Walmart beefs up online marketplace in Amazon challenge

It was summer in Las Vegas — the temperature hit nearly 110 degrees that late August day — but Christmas was on everyone’s minds.

While Santa Claus wandered around during an invitation-only conference, businesses that sell items on Walmart’s website attended how-to sessions and swapped advice. Walmart leaders gave third-party marketplace sellers an early gift, too: Waiving extra fees for storing merchandise during the peak season.

Doug McMillon, who leads the world’s largest retailer, took the stage and made a sales pitch to the smaller businesses and brands.

“We hope you’ll choose to grow with us,” the CEO told the more than 1,500 attendees, invoking the memory of company founder Sam Walton, who was at one time a small-town entrepreneur. “We want you to bring great items to our marketplace. Our team is here to serve you.”

As Walmart heads into the retail industry’s most important season, the company is trying to recruit and retain hundreds of thousands of independent sellers that fill the company’s virtual shelves with items ranging from lip gloss to Rolex watches. It is also working to coax those sellers into paying Walmart to pack and ship — and even advertise — their products. It is leaning into a moment when inflation has pushed more high-income shoppers to its stores and website.

This holiday season will put Walmart’s e-commerce strategy to the test. Already, the company is using the third-party marketplace to try to drum up early business.

More than half the items included in Walmart’s sales event last week, which kicked off the season, were from its third-party marketplace. The event coincided with Amazon’s Prime Big Deals Days event, but there were no comparisons available.

About 70% of items included in Walmart Plus Week, which coincided with Amazon Prime Day in July, were marketplace items. Walmart wouldn’t share comparisons with sales events in prior years, but said more sellers are participating in the events overall.

There are signs Walmart’s growing third-party marketplace could help the company defy slower spending patterns and capitalize on inflation-wary shoppers.

Online sales for Walmart U.S. rose sharply the past two fiscal quarters, even as other major retailers such as Macy’s and Target reported declines. As shoppers at many stores, including Walmart’s own, skipped over discretionary purchases, Walmart’s third-party marketplace saw sales in some discretionary categories such as home and apparel rise by double digits in the most recent fiscal quarter.

Tom Ward, chief e-commerce officer for Walmart U.S., said the company’s app and website have a fresh look, its fulfillment centers and stores have automation that’s helping power more late-night and last-minute deliveries and its growing marketplace has helped create an “endless aisle” of electronics, toys and groceries to give customers a reason to return.

“Customers want choice,” he said. “They want that selection. They want that variety. And as they visit us more and more often, they expect to see it.”

When it comes to e-commerce, Walmart is in a rare spot: the underdog. Its online sales are just a tiny fraction of what Amazon rings up — and that carries over to the companies’ third-party marketplaces, too.

Customers who shop on Amazon and Walmart’s website see a mix of items. Some items are sold directly by the retailers and others are sold by sellers that own the inventory, list items on other retailers’ websites and share a cut of the profits with those retailers.

Amazon has more than one million active sellers, and Walmart has roughly 100,000, according to Marketplace Pulse, a third-party firm that collects data on e-commerce marketplaces including Amazon, eBay and Etsy. Amazon and Walmart do not disclose how many active sellers they have.

For Walmart, closing that large gap is an uphill climb, and also an opportunity, said Rick Watson, CEO of RMW Commerce Consulting, an e-commerce consulting firm with clients that cut across categories such as furniture, fashion and food and beverage categories.

“Amazon has never been known as the most seller-friendly place to do business,” he said. “Something I’ve seen recently is a lot of sellers actually cheering for Walmart because they want an alternative.”

Tension between Amazon and some of its sellers is at the heart of an antitrust lawsuit filed in late September by the Federal Trade Commission against Amazon. The suit accuses the e-commerce behemoth of anticompetitive practices, such as punishing sellers for offering cheaper prices on other websites and strong-arming them into using its fulfillment services.

Amazon denied the allegations in a blog post, saying the company has helped, not harmed, customers, and contributed to lower prices and speedier services.

Watson said sellers can struggle to get someone on the phone on Amazon. At Walmart, on the other hand, he said sellers tend to get more “red carpet treatment.”

But first, Walmart often has to persuade successful sellers on Amazon to take a chance on the relative newcomer, such as companies like Lucky 21.

About a year and a half ago, the apparel retailer that represents national brands such as Disney, New Balance and Reebok tested sales of some items on Walmart’s marketplace.

Melissa LaCognata, vice president and divisional merchandise manager for Lucky 21, said the company knew Walmart was years behind Amazon. Yet, she said it heard about Walmart’s investments in marketplace and knew Walmart already had a large brick-and-mortar customer base and sizable online traffic.

“It’s like being in the second-best mall in the world,” she said. “Why not?”

