Walmart signs trio of drone deals as it races to play catch-up with Amazon

Key Points
  • Walmart has struck deals with three drone operators to test how the technology could be used for on-demand deliveries and to help it better compete with Amazon.
  • It is testing different drone uses, from dropping off groceries to delivering Covid-19 at-home test kits.
  • Amazon recently got approval from the Federal Aviation Administration to operate its own drone fleet.
Source: Walmart

Brent Morgan is one of many Americans who have had a Walmart package dropped off at his home during the coronavirus pandemic. Yet his delivery did not fit the typical mold.

A drone flew overhead and dropped a bag in his front lawn. Inside, there was an at-home Covid-19 test kit.

The aerial delivery in Morgan's Las Vegas neighborhood is part of a new effort by Walmart to understand how drones could expand its on-demand deliveries and help it better compete with Amazon.

Over the past month, Walmart has announced three deals with drone operators to test different uses for the drones. It's teamed up with Flytrex to deliver groceries and household essentials in Fayetteville, North Carolina. It plans to launch another pilot project with Zipline, a company best known for its medical drone deliveries in African countries like Ghana and Rwanda, for on-demand deliveries of health and wellness products early next year. And it's testing deliveries of at-home Covid-19 test kits with Quest Diagnostics and DroneUp in Las Vegas and Cheektowaga, a suburb of Buffalo, New York.

Drones, once seen as futuristic or a novelty, have gained traction as a potentially mainstream way for retailers to deliver purchases to their customers. Growing e-commerce sales have intensified pressure on retailers to speed up deliveries and use quick turnaround times as a differentiator. More Americans have gotten used to drones, as they have seen them in the sky or bought a hobby drone of their own. And pandemic-related trends, such as shopping from the couch instead of the store aisle and limiting contact with strangers, could broaden their appeal, too.

Tom Ward, Walmart's senior vice president of customer products, said drones could be another way to use its giant big-box stores "to serve customers in as many ways as we possibly can that suits their needs, whether that's speed or convenience."

"Drones now are at a place where I think that technology represents a huge opportunity," he said.

Yet Walmart and its rivals will have to overcome a variety of hurdles, such as bringing down the cost of deliveries and overcoming pushback from people who may see buzzing delivery vehicles over their backyard as a nuisance or invasion of privacy.

Walmart has not released terms of its deals with the drone companies and would not say how it splits costs.

Ward said the retailer is still testing and trying to better understand what consumers want and what the deliveries would cost. He said Walmart doesn't yet know when drone deliveries may become widely available across the U.S. 

"Where we see success and where we can see this proposition make sense for the customers and make sense for the business, we will move really quickly," he said. 

The 'drone wars'

With the drone tests, the big-box retailer is trying to play catch-up with Amazon's dominant e-commerce business. Amazon's robotics team has built its own drones and received certification from the Federal Aviation Administration in late August to operate a fleet of Prime Air delivery drones. It comes under Part 135 of FAA regulations, which gives Amazon the ability to carry property on small drones "beyond the visual line of sight" of the operator. 

The approval gives Amazon broad privileges to "safely and efficiently deliver packages to customers," the agency said.

United Parcel Service and Alphabet-owned Wing also have FAA approval for drone delivery.

Walmart has taken a different tact, partnering with existing drone companies, instead of building and operating its own.

Even as it steps into the drone wars, however, Ward said it has an edge: a huge footprint of more than 5,300 stores across the country, including its subsidiary Sam's Club. That could make it easier and cheaper for Walmart to deliver by drone, compared with Amazon, which relies on a network of large fulfillment centers often further from customers' neighborhoods. 

"With 90% of Americans within 10 miles of the Walmart, a drone is actually a fantastic solution that we're uniquely positioned to succeed in," Ward said.

He said the retailer wants to better understand how customers might use drones. For example, he said, parents could order a thermometer or an over-the-counter medication late at night for a sick child. 

One of Walmart's top executives recently saw the drone testing up close. Walmart U.S. CEO John Furner visited Las Vegas last week to see a Covid-19 test delivered by DroneUp, one of the retailer's partners. In a LinkedIn post, he said the companies have already made 57 total flights with an average time of about 10 minutes and had delivered 24 at-home Covid-19 test kits to customers.

"One customer said they didn't think they'd see drone deliveries in their lifetime, but we're making it happen," he wrote.

'Immediate gratification'

Vijay Mookerjee, a business professor at the University of Texas at Dallas, said drone deliveries seem like a logical next step for retailers — particularly with the popularity of online shopping during the pandemic. He said the secret is shortening delivery times, so it's quicker than making a trip to a nearby store.

He said faster deliveries by drone could create "immediate gratification," creating a loop that entices customers to buy more and decreases the number of items that customers leave behind in their virtual shopping carts. 

"It is not as much about a cost savings idea," he said. "It's about a demand expansion idea."

Plus, he said, it could create another stream of revenue — if Amazon or Walmart offer drones as a service to retail competitors or vendors who sell in their marketplace.

As the drone dropped off his delivery in late September, Morgan took a video to share on Facebook. The 38-year-old said he decided to order a Covid-19 test kit for himself and his fiance as he prepared to return to work. The descending drone got attention from his neighbors, too, who stepped outside to watch.

Morgan said he hopes the delivery is a preview of the future. He said he imagines ordering takeout by drone or having the new "Call of Duty" video game delivered to his home minutes after it hits shelves. 

"I am all for going full-on 'Jetsons,'" he said, referring to the cartoon about a family in the future that had flying cars and a housecleaning robot. "It's cool to see the world unfold before me."

— CNBC's Annie Palmer contributed to this report.

Walmart and Zipline team up to bring their own drone delivery to the U.S.
Walmart and Zipline team up to bring their own drone delivery to the U.S.