Long before Doug McMillon was CEO of Walmart, and before Marc Lore had even a glimmer of the idea for Quidsi or Jet.com, a former pharmaceutical manufacturing executive named Jeff Wilke was busy laying the foundations for perhaps the most disruptive innovation in retail since the Supercenter: Amazon Prime.
Jeff Bezos had recruited Wilke, a thirty-two-year-old who oversaw sales, marketing, manufacturing, and R & D at the Pharmaceutical Fine Chemicals division of AlliedSignal, to Amazon in 1999 to replace Jimmy Wright. Wright was the hard-charging former Walmart logistics executive who had succeeded in rapidly expanding Amazon’s warehouse footprint, but in a way that was more old-school retail than new-school e-commerce. Wright’s Amazon facilities were a sight to see at the time, “with blinking lights on aisles and shelves to guide human workers to the right products, and conveyor belts that ran into and out of massive machines,” according to Brad Stone’s The Everything Store. But Wilke and others determined that the equipment and processes implemented by Wright, and those who preceded him, were not suited for the type of continuous and efficient flow of merchandise orders through a warehouse that Amazon now desired. Wilke and company needed to completely overhaul the operations.
Wilke’s task was a gargantuan one: to reinvent Amazon’s systems and processes to be able to rapidly ship out items within a few hours. To accomplish this, he partnered with another Walmart veteran, Rick Dalzell, the Amazon CIO and former Walmart executive who had been at the center of the Walmart-Amazon lawsuit in 1999. Dalzell and his technical teams helped transform Wilke’s warehouse process changes into computer code that would be at the core of Amazon’s logistics prowess for decades to come.
“What helped the most was that Rick had been an IT exec at a large, sophisticated company,” Wilke told me shortly before his retirement from Amazon in early 2021. “And I needed such a partner to implement the process work that I knew was going to be important for the company to scale.”
In 2001, the big changes inside Amazon’s network of warehouses—what it calls fulfillment centers—began. Software code was rewritten and fulfillment center layouts changed. The new processes incorporated techniques from the lean manufacturing methodology, of which Wilke was a disciple, and which aimed to maximize productivity while minimizing waste—or unnecessary steps. The new system was called FastTrack.
By 2002, there were signs the new system was working. Previously, it took a full day between when an Amazon customer placed an order and when the box left the fulfillment center. Now that twenty-four-hour turnaround had shrunk in best-case scenarios to a mere three hours. A year later, Amazon began messaging those quick turnaround times to shoppers. Right on the website, a message declared: “Want it delivered tomorrow? Order in the next five hours and 25 minutes.” That promise had a profound effect: more shoppers started paying for expedited shipping.
Then, with a maniacal focus on operational excellence that even an old-school Walmart executive might begrudgingly applaud, Wilke demanded that his warehouse managers email him at the close of every day explaining the reason behind each and every late shipment. (Of course, this organizational addiction to speed and convenience would eventually help produce a pace of warehouse work for the tech giant’s lowest-paid employees that some found brutal.)
“We did that for almost a year to make sure that the processes worked and then we were confident launching it externally,” Wilke told me in 2018.1
By late 2004, when Bezos green-lit the idea for Prime—code-named “Futurama”—Wilke didn’t even need to be in the room. Most of the hard logistics work was already done. And, unbeknownst to just about anyone anywhere at the time (including Amazon’s own employees working on the secret project), Prime would catalyze Amazon’s e-commerce dominance for decades to come.
When Prime did launch in 2005, Walmart had little reason to consider this new membership program a threat. For one, the titan of retail’s profits were larger than Amazon’s revenue. Whether you were a Walmart executive in 2005 or 2015, you might happily ignore the threat of Prime for another very simple reason: the cost. Prime cost subscribers $79 a year from 2005 until 2014. That was a significant investment for the average Walmart customer, who had a household income of $53,000 in 2014, while Amazon Prime members in the US had an average household income of nearly $70,000.2 Would Walmart’s core customer base really cough up that much money up front, just for the right to order even more merchandise from Amazon?
Many Walmart leaders didn’t think so. Walmart was going to keep doing what it had done so well for so long: squeeze suppliers down to the penny to get their lowest wholesale cost, pay rank-and-file store workers a legal but barely survivable wage, and pass on the savings from those tactics and others to customers in the form of everyday low prices. The Walmart belief was, you shouldn’t have to guess if you are getting a good deal when you walk into a Walmart Supercenter; you know you are. And if you really wanted to join a retail membership program, Walmart customers could join Sam’s Club, Walmart’s answer to Costco.
