My good friend Neil Howe has reconsidered the escalating war between Amazon and Walmart for the future of retail. And in true Neil fashion, he has come up with some surprising insights.

One of the takeaways here is that market “duopolies” can save consumers money—so you and I had better hope the battle isn’t resolved anytime soon.

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Did you know that one in five US consumers is now an Amazon Prime member? But don’t count Walmart out, Neil warns.

Amazon and Walmart Battle for Retail’s Future

By Neil Howe, Saeculum Research

July 19, 2017

The two firms are aggressively scaling up and branching out: Who will rise as the rest of retail sinks?

Amazon turned heads last month when it acquired Whole Foods for $13.7 billion. On the exact same day, Walmart announced its own $310 million purchase of clothing e-tailer Bonobos. The timing is no coincidence: As the de facto leaders of U.S. retail, Amazon and Walmart are each spending heavily in an attempt to unseat the other. Which company has the advantage? Amazon is a forward-thinking e-commerce heavyweight with many far-flung (if not profitable) business lines. Walmart is unmatched in brick-and-mortar retail, with a surging (if still small) e-commerce business. With the future headed online, investors are betting heavily on Amazon—but is this a mistake?

The two retail giants have been stepping on each other’s toes lately. Amazon’s Whole Foods deal has been widely interpreted as a defensive move against Walmart’s thriving grocery business. Amazon is also playing offense: The company is going after Walmart’s predominately lower-income customer base by offering a discounted Amazon Prime membership to U.S. consumers who rely on government assistance.

Walmart, meanwhile, has been even more aggressive. It all started when Walmart bought e-commerce firm Jet.com for $3.3 billion back in 2016. The company earlier this year rolled out free two-day shipping for all orders over $35, and is testing a pilot program that pays work­ers overtime for delivering packages on their commute home. Walmart is even barring some prospective tech vendors from building apps and services on top of Amazon’s cloud—and is telling its for-hire truck drivers that they cannot haul Amazon goods on the side.

Each company has scored some direct hits in this battle. But which one is positioned to win the war?

Amazon’s utter dominance of e-commerce sets it apart in an era when ever-more sales are moving online. As the leading e-tailer, Amazon has been the largest beneficiary of a massive shift online: Nearly half (43 percent) of all U.S. online retail sales take place on Amazon.com. One key ingredient to this success has been Prime, which now tallies 66 million subscribers—equal to roughly one in five U.S. consumers.

Arguably the company’s greatest strength is its ability to build successful tech-enabled businesses seemingly from scratch. Take cloud computing. In a few short years, Amazon has transformed from a cloud newcomer to the unques­tioned market leader: Fully 57 percent of survey respondents say that their business is currently running appli­cations in Amazon Web Services, 23 percentage points ahead of Microsoft Azure. Meanwhile, Amazon Home Services—a platform on which home­owners can find credentialed experts to carry out a rebuild—is now competing with the likes of Lowe’s and Home Depot. (See 77: “Home Services, At Your Serv­ice.”) In 2012, Amazon even began renting out excess warehouses to create yet another profit stream.

But for all of its success, Amazon has yet to generate much in the way of actual profits. Jeff Bezos is not interested in growing the company’s profit margin, but rather in keeping prices low in order to steadily gain market share—that is, grow faster than its competitors. With a lofty P/E ratio of 187.8, Amazon is clearly benefitting from investors who believe that the company will eventually focus on profitability. Such a huge bet on deferred earnings is fraught with downside risk.

So what’s the argument for Walmart? First, it is still a much larger company, with revenues of nearly half a trillion dollars—nearly four times Amazon’s. That scale alone enables it to put a much bigger squeeze on suppliers than Amazon. Second, Walmart generates a large profit—and generates it today. Walmart (P/E of 17.0) is a better value proposition than the majority of the S&P 500 (average P/E of 21.6). The company is also a reliable dividend machine: Walmart will pay out dividends of $2.04 per share in 2018, marking the 44th consecutive year of dividend growth.

Walmart’s main revenue driver is its brick-and-mortar retail business, which continues to gain steam amid a collapsing retail space. According to Credit Suisse, 2,800 U.S. brick-and-mortar retail stores closed up shop in Q1 2017, a record full-year pace. Commercial real estate firm CoStar reports that U.S. retailers must eliminate 1 million square feet of brick-and-mortar space just to grow their sales per square foot back to where it was a decade ago. In this low-margin environment, cost efficiency is key—and nobody does cost efficiency better than Walmart, a company that uses its clout to negotiate favorable deals with suppliers and finance its “Everyday Low Prices.” While mall anchors like Macy’s and JC Penney continue to announce store closures, Walmart plans to add 10,000 retail jobs and 59 new/renovated properties by the end of the fiscal year.

So what does the future hold? Amazon certainly has the look and feel of a winner in the digital age. The company epitomizes a blue-zone, mold-breaking, Silicon Valley mindset. Its leaders aren’t afraid to spend big today to solve tomorrow’s problems. Walmart, on the other hand, was founded in the deep-red, lower-middle class Bentonville, Arkansas (where it still keeps its headquarters) and built upon the paradigm of penny-pinching—hardly the type of company that inspires effusive praise as a forward-thinking leader.

But this line of thinking may be off the mark. For one, both companies acknowledge that tomorrow’s retail likely will be a blend of online and brick-and-mortar. As TechCrunch columnist Sarah Perez puts it, “Amazon wants to become Walmart before Walmart can become Amazon.” And the fact is that it may be easier—and cheaper—for Walmart to become Amazon. Walmart has already shown that it is willing to spend big on top tech talent. It would be a lot tougher, on the other hand, for Amazon to pour enough concrete to become a brick-and-mortar powerhouse while still maintaining the company’s culture.

The assumption that Amazon is far ahead in the court of public opinion is also untrue. Decades ago, Walmart was panned for decimating communities with bargain-bin consumerism. But today, Amazon is reviled by many consumer advocates who say that its e-commerce dominance—powered by its robot-filled warehouses—is killing retail jobs. In an era when consumers pride themselves on buying local to support their community (see SI: “The New Localism”), Amazon represents a faceless global entity without roots.

Even Millennials, who at first glance should be overwhelmingly pro-Amazon, show strong support for Walmart. According to YouGov BrandIndex, Walmart ranks as the fifth-favorite brand among Millennial consumers—just one spot behind Amazon and ahead of brands such as Netflix (#6) and Apple (#8). Why? Community-oriented Millennials likely realize the value of a company

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