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Walmart's AI Advantage

#Walmart

Source: Seeking Alpha

Summary

  • AI technology is becoming increasing important to Walmart.
  • The company has everything it takes to become an AI powerhouse, but management must continue to demonstrate commitment.
  • Investors should look past short-term earnings and support Walmart's AI investments.

Over the years, I've written multiple article covering Amazon's (AMZN) AI investments and strategy, highlighting it as a key source of competitive advantage and the massive opportunities that it opens. When people think about AI, they tend to think of leading internet companies such as Google (GOOGL), Facebook (FB), Amazon, Baidu (BIDU) and Tencent (OTCPK:TCEHY).

Few people would closely associate AI with Walmart (WMT), but that would be a mistake. Over the years, Walmart has been investing in AI on a scale few companies can match, and it is not slowing down. In this article, I will explain why it makes sense for Walmart to invest in AI, review Walmart's AI investments, and argue that investors should welcome such investments even if it weighs on near-term earnings.

Why AI Makes Sense for Walmart?

In my recent article on Amazon, under the "Why AI = Competitive Advantage" section, I explained why AI is a technology that favors large companies that check the following boxes:

  1. Highly profitable or well-funded companies that are able to build and sustain a team of AI talent.
  2. Companies with massive data assets.
  3. A management team with the technological know-how to combine AI talents and data assets to create products that increase the company's competitive advantage.

 

 

AI "nirvana" from an investor's perspective occurs when the above three factors began to feed into each other like a flywheel: AI models drive competitive advantage in products, better products attracts more users (who generate more data assets), more data assets attracts scarce AI talents and improve AI models, and so on. Thus, once a company establishes a competitive advantage in a niche using AI technology, its moat will almost inevitably widen over time.

Moreover, the idea that investing in AI makes sense is more than mere speculation. According to a 2018 Deloitte survey:

82 percent said they have gained a financial return from their AI investments. For companies across all industries, the median return on investment from cognitive technologies is 17 percent."

 

 

Walmart Can Become an AI Powerhouse

How many of the three boxes does Walmart check? I would argue all of them, with the caveat that one of them remains tentative.

Financial Resources: In FY19 ended January 2019, the company reported $22 billion in GAAP operating income and $28 billion in cash flow from operations. This compares to Amazon's $12 billion in GAAP operating income and $31 billion in cash flow from operations in FY18 ended December 2018. In other words, Walmart's financial resources is roughly equivalent to Amazon's, though this will not last given Amazon's faster expected growth rate. Excluding financial companies, only eight US listed companies generated more operating cash flow in their latest fiscal year than WMT: AT&T (T), Berkshire Hathaway (BRK.B, BRK.A), Exxon (XOM), Verizon (VZ), Amazon, Chevron (CVX), Intel (INTC) and Facebook.

Massive data assets: In January 2019, Walmart's VP of Merchandising Operations and Business Analytics, Galagher Jeff, said the company has "more data than nearly everyone in the world." It seems self-evident that this is true, but let's step back a moment to see where all that data is coming from:

  1. 4,756 US Walmart stores, including 3,570 super centers
  2. 5,993 International Walmart stores
  3. 599 Sam's Clubs
  4. 275 million customer store visits each week
  5. Over 2,000 stores with online grocery, going to 3,000 by year end
  6. Over 800 stores with delivery
  7. Multiple e-commerce platforms, including Jet, Bonobos and Flipkart (among many smaller tuck-in acquisitions such as ShoeBuy and Modcloth)
  8. 2.2 million employees.

(Source: Company filings, conferences, earnings call and company website)

The big question is whether Walmart's management is capable of leveraging its financial resources and data assets to create competitive advantage with AI technologies. Although it is too early to draw a firm conclusion, I believe the answer is "yes." In the next section, I will show that the company's efforts to embrace of AI have been exceptional, and I believe that management has a long-term commitment to deploying the technology.

Walmart's AI Investments

For a company that most people would not associate with "high tech," Walmart has certainly displayed an admirable willingness to adopt new technologies. Since mid-2018, the company announced multiple AI initiatives:

  • In July 2018, Walmart and Microsoft (MSFT) announced a 5-year partnership where Walmart will embark on a broad set of cloud innovation projects that leverage Machine Learning, Artificial Intelligence and data platform solutions for a wide range of external customer-facing services and internal business applications.
  • In November 2018, Walmart announced that it is building an AI lab inside one of its stores to better identify when items are running low so that it can proactively replenish the stock.
  • In December 2018, the company announced that it will deploy 360 floor-scrubbing robots armed with computer vision and AI capabilities in hundreds of its stores by the end of January 2019.
  • In February 2019, Walmart announced that it acquired Aspectiva, a startup out of Israel whose AI-based technology analyses user-generated content, like customers’ product reviews, and combines it with a shopper’s browsing behavior to make product suggestions to shoppers both online and in stores.

During Walmart's October 2018 Investment Community meeting, multiple senior executives commented on the importance of AI to the company, which demonstrates the company's deep embrace of the technology. Below, I quote Walmart's CEO, CFO and CEO of eCommerce (Source: FactSet, subscription required).

CEO:

Did you know we're using machine learning across the enterprise from our supply chain to real estate to merchandising to legal and more?

...

We're also implementing Intelligent Automation across the business with over 500 software automation bots using machine learning to complete manual and repetitive tasks in areas like accounts payable, payroll, benefits, logistics, and transportation. They allow our people to focus on more engaging work and also help reduce expenses. This is saving us an estimated $30 million a year.

CFO:

Another example of a new approach to innovation is our new tech incubator in Austin, Texas, where we're working on analytics, AI and machine learning. It's a different approach that allows us to recruit some of the brightest minds to a tech hub to help us solve complex problems more efficiently and effectively.

President and CEO of Walmart eCommerce:

So I think this really plays to Walmart's unique strengths around product and merchandising. So we're investing a lot in sort of the recommendation engine, we're investing a lot in the decision trees and we're seeing lots of conversations. And because these conversations are sort of today largely human powered, we're seeing exactly how people would ideally want to converse. We need those conversations because the more conversations we have, the closer we are to be able to use machine learning to automate it. So that's the long-term goal. Ten years from now, they're not going to be humans, we're going to have seen enough conversations that this will be automated.

If anyone still doubts management's commitment to AI, I once again quote WMT's VP of Merchandising Operations and Business Analytics, Galagher Jeff:

We’re making heavy investments in artificial intelligence and machine learning to grow our business. Why? Because we have to.

Conclusion

Over the years, Walmart has been investing in AI on a scale few companies can match, and it is not slowing down. I believe Walmart has what it takes to become an AI giant: financial resources, massive data assets and a committed management team that seems to understand the importance of AI in driving competitive advantage.

In my view, few investors are aware of Walmart's commitment to AI technology, and fewer still understand how AI could create sustainable competitive advantage for the company as described in this article. In the face of relentless competition from Amazon and massive opportunities that AI can unlock, WMT investors should remain patient with and cheer on the company's investments in AI.

 



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