When Amazon upped the cost of Prime to $99 a year in early 2014,3 the threat could have become even easier to ignore for Walmart executives. A bigger price tag for Prime would be considered an even bigger splurge for the average Walmart customer. How many would really take Amazon up on that offer?
Inside Amazon, however, top leaders trusted that the value they were providing was more than worth the new price. They had already added an entertainment perk to the Prime bundle a few years earlier, when Bezos surprised his video executives with the idea that the company’s new streaming video service, which lacked great content, should be free for Prime members. Bezos wanted to take a page from Netflix’s lucrative playbook, which first introduced its streaming service as a free bonus to existing DVD-rental subscribers. Bezos believed that Netflix had succeeded despite the fact that its early collection of streaming shows and movies was more lackluster than blockbuster. Bezos wasn’t above copying a competitor’s tactic—if it was a good one.
“I remember Jeff used those exact words: it’s an, ‘Oh, by the way,’” former Amazon executive Bill Carr told me in 2018. “‘Yeah, Prime is seventy-nine dollars a year. Oh, by the way, there’s free movies and TV shows with it.’” And how much could consumers complain about the quality of movies and TV shows if it’s free?4
The move worked. The entertainment perks of Prime not only helped accelerate membership growth; they also gave existing members another reason to stick around if they were placing fewer merchandise orders and were considering canceling their membership.
When Amazon announced the Prime membership fee increase in 2014, they knew they were giving members more bang for their buck than when Prime first launched, with additional features planned to be revealed in the future. Amazon leaders had a goal of reaching 100 million global members, and a fear that shipping and video content alone might not get them there.
“I started going to every business leader at Amazon and said, ‘Hey, Prime is this opportunity to provide our premium customers the best of Amazon,’” former Amazon Prime VP Greg Greeley told me in 2018.5 “‘What is it in your business unit that you think we could include in Prime as a way to drive more engagement, not only for your business, but to add to the flywheel of all things Amazon?’”
Later in 2014, the company introduced Prime’s music streaming service, as well as Alexa and the first Amazon Echo speaker (half price for Prime members at launch, of course) to use with the new music service. Amazon also unveiled Prime Now, which offered two-hour delivery for no extra cost on a small subset of popular goods in New York City, followed by other urban areas over time.
Amazon executives tried to be cautious about these additions; they were acutely aware of the risk of adding hollow “benefits” that came with certain credit cards, or a AAA subscription. They understood the impact those kinds of perks had on diluting the value of the overall offering. But they believed the new additions would help convince customers that Prime was just too good to pass up.
“We want Prime to be such a good value, you’d be irresponsible not to be a member,” Bezos wrote in his 2015 annual shareholder letter.6
Use It, Abuse It, Lose It
For a large subset of Americans, however, Prime’s $99 up-front cost was a nonstarter. Amazon executives understood this. They had long debated making Prime more accessible to more people by offering a monthly payment option instead of the annual fee. Not only would that require less up-front money for customers to pay, but it would also let costumers weave in and out of the membership as their income allowed. When Amazon surveyed customers who signed up for a free trial but declined to pay for the membership at the end, the up-front annual cost was a top reason why.
“To them, they’re buying shipping, right?” Greeley told me. “It’s like, ‘Well, I don’t know how much stuff I’m going to buy in the future.’”
A main concern among executives who opposed the monthly option was that customers would subscribe for a month leading up to the holiday shopping season—putting even more pressure on the company’s logistics operations during Amazon’s peak season—and then cycle out of the service come the new year.
But as Amazon added more perks to the program, more executives became confident that the upside of making Prime more financially accessible to more people outweighed the downsides. By 2016, Amazon Prime was having great success attracting wealthy and upper-middle-class Americans. That was important—Prime customers shopped more frequently and spent more on Amazon than non-Prime customers did. That’s because the program did something fascinating to the consumer brain that many all-you-can-eat memberships do: it ignites the desire to want to use it frequently so as to get your money’s worth, at the expense of spending with other retailers.
