company.

Billions more will be spent to speed deliveries of fresher produce and on “price investments” to cut costs and maintain margins. “To have everyday low price, we have to have everyday low cost in our operations,” Holley says. “We have been very clear with Wall Street about this.”

For a glimpse of what Wal-Mart hopes its Supercenters will look like once these investments begin to show results, the company points to its Teterboro, New Jersey, store, inaugurated in April, 16 miles west of Manhattan. Open 24 hours a day, seven days a week, the store extends over 150,000 square feet, or about 30,000 square feet less than the typical Supercenter. Customers get less tired moving about and can locate employees more quickly. Self-checkout stands supplement the traditional cashier lines and speed up shopping.

There is an uncluttered look to the premises. Aisles are wide. Sight lines are lower, making products more visible. Fruits and vegetables look invitingly fresh. An employee inspects packages of meat, stacking them neatly and culling those nearing their expiration dates, which will be sold at a steep discount. Cosmetic cases are brightly backlit. Clothes are offered in shocking colors and prices: An aquamarine tank top sells for $1.68. And everywhere signs and labeling are in both English and Spanish.

Teterboro and its outlying neighborhoods are 54 percent Latino. “We accessed census data that tells us who our customers are,” says regional general manager Matt Armiger, pointing to mounds of green plantains and shelves of canned Goya beans as evidence of the store’s eagerness to accommodate Latino tastes. The census also indicated that many customers are too busy to shop during the day. “So we are more heavily staffed in the evenings and weekends,” Armiger says.

Such data mining isn’t a perfect science. The garden center was made smaller than at other stores because most Teterboro shoppers live in apartments instead of houses, but it turned out they still wanted plants. So under a new Wal-Mart policy that gives local stores more autonomy than before, Teterboro manager Aaron Klein increased the inventory of plants only a week after the Supercenter opened.

Demographics aside, the Teterboro store faithfully reproduces the experience of Walmart Supercenters across the U.S. The pharmacy offers an ever-expanding list of retail generic prescriptions — now totaling 224 — at only $4 for a 30-day supply. That’s a lifesaver for families with limited health insurance. Launched in 2006, the program has boosted store traffic and been taken up by other major retailers.

To further increase traffic, Wal-Mart is leasing space to outside retailers, though at the Teterboro store there are only a hair salon and a Subway fast-food outlet. Wal-Mart has announced a variety of financial services to draw more shoppers, many of whom either have no bank accounts or cannot afford bank fees. At Teterboro a large alcove called the MoneyCenter handles money transfers to and from the U.S. and abroad at fees lower than at traditional agencies such as Western Union and MoneyGram. The store still doesn’t offer some recently trumpeted Wal-Mart initiatives, such as cash pickup for tax refunds or a website that allows customers to do comparative shopping for auto insurance.

But Teterboro does encourage shoppers to embrace Wal-Mart’s e-commerce apps, particularly Savings Catcher, which enables them to use their smartphones to compare prices with other stores as they shop. To demonstrate, regional manager Armiger activates his phone to scan the bar code on a receipt for a box of macaroni and cheese he purchased at Price Chopper, a competitor. It turns out to be 12 cents less expensive than at a Wal-Mart store, so Armiger will receive an electronic credit from Wal-Mart allowing him to subtract the 12 cents from his next purchase.

Teterboro is using e-commerce in other ways. Shoppers can go online to order products for pickup at the store; in the store they can use their smartphones to arrange to have their purchases — especially larger items — waiting for them in the pickup area at the exit.

But for the biggest potential spur to traffic at Teterboro and other Supercenters, Wal-Mart may have to rely on a low-tech development: the new era of cheaper gasoline. After suffering through a decline in traffic and same-store sales for more than two years, Wal-Mart showed slight increases of 1.5 percent and 1.1 percent in same-store sales over the past two quarters. Much of the uptick was linked to the decline in gas prices.

