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Wal-Mart scraps Amazon Prime competitor in favor of new free shipping tactic

Wal-Mart is scrapping its ShippingPass program, a fee-based, two-day shipping service it was testing to compete with Amazon's Prime.

Instead, the world's largest retailer will offer free two-day shipping on more than 2 million items when shoppers spend at least $35. That's down from its previous spending threshold of $50, and its prior delivery window of three to five days.

The shift is one of the first major changes Marc Lore has made at Wal-Mart since the retailer purchased his start-up, Jet.com, last year.

Wal-Mart will give the undisclosed number of members who paid for a ShippingPass subscription a full refund.

"In this day and age, two-day shipping is really just table stakes," Lore, now president and CEO of Walmart U.S. eCommerce, said Monday. "We don't think it's necessary to charge a membership [fee] for it."

Wal-Mart first started testing its ShippingPass program in May 2015. It pumped up the program ahead of Amazon's second Prime Day sales event, when it offered a free 30-day trial. But the program never took off to the same degree as Prime.

Though Wal-Mart's service offered an unlimited number of free deliveries for just $49 a year — $50 less than the cost of Prime — it lacked the ancillary perks that have made Prime so addictive. Those include Amazon's vast network of streaming video, music and unlimited photo storage. There also are members-only deals and it recently introduced a credit card that gives Prime members 5 percent back on their Amazon purchases.

These types of perks encourage shoppers to stay loyal to Amazon.

In an interview with CNBC over the holidays, Leon Nicholas, chief insights officer at Kantar Retail, said Wal-Mart was simply too late to the subscription game. Roughly one-third of Wal-Mart shoppers are Prime members, according to Kantar's data — and they have little incentive to switch, Nicholas said.

Prime has more than 50 million members in the U.S., according to Cowen and Co. Its renewal rates have been pegged at north of 90 percent. According to Kantar's data, the biggest reason Prime members renew their subscriptions is for free two-day shipping — which Wal-Mart will now provide for customers spending $35 or more.

Wal-Mart's offer will apply to 2 million products, compared with more than 40 million eligible products on Prime. Lore emphasized that the 2 million items account for the vast majority of what its customers are purchasing.

"There won't be too many products that you'll want that won't be available [for] two-day shipping," Lore said, adding that the items will be skewed toward everyday essentials including pet food and cleaning supplies.

Wal-Mart's lower spending threshold comes as retailers including Target and Urban Outfitters have said that a larger-than-anticipated acceleration in their online sales dented their margins over the holidays.

Though Lore did not address how the shift could impact the company's margins, he said the minimum spending requirement encourages shoppers to build bigger baskets. The executive founded Jet.com on that principle, by using a pricing algorithm that saves customers money when they add more items to their basket. Jet also offers free shipping on orders of $35 or more.

Spokeswoman Danit Marquardt added that the scale of Wal-Mart's distribution network allows it to create efficiencies that it can then pass along to the consumer through lower prices and shipping costs.

"It's not going to affect our pricing at all. In fact, we're going to look to get more aggressive on the price side," Lore said. He said more changes to Wal-Mart's digital strategy will be announced shortly.