In the earliest days of Prime, this behavior was problematic precisely because Prime’s first heavy users were those already frequently paying extra for express shipping, which often required shipping products by airplane, which cost Amazon about ten times as much as shipping by truck. With Prime they began shopping even more, and the annual membership fee was falling short of covering the shipping costs associated with their orders.7
From the perspective of a profit-obsessed company like Walmart, this might have been seen as a death knell for a program like Prime. Yet, at Amazon, Bezos had promised to focus on the long term, even at the expense of short-term profits. The Prime show would go on.
“Jeff just saw the strategic benefit of Prime and he saw the value to customers,” former Amazon executive Julie Todaro told me in 2019.8 “Whereas, I think at some companies they would say, ‘Yep, customers are doing what we want, but it’s a little too expensive. So let’s kill it.’”
Over time, as Prime’s popularity grew, some shipping costs came down because the customer demand that Prime encouraged gave Amazon good reason to build more warehouses closer to more customers, allowing for more shipments sent via trucks than aboard costlier planes. That warehouse expansion accelerated when Amazon began cutting tax deals with state governments in the early 2010s, making the company more willing to build facilities in states it had previously avoided.
But if Amazon execs wanted to mint more Prime members in the back half of the 2010s, they needed new ways to attract less wealthy Americans. At the time, 60 percent of US households with income of at least $150,000 had Prime memberships, according to research from Cowen and Company. On the other hand, only about 40 percent of households that made between $40,000 and $50,000 a year had a Prime membership, and just 30 percent of those with earnings of less than $25,000.
So, in March 2016, Amazon dipped its toes in the water with a monthly Prime subscription option for Sprint wireless subscribers. Later that year, the company opened the option up to all US customers. Monthly Prime members would pay a premium for the luxury of paying for their membership month by month—Amazon charged $10.99 a month for Prime, which worked out to $132 a year, compared to the annual fee of $99 for those customers who paid for a year of Prime all at once. But for those who couldn’t, or wouldn’t, pay $99 all at once, Prime membership was finally a possibility.
That same year, Walmart announced the closing of more than 150 US stores, raising the question of whether the timing of Amazon’s launches had something to do with their brick-and-mortar competitor.9 Amazon Prime’s boss at the time, Greg Greeley, insisted that the timing of the move to introduce the monthly Prime option had nothing to do with their rival. But the former Prime boss did admit that he was aware that “as soon as [Walmart] closed those stores, they expanded the number of retail deserts that were out in the world.”
At the time, Amazon was very interested in figuring out how to appeal to shoppers in retail deserts, many of whom struggle to make ends meet. By early 2017, Amazon Prime membership growth was fastest in US households with less than $50,000 in annual income.10 That year, Prime attracted the most paid members in a year in its then-thirteen-year history. The monthly payment option for Prime memberships had helped Amazon’s cause.
Amazon executives have long seen three methods to adding more members to Prime, according to current Prime boss Jamil Ghani. One is international expansion. Another has been by adding more perks to the program. But a crucial third lever, and the one that perhaps was the biggest threat to Walmart, has been to make Prime more accessible—that is, cheaper—for more people.
In the wake of Amazon’s introduction of a monthly subscription option for Prime in 2016, the company continued to unveil new ways to attract customers with less disposable income. In 2017, Amazon began a test to let customers buy groceries online using food stamps—a program the company would later roll out widely just in time to reap the rewards of the human and economic devastation wrought by the Covid-19 pandemic.
(When the program rolled out nationwide in 2019, Amazon gave those customers using food stamps free access to the Amazon Fresh grocery delivery service, which was added to Prime that same year as a free perk and was otherwise restricted to Prime members. The decision to give those on food stamps free access to Fresh without a Prime membership was hotly debated at the executive level. The leader in charge of Amazon initiatives aimed at “underserved populations” [UP] remained steadfast that it was simply the right thing to do. That executive was a former company lawyer named Kristina Herrmann, and she had a powerful ally on her side: the then-chief of Amazon’s North American retail business, Doug Herrington, for whom she had previously served as a “shadow,” or chief of staff.)
In early June of 2017, Amazon stepped up the Prime onslaught by providing a 45 percent discount to the membership service to US customers on government assistance programs. Instead of paying $10.99 a month for Prime, eligible shoppers would pay just $5.99 for a Prime membership. In March 2018, Amazon added Medicaid recipients to those eligible for that discount. Now working-class and low-income Americans could access Prime every month for less than the cost of a movie ticket. There was some concern that the discount program might cannibalize their full-price membership business, if existing low-income Prime members could now qualify for the lower-priced fee. But the discount idea moved ahead, nonetheless. Herrington often reminded the “UP” team that the work they were doing “was on the side of the angels,” which would become a rallying cry for Herrmann and her staff.