Will a combination of Wal-Mart strategies and macroeconomic trends return big-box stores to their pre-2000 heyday? “If you study retail history, you know that retailers come and go,” CEO McMillon said at the annual investors’ meeting last October. But he and his CFO insist that the Supercenter will defy this cycle. “History says the Supercenter is still relevant to the customer,” says Holley. “We are working to ensure that it stays relevant five, ten, 15 years from now.”

A substantial part of Wal-Mart’s future lies in smaller stores. The company’s explosive growth in the last two decades of the 20th century helped create agile rivals, such as Kroger Co. in groceries, dollar stores in discount merchandising and CVS Health Corp. and Walgreens Boots Alliance in pharmacies. “To survive the Wal-Mart onslaught, they had to get pricing down,” says Scott Mushkin, a retail industry analyst at New York–based Wolfe Research. According to Wolfe, these competitors are at or near price parity in product categories that account for more than 70 percent of Wal-Mart’s domestic revenue. They are smaller and more specialized than Wal-Mart. But they are everywhere. Kroger has 2,300-plus supermarkets; CVS and Walgreens each have upwards of 7,800 pharmacies. Dollar General Corp. has more than 11,000 stores, and Dollar Tree and Family Dollar Stores will top 13,000 after their merger later this year.

To shore up and possibly regain market share from these rivals, Wal-Mart is betting on its Neighborhood Markets, which average fewer than 43,000 square feet. Supercenters and Sam’s Clubs will always account for most of domestic revenue and profits, but they will remain low-growth businesses. It will be up to Neighborhood Markets to generate higher growth. “These stores give Wal-Mart the opportunity to reach brand-new customers, especially in urban areas,” says analyst Trussell.

There were 599 Neighborhood Markets as of the end of January, and as many as 220 more will be inaugurated this fiscal year — triple the number of new Supercenters scheduled to open. Since their launch in 1998, Neighborhood Markets have always shown growth in same-store sales, including a healthy 7.9 percent in the first quarter of this year, or about seven times the figure for domestic Supercenters and Sam’s Clubs. Although Wal-Mart won’t disclose profit figures, management asserts that Neighborhood Markets show a return on investment comparable to that of Supercenters. “That means a return in the high teens,” Trussell says.

But critics wonder why it has taken Wal-Mart so long to embrace the smaller-store format. “They have been working on this concept for so many years, and it’s still just a pimple on the elephant’s back,” says Howard Davidowitz, chairman of Davidowitz & Associates, a New York–based investment bank and retail industry consulting firm. Now it will be harder and more expensive to rapidly increase the number of Neighborhood Markets, especially in more-urban locations, where rivals already have acquired the choicest acreage.

Wal-Mart’s CEO is well aware of these negative sentiments but insists that the company must fine-tune its format for Neighborhood Markets. “Before we end up with thousands of them, I want to make sure that we’ve got that right,” McMillon said at the October investor meeting.

According to Holley, the biggest obstacle to the growth of Neighborhood Markets is a shallow pool of trained managers. “We want our people to be ready, because if customers have a bad experience, the odds of them going back are pretty low,” he explains. Higher pay is expected to help the recruitment of more able managers. In June, Wal-Mart announced it would raise the starting hourly wage of more than 100,000 department managers by next February to a $10.90 minimum and a $24.70 maximum from the current range of $9.90 and $19.31.

Only a mile away from Holley’s Bentonville office, the Neighborhood Market on SE 14th Street has been a showcase since it opened in January. In reality a large supermarket, it features 41,000 square feet almost entirely devoted to groceries, except for a sizable pharmacy and a MoneyCenter to handle check cashing, money transfers, car insurance and other financial services.

Of the 100 employees, half are part-time recruits from local high schools; 25 full-timers are transfers from nearby Wal-Mart stores. The manager and assistant managers are in their 20s. An exception is Carl Simpson, a 56-year-old Wal-Mart veteran who personally knew Sam Walton, worked at some of the earliest Supercenters and now oversees smaller Walmart stores in Bentonville and nearby Rogers.