Last year, Lucky 21 became the largest third-party seller of children’s apparel on Walmart’s website.

But Walmart has had to play a major game of catch-up, such as simplifying the on-boarding process to make it easier for new marketplace sellers to join and launching membership program, Walmart+, to drive more online sales. Three years ago, it launched Walmart Fulfillment Services, which allows sellers to pay the retailer to store inventory and pack and ship orders. Amazon began offering a similar picking-and-packing service in 2006.

This summer, Walmart announced another wave of features to better compete with Amazon. It has begun to offer fulfillment for sellers’ big and bulky items as well as merchandise that comes in multiple boxes, such as canoes or patio sets. It also debuted tools to support sellers’ businesses, such as allowing them to hire Walmart to make local deliveries of cakes or other online orders or pay Walmart for software to power curbside pickup at shops.

Walmart is looking to its more than 4,600 stores across the country as another way to outmatch Amazon.

The stores act as mini warehouses, with more than 50% of online orders fulfilled from its stores as of the end of its most recent quarter, which ended in late July. About 90% of Americans live within 10 miles of a Walmart store, proximity that makes it possible for Walmart to sometimes to get a package to customers’ doors faster than Amazon.

So far, Walmart does not carry third-party marketplace items in its stores, which means customers can’t get those online orders through curbside pickup or ultra-speedy delivery to their homes.

Yet, Jaré Buckley-Cox, vice president of Walmart Fulfillment Services and an Amazon veteran, said that is coming within the next five years and described it as “a high priority.”

Some customers have gotten a glimpse of how that might look. One of Walmart’s popular marketplace items has become tires, which shoppers can ship to select stores and get installed at Walmart’s auto center.

As inflation weighs on Americans’ budgets, Walmart’s marketplace could help the retailer crack one of its longtime challenges: convincing shoppers to buy more high-margin items such as a sweater or purse, along with a box of cereal or loaf of bread.

Walmart has tried and backed away from other strategies to do that. It previously went on an acquisition spree of direct-to-consumer brands with a fan following including Bonobos, Moosejaw and Eloquii after buying Jet.com in a $3.3 billion deal. It has since reversed course and sold off those companies, as it focuses on turning its online business profitable.

Over the past year, Walmart, the country’s largest grocer, has reported market share gains for groceries coming from households that make more than $100,000 a year.

That may be helping to lift the use of Walmart’s app. According to estimates by third-party firm Apptopia, which analyzes trends with mobile apps and connected devices, Walmart’s shopping app has now surpassed Amazon’s in terms of daily use.

The third-party marketplace is another approach: a way to add items without the risk of buying pallets of inventory and wondering if it will sell — or get marked down.

Walmart can monitor and quickly add popular or relevant products, said Michael Mosser, vice president of categories for Walmart’s U.S. marketplace. For example, he said, sellers helped Walmart bulk up on more hot pink and Barbie-themed items. They also can help in unexpected scenarios, such as when smoke from the Canadian wildfires caused East Coast residents to search for air filtration systems, he said.

“We’re not buying products a year out or three quarters of a year out,” Mosser said. “If we see something trending in social media or we see something trending as a cultural moment, we can reach out to our community of sellers and be like, ‘Hey, we’re seeing this thing spiking. What do you have for available inventory?”

Some items Walmart has tested and expanded on its website through marketplace are premium brands that Americans may not expect to find on Walmart’s website, such as Michael Kors, Dyson and Solo Stove.

Solo Stove’s fire pits start at about $100 on Walmart.com, but range as high as $1,155 for a set that includes a fire pit, lid, shield and collection of portable camping accessories.

John Merris, CEO of Solo Brands, said Solo Stove already had traction on Amazon and questioned whether Walmart would draw the kinds of customers willing to spring for a more expensive, discretionary item.

“You wonder not only is it not your customer, but more importantly, does it cheapen your brand?” he said. “Is there a perception with consumers that if your product is found in Walmart that somehow means that you have a lower quality product?”

He said Solo Stove’s perspective changed. It began to sell the smokeless fire pits on Walmart’s website early last year. It got a bump in business during Walmart’s competing sales event during Amazon’s Prime Day in July. Solo Stove’s sales are up 300% on Walmart’s marketplace as of this fall, compared with the year-ago period.

Soon, the fire pits will hit Walmart’s store shelves. Merris got surprised with a purchase order at the company’s seller summit in late August. He joked that he has high hopes for store sales, especially since they’ll be a few aisles away from ingredients for s’mores.

If Walmart uses stores to speed along deliveries and adds more brands across price points that customers love, Merris said the discounter “could be very dangerous for a marketplace like Amazon in the future.”

Don’t miss these CNBC PRO stories:

— CNBC’s Gabriel Cortés contributed to this report.