“Was there some discussion about Walmart? Yeah, probably,” a former company insider told me. “But it wasn’t the driving factor. Fundamentally, Amazon was trying to do the right thing for this customer segment.”
For Walmart executives who thought the Prime conflagration wouldn’t rage all the way to Bentonville, the introduction of the monthly Prime subscription in 2016, and then the discounts for those on government assistance the following year, should have set off fire alarms. But even at that point, some longtime Walmart executives still didn’t see Amazon as a particularly noteworthy threat, in large part because of Amazon’s weakness in the arena where Walmart held its biggest strength: perishable groceries.
Though Walmart did not start out as a grocery merchant, the invention and massive expansion of the Supercenter in the 1990s and 2000s catapulted it to become the largest seller of groceries in the country. By comparison, Amazon was still not a large seller of fresh groceries, despite having first launched the Amazon Fresh grocery delivery service a decade earlier, in 2007. Even Amazon’s acquisition of Whole Foods in 2017 would leave some Walmart long-timers shrugging; the overlap between customers of the bougie organic grocer and the low-priced mass retailer, they assumed, was minimal.
But even before he joined Walmart, e-commerce lifer Marc Lore understood the threat Prime posed to just about everyone in retail, including Walmart. He was acutely aware that Walmart’s existing subscription service, ShippingPass, came across as an ineffective substitute to Prime, whether it was intended to be a competitive offering or not. Walmart had started offering ShippingPass in the spring of 2015, first as a membership program that offered unlimited three-day shipping at a cost of $50 per year. Shortly before the Jet acquisition, Walmart’s existing e-commerce leaders shaved the price to $49 and improved shipping speeds to two days instead of three.
But the two-day shipping speed was still only available for a catalogue of goods that was a fraction of the size of Amazon Prime’s catalogue. The main reason for the discrepancy was the fact that third-party merchants who sold goods on Amazon could pay Amazon to store and ship their products through a program called Fulfillment by Amazon, or FBA. Merchants who paid FBA fees qualified their merchandise for Prime shipping and the crucial Prime badge on the Amazon shopping site. It was a critical reason for Prime’s growth.
But Walmart didn’t have a competitive offering to FBA for third-party merchants who wanted to sell on Walmart.com—not yet, anyway. That meant Walmart could only offer the shipping speed on the 2 million or so items that Walmart’s e-commerce division purchased and stored itself. Yes, ShippingPass was half the price of Amazon Prime, but it had none of the nonshipping perks like entertainment or music, and it did not come close to matching the product catalogue of Amazon’s Everything Store.
Not surprisingly, Lore’s first big move was to axe the knockoff Prime program in early 2017, and he issued a rather dismissive statement in doing so: “In today’s world of e-commerce, two-day free shipping is table stakes,” he said.11 Two-day shipping on the same catalogue of goods from Walmart.com would now be free—no membership necessary—as long as customers ordered at least $35 of goods. At the time, a source told the Wall Street Journal that the ShippingPass program had been intended “to test and ramp up its logistics and online warehouse network on an easier to manage, limited number of shoppers.”12 To many, though, that explanation sounded like an attempt to save face over a failed membership program.
Even with the move, there would be little reason for Amazon Prime customers to shop at Walmart.com for anything other than perishable groceries, like dairy products, produce, and meat. But perhaps making two-day shipping free on many popular, nonperishable products—everything from toys to video games to packaged goods like soap and cereal—would at least keep those Walmart shoppers who hadn’t been sucked into the Prime vortex from doing so, while Walmart came up with a real plan for a membership program that would inspire loyalty and extinguish the flames from Amazon’s indirect attack.
Walmart Prime
Lore wasn’t dead set against a membership program at Walmart.com; he was dead set against one that wasn’t worth paying for. So in the spring of 2018, as Jeff Bezos announced that Prime had surpassed 100 million members globally, Lore’s e-commerce strategy team crafted an internal memo that touched on the idea for a new membership program that Walmart should pursue.
“If we want to win, we need to be the primary digital destination, and we already have something that can do so: same-day delivery of the full store assortment,” the memo read. “It’s a value prop[osition] others can’t match,” it continued, citing the advantage of having fixed costs for such a program paid for by the revenue Walmart stores already generated from their in-store customer base.