Simpson finds it easier to ensure timely deliveries of fresh food to Neighborhood Markets than to the big-box stores. “We don’t have to deal with the same buyers who supply the Supercenters or Sam’s Clubs,” he says. “We have a team just dedicated to us.” The highest priority is given to fresh vegetables, fruit and meat, which account for about 15 percent of sales. But because employees from Wal-Mart’s far-flung global outposts spend long stretches in Bentonville, the store is also well stocked with Japanese ramen noodles, Indian curries and Mexican tortillas.

Critics would prefer to see Neighborhood Markets placed in more-urban environments rather than in the rural and small-town settings most of them now share with Supercenters and Sam’s Clubs. “Otherwise they are just cannibalizing themselves,” says analyst Mushkin. “The new Neighborhood Markets are taking away sales from the big-box stores.”

Holley insists that Neighborhood Markets are drawing business from rival supermarkets and smaller food stores. “They are convenience customers who aren’t going to a Supercenter anyway,” he says.

Wal-Mart’s international operations occupy considerably more of its CFO’s time than the Neighborhood Markets do. Holley was recruited for his international experience, joining Wal-Mart in 1994 after several years as director of finance for European operations at Tandy Corp., a consumer electronics maker that eventually became RadioShack. By 1999 he had been promoted to CFO of Walmart International.

With $136 billion in sales in the last fiscal year, Walmart International trails only Wal-Mart U.S. among the world’s retailers. Over the past decade revenue has increased threefold thanks to a strategy that combines organic growth and acquisitions. Today, Walmart International has about 6,300 stores and more than 800,000 employees and operates in 25 countries. The five largest markets are Mexico (with 2,290 stores at the end of the last fiscal year), Great Britain (592), Brazil (557), China (411) and Canada (394).

But for all these glowing statistics, Wal-Mart doesn’t execute as well abroad as in the U.S. Last year international revenue accounted for 28.2 percent of total sales but only 22.7 percent of operating income. It will take time to reduce costs and increase margins. “There is a lot more to do as far as international performance is concerned,” Walmart International CEO David Cheesewright told investors and analysts last September. Some critics assert that a multitude of complex issues abroad are diverting management attention. “The entire international business should be placed on strategic review,” analyst Mushkin says. “The Americas should stay. Everything else should probably go.”

The stronger dollar is affecting revenue from all Wal-Mart operations abroad. In the first quarter of the current fiscal year, net international sales were down 6.6 percent in dollars over the same period the year before but up 3.4 percent on a constant currency basis.

Other problems are unrelated to foreign exchange rates. A helter-skelter growth strategy is being reeled back in China and Brazil. Instead of opening stores everywhere across those huge countries, Wal-Mart is now focusing on specific regions: the south of China and the north of Brazil. The priority in Canada is to drive up same-store sales by asserting price leadership. In Britain, where Wal-Mart acquired the Asda grocery chain in 1999, the retailer is sandwiched between German-owned discounters Aldi and Lidl at the lower end of the market and Marks & Spencer and Waitrose at the top.

Mexico is far and away Wal-Mart’s most important foreign operation. In the last fiscal year, Walmart de México y Centroamérica, better known as Walmex, brought in 470 billion pesos ($29.9 billion) in revenue and 25.8 billion pesos in profits, compared with 441 billion pesos in revenue and 23.7 billion pesos in profits in the previous fiscal year. “Mexico is a phenomenal business,” says Holley.

Maybe so, but Walmex has struggled with legal problems since accusations of widespread bribery at the company surfaced following a story published by the New York Times in 2012. According to the Times, Mexican officials had been paid off to issue the necessary building permits for Wal-Mart’s rapid expansion in the country. The story led to investor lawsuits and a U.S. government probe into Wal-Mart’s global operations.

Although the outcome of Washington’s investigation is still pending, Wal-Mart has accepted the resignation of at least eight senior executives in Mexico, India and Bentonville. The company has increased its compliance staff by more than 30 percent, to 2,000 employees, and spent close to $1 billion to deal with lawsuits and inquiries.

