If Wal-Mart wants to beat Amazon, it needs to follow this playbook

Wal-Mart (NYSE: WMT) CEO Doug McMillon has pledged to make the bricks-and-mortar retailer look "more like an e-commerce company." But to beat Amazon (NASDAQ: AMZN), the mass merchant will need to do more.

As more Wal-Mart shoppers sign up for Amazon's subscription Prime service, Cowen and Co. analyst Oliver Chen outlined the steps the world's largest retailer needs to take to protect its market share.

While accelerating its online sales growth is a key part of this plan, Wal-Mart also needs to tap into its key advantages over Amazon to effectively compete, Chen said.

That includes leveraging its massive footprint to deliver services that can't be replicated online (think health care); leaning on its "excellence" in food supply chain and compliance; and reaffirming its reputation as the low-price leader.

"Wal-Mart needs to change and accelerate innovation in pricing, assortment access, and experience; otherwise, we believe the company will continue to lose market share to Amazon," Chen told investors.

At its annual investor day last week , Wal-Mart executives told analysts that the company would slow the rate of store openings, and instead shift the company's spending toward the web and remodels.

While new store growth represented nearly half of the retailer's $13.1 billion in capital expenditures in fiscal 2014, it will account for less than 20 percent of its $11 billion spend next year.

"We have to change how we work," McMillon said.

Wal-Mart has been criticized for its sluggish online sales growth, which has slipped as Amazon repeatedly generates double-digit gains. Though trends at Wal-Mart improved in the fiscal second quarter, the pace of Prime sign-ups is likewise accelerating, Cowen analyst John Blackledge estimates.

Chen noted the "growing overlap" between the two retailers' customers, saying the average percentage of monthly purchases at Wal-Mart coming from Prime households has doubled over the last four years.

Still, Chen is confident that through investments in speedier checkout and services like grocery pickup, Wal-Mart can continue growing its comparable-store sales by 1 to 2 percent over the next few years.

"A better shopping experience should aid traffic," Chen said.

Meanwhile, analysts expect that the retailer's $3.3 billion acquisition of Jet.com will reignite its online sales growth.

Wal-Mart shares dipped after Thursday's investor meeting, when it tempered its earnings forecast for fiscal 2018 and 2019. They were down nearly 1 percent in late morning trading Monday.

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