Members of this new service would pay “an affordable” $98 a year for unlimited same-day deliveries of Walmart’s full store of products, including both perishable and packaged groceries, as well as general merchandise. That same spring, Amazon increased the annual price of Prime from $99 to $119 a year, which included deliveries from Whole Foods and a small selection of mainstream groceries through a service called Prime Now, but not the full selection of Amazon’s more affordable Amazon Fresh grocery service. Prime members who wanted access to Fresh’s full online store of groceries had to pay an additional $15-a-month fee. That meant Amazon customers subscribing to both Prime and Amazon Fresh were paying $299 annually, combined. With that comparison in mind, Walmart executives were right in considering a $98 annual fee focused on same-day grocery delivery “affordable,” even if the service lacked the entertainment perks of Prime.
Lore’s team felt even more confident about the membership idea because they knew Walmart customers loved the closest comparable offering at the time. Walmart called that service Online Grocery Pickup, or OGP for short. It had rolled out years earlier, prior to the Jet acquisition, and allowed customers to place grocery orders of $30 or more on Walmart.com or Walmart’s dedicated grocery app, and then have a Walmart associate bring the goods out to the customer’s car when they arrived. Grocery pickup might not have had the business-world sex appeal of grocery delivery, which was all the rage in Silicon Valley and among tech investors at the time. But in large swaths of the country, where minivans far outnumbered delivery vans, the model made a lot of sense—for customers and for Walmart.
Walmart executives working for the company’s Asda grocery chain subsidiary in the United Kingdom first honed the model on the other side of the Atlantic, where it’s referred to as Click and Collect. But they only did so after losing boatloads on an unsuccessful grocery delivery initiative, which resulted in the company pulling out of the UK online grocery market for a period of time. As a result, Asda ceded first-mover advantage to their giant rival Tesco—and significant customer loyalty along with it.
So, when some of those same executives, including current Walmart International CEO Judith McKenna, moved into senior roles inside Walmart’s US division years later, they kept a promise to start first with a pickup service instead of delivery.
The service started expanding from a small test to a wider rollout at Walmart stores in the US while Neil Ashe, the company’s previous global e-commerce leader, was still in charge prior to the Jet acquisition. But even though they weren’t the ones to first get it off the ground, Lore and his executive team recognized the strength of the program, which was clear in its usage and customer satisfaction metrics. Of the 2 million customers who were using the grocery pickup service at the time, around 1 in 4—nearly 500,000 people—used it at least twice a month, the memo said. Moreover, customer satisfaction scores were through the roof—OGP was far and away the service that Walmart customers loved the most.
To make the new $98 same-day delivery membership more economically viable, the e-commerce strategists called for combining Walmart’s two separate shopping apps—one to order perishable groceries and the other general merchandise—so customers could order more profitable items, like clothing, alongside less profitable groceries like a gallon of milk. At the time, the “orange” branded grocery app was used by customers to order fresh groceries for pickup or delivery, both of which were largely run by the US stores division. The main “blue” app, on the other hand, was run by Lore’s e-commerce division and consisted of general merchandise like toys, TVs, and clothing.
The idea of combining the apps had festered for years, even before Lore and his team took over Walmart’s e-commerce operation. Shortly after the Jet leaders arrived at Walmart, Walmart’s US stores leader, Greg Foran, had tentatively agreed to the merging of the apps, much to the surprise of his staff, according to a former Walmart e-commerce executive. But Foran backed away from the verbal commitment as the technical timeline to execute the app merger grew longer than first promised. The memo made the case to revisit the app consolidation idea once again.
Lore had his team include one last tidbit in the memo to try to prod leadership to move aggressively on the latest membership idea: a new metric, and a made-up one at that. It was called “first place wallet share,” meaning the percentage of customers who spent more with a given retailer than any other. Over the course of five years, the memo said, Walmart’s “first place wallet share” had declined from 25 percent to less than 22 percent. Amazon’s, during the same time, had more than tripled—from approximately 4 percent to more than 12 percent.
“Let’s lean into same-day delivery . . . and win,” the memo said.
By the fall of 2018, the membership idea had gained enough traction that Walmart CEO Doug McMillon included it in a board meeting presentation. But when Walmart closed out its fiscal year at the end of January 2019, Walmart was still without its answer to Prime. McMillon was juggling big personalities, differing incentives, and a long list of potential blockbuster bets to prioritize. All the while, the Amazon Prime wrecking ball continued to swing.