On the business front in Mexico, the big issue is restoring the health of Sam’s Clubs. After running up double-digit sales losses through the first half of last year, the warehouse stores rebounded with a 6.8 percent revenue rise in the first quarter of the current fiscal year. But that still left same-store sales below the level of two years ago.

“The improvement is taking longer than anticipated,” says Andrea Teixeira, a New York–based Latin American retail analyst for JPMorgan Chase & Co. And by Walmart International CEO Cheesewright’s own estimate, it will probably be early next year “before we really see that business start to get back to where it should be.”

Sam’s Club is encountering fierce price competition from other Mexican retailers. Trying to regain market share from department store rivals, Sam’s Club carried out too many promotions and continued to slip in sales because shoppers assumed it would keep dropping prices. On the grocery side Sam’s Club fell behind Costco Wholesale Corp., which has burnished a more upscale image in Mexico by attracting shoppers with large assortments of seafood and private label foods.

As elsewhere in the world, big-box stores in Mexico are drawing less traffic. “That’s why Wal-Mart is focusing on smaller stores, especially the Bodegas,” Teixeira says. “They have become Wal-Mart’s most important format in Mexico.” There are almost 1,700 Bodega Aurrera stores, some no larger than delis, and they seem to be everywhere in the country. The Bodegas are especially popular in rural and smaller urban areas where families receive dollar remittances from relatives in the U.S. While the devaluation of the peso has hit Walmex’s overall dollar earnings, it has fueled the Bodegas because of the rising peso totals gained from dollar remittances.

The Bodegas account for 39 percent of Walmex revenue, compared with 29 percent for Supercenters and 24 percent for Sam’s Clubs; the remaining 8 percent is split between Superama supermarkets and Suburbia apparel stores, two local chains acquired by Wal-Mart.

at home or abroad, Wal-Mart’s ultimate battle to retain retail supremacy is tied to a successful e-commerce strategy. Big-box stores were Wal-Mart’s breakthrough invention three decades ago, spreading from semirural Arkansas to emerging-markets megalopolises. But the retailing world’s great disruptive force today is e-commerce, pioneered and led by Amazon. Online sales in the U.S. reached $305 billion last year and are projected to top $400 billion by 2018, according to Forrester Research, a Cambridge, Massachusetts–based firm that tracks e-commerce trends. With $89 billion in revenue last year, Amazon is by far the largest online merchant, with more than seven times Wal-Mart’s global e-commerce revenue. Amazon offers 300 million products for sale, compared with 7 million on Wal-Mart’s website,

In addition to revolutionizing the delivery of goods, Amazon has convinced shoppers that the lowest prices and best-quality goods are found on the web, accessed either at home or through “showrooming” — using smartphone apps during store visits to compare prices. “That means all retailers need to adjust to the reality of shrinking margins and customers cherry-picking the best deals,” says Forrester analyst Sucharita Mulpuru.

Wal-Mart was slow to respond to this challenge. “They didn’t take Amazon seriously up until four or five years ago,” says Credit Suisse’s Exstein. “They said, ‘Amazon doesn’t make money, so how long can they keep doing this?’”

But the market continues to hold Amazon and Wal-Mart to vastly different standards. Profitable since its inception, Wal-Mart has an operating profit margin of 5.63 percent, far above Amazon’s 0.20 percent. Yet Wal-Mart’s share price has barely budged since June 2012, while Amazon’s has nearly doubled in the same period. Despite losing $241 million in 2014, Amazon had a recent market cap of $203 billion. Wal-Mart, which recorded more than $16 billion in net income last year, weighed in with a market cap of $229 billion.

Since waking up to the Amazon threat, Wal-Mart has plunged into e-commerce. The company realized that although Bentonville might have had the pulse of America four decades ago, it could not possibly recruit the battalions of brainy techies needed for a credible online operation. Instead, in 2011 the retailer created a Silicon Valley outpost known as @WalmartLabs in San Bruno, California — a San Francisco suburb some 1,500 miles west of Arkansas headquarters — to develop the necessary apps and software. Initially, it was hard to recruit against the likes of Amazon, Facebook and Google. “We were considered an old, stodgy brick-and-mortar,” Holley says.

