Walmart’s Business Mix Changing as it Expands Profitable Services

The business mix at Walmart is changing, with services growing faster than merchandise.

So said Walmart Executive Vice President and Chief Financial Officer John David Rainey Tuesday (March 7) during a Raymond James Institutional Investors Conference.

Walmart’s services include the sale of advertising on its website and in its stores, the sales data it offers to boost the effectiveness of clients’ ads on other media, the listings it offers third-party sellers on its online marketplace and the order fulfillment it provides for other merchants.

While the “vast majority” of the company’s profits now comes from the sale of merchandise in its brick-and-mortar stores, the profits it derives from these services are growing rapidly, Rainey said.

“If you fast forward five years, we are much less dependent upon [merchandise] as an income stream,” Rainey said. “There’s some of these other faster growing parts of our business.”

Walmart has been rolling out new incentives to bring third-party sellers to its marketplace. For example, in January, it announced a limited-time offer to new U.S.-based sellers that includes a commission rate reduction of up to 25% for 90 days when they launch on the marketplace and try several tools and services.

Competitor Amazon, too, has been adding new services and products to attract third-party sellers to its marketplace.

Expanding its marketplace allows Walmart to sell more third-party merchandise, offer a greater assortment of products and earn a higher margin. That is changing the composition of the firm’s profit and loss (P&L) statement, Rainey said.

These services are interrelated, with the growth of each supporting the growth of others. For example, when third-party sellers bring a greater assortment of products to the marketplace — which now offers 400 million stock-keeping units (SKUs) — that brings consumers to the site and, in turn, increases the desire of merchants to advertise to reach those consumers.

“These are faster growing, higher margin parts of our business that just mathematically changed the composition of our P&L to where our operating margins went to go up over time,” Rainey said.

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