Walmart vs. Amazon

Walmart vs. Amazon

The Economist recently ran two articles on Walmart‘s ongoing efforts of keeping up with Amazon and online retail in general.

The Economist (paywall):

American e-commerce accounted for 10.4% of retail sales last year, up from 9.3% in 2014, according to Morgan Stanley, a bank. Amazon is the force behind this, with sales in North America rising by nearly 30% in 2015. The choice for bricks-and-mortar retailers is clear: evolve or decline.

On Walmart’s size compared to Amazon:

It is not just the world’s biggest retailer but also its largest private employer and company, measured by revenue. Last year it raked in $482 billion. Walmart’s empire is global, but America is its particular dominion, accounting for three-quarters of its sales. And on home turf Walmart still towers above Amazon, accounting for 10.6% of America’s retail sales, more than twice Amazon’s share, according to Cowen, a financial-services firm (see chart 1). Yet Amazon is still growing fast, and Walmart may be past its peak. In 2009 Walmart commanded 11.6% of American retail sales. By 2018 Cowen reckons its share will be stuck at 10.6%, whereas Amazon’s will have jumped.

This size gives Walmart advantages other retailers don’t have. With this size comes considerable buying power, which helps with prices and margins. But more importantly, its size gives Walmart a fighting chance in what is really Amazon’s game: Building infrastructure. (High capital expenditure, big moats, large ‘tax-like’ businesses)

But for this to lead to any meaningful impact on Walmart’s business, the retail giant needs to have the matching mentality and corporate culture, to, you know, actually leverage this.

Some 90% of Americans now live within ten miles of one of its stores. Nearly four out of five of them shopped at Walmart last year.

When Amazon is putting the finishing touches on the company’s infrastructure in a few decades, more than 90% of Americans will be living within ten inches of the Seattle based online retailer’s ‘stores’ instead of ten miles. The magic of online retail.

One problem for Walmart (and others): The lowest price is increasingly less important. That is not to say that people are not looking at prices or that the economy is changing in a way that pricing power increases dramatically or that the middle class in the U.S. is growing rapidly etc. pp. All this is not the case. Instead, Amazon is subtly and slowly changing the game with Amazon Prime. Prime subscribers are, rationally or irrationally, shopping differently. They start by default at Amazon and, more importantly, compare prices less often than if they were not Prime subscribers. (True) Convenience and the sunk cost fallacy are a powerful couple.

With Amazon Prime, the Dash buttons (and the Dash Replenishment Service), and Amazon Echo and Alexa, Amazon is building ways to shop with a level of convenience unseen before. A few more cents here and there on small items (volume!) will go largely unnoticed for most customers. (And those customers who are noticing them will mostly file them away under ‘convenience fee’. Never underestimate inertia.)

The Economist acknowledges this (“Amazon shopping could become almost as easy as flicking a light switch.”, the paper writes.), so it is rather surprising that it is putting the focus on Walmart’s bottom line:

Store operations continue to get better. Staff are armed with hand-held devices with apps to simplify common tasks, like managing inventory. The company fretted that bakers were leaving too much icing at the bottom of tubs, so Walmart gave them new scrapers. The company reckons this will save more than 35 lorryloads of buttercream icing each year.

These efforts are likely to intensify but may not do enough to keep it in the lead.

(It is telling how much this sounds like an anecdote provided by PR. If PR is focusing on things like this, it may be time for investors to start asking serious questions about the long-term outlook for Walmart.)

None the less, two good articles on the coming struggle for Walmart to keep up with the upstart that is going to dispute the throne:

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3 comments

  1. […] is affecting the bottom line, but that is not what is interesting here. (same as Walmart’s efforts regarding its bottom line are uninteresting regarding the big […]

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