Wal-Mart decided to buy whole Internet companies — 14 thus far. The single most important was social media start-up Kosmix, purchased for $300 million in 2011. “We weren’t acquiring what they built,” Holley says. “We were acquiring their 85 engineers.” Today, Wal-Mart has more than 3,600 e-commerce employees in Silicon Valley, São Paulo and Bangalore, and adds about 600 new hires a year.

E-commerce accounted for 2.6 percent of global Wal-Mart revenue, or $12.2 billion, in the last fiscal year. But racked up $800 million in losses and could double that by the end of the current fiscal year. Holley says he expects to see e-commerce show positive cash flow by 2017, though profits may take longer. In the meantime, he concedes, online business losses are reducing buybacks for shareholders. “This year they will be low again because of our e-commerce investments,” Holley says.

Among’s most notable breakthroughs are Pangaea, an e-commerce technology platform that will eventually unite Wal-Mart operations around the world, and Savings Catcher, the smartphone app used for showrooming.

Wal-Mart has closed the growth gap with Amazon, expanding its online sales by 22 percent last year, compared with Amazon’s 23 percent. But Wal-Mart has yet to figure out how to leverage the ubiquity of its stores into a home delivery advantage over Amazon. “This has been a challenge for every brick-and-mortar retailer,” says Oliver Chen, a New York–based analyst for Cowen and Co.

Unlike at Amazon, home delivery was never at the heart of Wal-Mart’s strategy. Supercenters and Sam’s Clubs continue to focus on distributing products to their stores in large truckloads. That is very different from pure e-commerce, which involves picking, packing and distributing small assortments of goods to millions of homes.

In May, Wal-Mart said it would start experimenting this summer with unlimited shipping service to customers for an annual fee of $50 — or half what Amazon Prime charges. But analysts remain skeptical. “The distribution infrastructure isn’t there at all,” Chen says. “It may be someday, but for now the reality is bricks-plus-clicks.”

Wal-Mart’s most advanced experiment in bricks-plus-clicks began in Bentonville last September at a warehouse operation called a Walmart Grocery Pickup Center. Shoppers go online to the website and place their orders. They receive confirmation by e-mail and have a three-hour time frame to alter their orders before they are delivered to the Pickup Center. “So the customers have an option to go in and out, add to and subtract from the order,” explains Ellen Martinez, manager of the 52-employee Pickup Center. The customer then drives up to the center’s entrance, which resembles a series of gas station kiosks with computer screens instead of pumps. A screen directs the customer to a parking spot in front of the warehouse. Minutes later an employee emerges with a cart loaded with the shopper’s purchases.

Wal-Mart has opened only four other Pickup Centers, in Denver, San Bruno, Phoenix and Huntsville, Alabama. They are all attached to existing Supercenters. And that may be the key to Wal-Mart’s attempt to compete with Amazon and its nationwide network of distribution centers.

Holley points out that many of the 4,500 Walmart stores within a short drive of most American families may someday double as fulfillment centers. “That’s definitely part of our future plans,” he says.

Those plans are built on the rock-solid conviction that the vast majority of the 140 million people who now shop at Walmart every week will still want to visit the brick-and-mortar stores even if they can opt for the convenience of home deliveries ordered online.

Holley insists that Wal-Mart isn’t being driven by a nostalgic attachment to the physical stores created by Sam Walton. He cites a long list of failed experiments in previous decades, even when the founder was still in charge; these included Walmart outlet stores, small groceries and stand-alone pharmacies. The biggest flop of them all was a so-called hypermarket that combined general merchandise and food.

“But from that miserable failure grew the Supercenter, arguably the most successful retail format in the world,” says Holley. “So you have to keep trying; you have to keep experimenting.” •

See also “Building an American Art Mecca in Arkansas.”