Walmart's soon-to-launch subscription service may lay the path for the company's online business to turn a profit, former CEO Bill Simon told CNBC on Tuesday.
Walmart, the largest U.S. grocer, announced earlier its membership program Walmart+ will launch Sept. 15. The program is a byproduct of many subscription plans the company toyed with last decade and takes inspiration from each, said Simon, who led the retail giant from 2010 to 2014.
"It's something they've coveted for a long time," he said in an interview on "Closing Bell." "What Walmart's trying to do — and it's been their secret sauce for many years, in particular with the supercenters — is to try to take the traffic, in this case clicks, that's generated from their really robust food business and sell general merchandise, in this case to try to help make their digital online business profitable."
Walmart has seen sales surge amid the pandemic, benefiting from both its wide reach to U.S. households with physical stores and years of investments in its e-commerce operations. The company grew U.S. same-store sales by 9.3% in its most recent quarterly report, powered by a 97% spike in online sales as consumers spent more time shopping online and shipping packages home or picking up orders with same-day curbside pickup.
Online profits continue to elude Walmart, but the company said it is making progress. Walmart reduced its losses in its e-commerce operations in the quarter ended July 31, and the company's scale is critical to boosting profitability, according to Atlantic Equities research. The firm also thinks that Walmart+ would help the discount retailer retain new customers and foster customer loyalty.
Walmart CEO Doug McMillon said after the company reported quarterly numbers last month that it wants to capitalize on the new customer additions with the membership program.
"It's been really hard for them to hit profitability, and if they can mix it out with more general merchandise they can probably get to profitable, here," Simon said.
Walmart+ will cost subscribers $98 per year, or $12.95 per month. In turn, customers will get unlimited free delivery on orders above $35, fuel discounts and the ability to skip checkout lines with a checkout app. By comparison, Amazon charges Prime members $119 a year, or $12.99 a month, which includes free two-day shipping on all orders, same-day shipping on some orders and free grocery delivery from Whole Foods on orders above $35.
The subscription service is seen as a way for Walmart to compete with Amazon, but both the company and Simon have downplayed the assertion.
Simon said Walmart has a "very distinct advantage in online grocery," given that it has a much larger footprint, reaching about 90% of households, than Amazon's Whole Foods. Walmart has more than 4,700 stores in the U.S.
"I don't think — it's a competitor to Amazon because everything is — but I don't think it's a direct competitive move," he said. "I think it's an attempt to leverage their food business."
Walmart shares rallied in Tuesday's session as investors paid up for the stock on the news. Shares rose more than 6% to $147.59 at the close for a record high.