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Here’s what Walmart’s latest Amazon Prime challenge needs to do to succeed

walmart (WMT -0.30% ) is launching a new subscription service this month, reportedly called Walmart+.

It will rely on Walmart’s Delivery Unlimited subscription offer and cost the same price: $98 per year. Delivery Unlimited offers same-day delivery for Walmart’s online grocery shoppers. According to a report by Recode.

The new service appears to be aimed directly at Amazon ( AMZN 2.10% ), which increased its global Prime membership to over 150 million. The success of Prime led Amazon to continue to take market share in e-commerce, whereas it already represented nearly 40% of online sales in the USA

Prime members spend more than enough on Amazon to offset shipping costs and other benefits that Amazon offers as part of membership. For Walmart+ to succeed, it will need to create equally loyal customers who buy things in addition to groceries and fuel.

Image source: Wal-Mart.

Grocery and fuel sales are already low margin

Walmart+ can’t make a profit just by getting customers to order more grocery deliveries and buy more fuel at its gas stations. In fact, it’s a surefire way to lose money.

Walmart’s low fuel prices aren’t just down to scale, its profit margin at the pump is extremely slim. It aims to attract customers to its stores with its low gas prices. Offering Walmart+ subscribers a fuel discount could put him in the negative.

Meanwhile, the grocery business is notoriously low-margin. When you add the cost of picking each product in an order to have it ready for delivery and paying for a driver, Walmart won’t make any money on grocery delivery either.

Marc Lore, head of Walmart’s US e-commerce business, knows this. When asked at a Recode conference last September if Delivery Unlimited could be profitable, he replied, “We can do it cheaper than anyone else.”

He went on to explain that making same-day grocery delivery profitable with a service like Delivery Unlimited or Walmart+ is all about making the customer more loyal and dependent on Walmart. If customers have a reason to choose Walmart.com over Amazon or any other competitor, they’ll be more likely to purchase higher-margin items from Walmart, the reasoning goes.

Where Walmart will make money is in the “long tail”. These are items that are not purchased as frequently, but Walmart can sell with a much higher margin. Lore also plans to increase sales from third-party merchants, who pay a percentage of sales to Walmart. The company also offers fulfillment and advertising services, which may expand if Walmart.com sees an increase in traffic.

Walmart+ is therefore a big bet that customers will use their perks to purchase items from Walmart and Walmart.com far beyond groceries and fuel. And if they don’t, the retailer will see their e-commerce losses soar.

Can it take Amazon?

It won’t be an easy task to convert Walmart grocery shoppers to general merchandise shoppers. Walmart’s online grocery platform remains somewhat isolated from the rest of Walmart.com.

the retailer shut down the dedicated Walmart Grocery app earlier this year, forcing customers to use the main Walmart app. Yet grocery orders remain separate from most other merchandise. Shoppers may think of Walmart when they want to get groceries, but they don’t necessarily think of Walmart when they’re looking to buy new kitchen equipment to cook those groceries with.

Amazon Prime, on the other hand, has been increasingly driving shoppers to Amazon.com when looking for something online. About three in four Prime members start their product searches online with Amazon, according to a recent Civics investigation.

Overcoming the mentality that Amazon has accumulated for more than a decade is the true goal of Walmart+. It’s what he needs to do to be successful in the long run without simply racking up losses for the company’s shareholders.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.