Walmart Can Crush Amazon
walmart-amazon-pac-man_rd.3-600x400.jpg

Written by:

Share

Facebook
Twitter
LinkedIn
Pinterest
Email
Print

\"walmart-amazon-pac-man_rd.3\"I described Amazon a while ago, as “PacMan,” gobbling up everything in sight, including big chunks out of Walmart. Well, that’s about to change. Walmart can literally crush Amazon. Or at least it can put a lid on Jeff Bezos’ mantra: “get bigger faster.” Bezos will have to begin quantifying just what getting “big, bigger and faster” means. And it will also be the moment we’ve all been waiting for when Amazon will have to start turning a profit. At this juncture, yes, Amazon, the great disruptor, has created a new retail playing field, that they alone have been dominating.

But Walmart is finally rediscovering and reinventing the part of its DNA that disrupted the industry and created a unique new playing field half a century ago, which it alone dominated and grew to its near- $500 billion in annual sales (Amazon is pushing for $90 billion). Walmart is rediscovering its once-revered distribution genius, not just as an incremental update and improvement, but rather to reinvent it altogether. And I predict it will reinvent itself by “leapfrogging” over Amazon’s model (which still has miles to go), and will redefine what getting bigger, faster really means. Talk about a breathtaking spectacle. What does a gargantuan $500 billion, 10,000-store (worldwide – about 4500 in the US) company look like getting bigger, faster?

So how can Walmart crush Amazon? Hold onto your britches. Before we get to that, we need to understand what Walmart’s awakening is all about.

When Did Walmart Wake Up and What Did it Wake Up To?

It took awhile for the world to understand the full-on disruption that Amazon wreaked on the industry. For the behemoth from Bentonville, it was akin to tweaking the giant’s nose … until it wasn’t. At some tipping point, the tweaking turned into war. And Walmart now realizes its situation is about more than losing some market share now and then and waging constant pricing battles. It has awakened to the fact that Amazon not only created a new business model that uniquely optimizes the Internet, globalization and all of the newly invented technologies (increasing daily), but more importantly, Amazon redefined Walmart’s genius of 50 years ago: its distribution model. And in Amazon’s redefinition, the meaning of the word ‘distribution’ has not changed incrementally. It has changed fundamentally.

In fact, that punch-in-the-nose waking moment, was like Amazon saying to Walmart, “you guys thought you were distribution wizards and then sat on your giant butts all these years just doing a little better today than what you did yesterday. In the meantime, the earth moved, and we at Amazon were the movers. We took the meaning of the word distribution into the stratosphere and you guys did not see it coming or understand it”. Distribution doesn’t just start at the source of production and end on the selling floor where the consumer then shops and buys it. It isn’t just about the most efficient, effective and timely physical movement of goods to the space where and when they are most needed (granted Walmart did set the standard, “back in the day”).

To continue, Amazon could be saying, “you just don’t get it Walmart. You set the standard when the store was ‘in the center’ and the consumer went to the store. That’s been flipped on its head”. The consumer is THE ‘center’ and the store and everything else in this world they desire must go to them, wherever they may be, whenever they want it, how they want it, and how often they want it. Essentially, the consumer has every store in the world, in fact every industry’s marketplace, right in their pockets on what is possibly the biggest distribution platform in the world: the smartphone.

Amazon not only “gets it,” on its way to disrupting the world (while Walmart was snoozing), it decided to become the biggest distributer on the biggest distribution platform. And beyond the traditional retail distribution model: buying stuff wholesale from any and all vendors; Amazon literally welcomes all retailers, brands and even services onto its distribution platform. Think of Amazon as potentially the biggest global realtor; the biggest brand; the biggest mall; the biggest retailer; the biggest advertising services company; and the biggest, fastest, and lowest-cost distributor of anything anybody desires, anywhere on Earth.

I said “potentially.” They aren’t there yet. At about $90 billion in revenues, they are not even close. And therein lies the reason Amazon’s CEO, Jeff Bezos’ mantra has been from day-one, and still is, “get big, fast.” It’s also why he needed to convince Wall Street that it’s okay not to make a profit, so instead he can gobble up share with the lowest prices and then can reinvest all of the revenues into getting bigger, faster.

So How Can Walmart Crush Amazon?

One might say that while Walmart is roughly 10 times bigger than Amazon in total revenues, its total online sales are a mere 3%, or roughly $15 billion, as opposed to Amazon’s near $90 billion in sales. More significantly, Amazon is getting bigger, faster than Walmart, growing 20-25% a year against Walmart’s lumbering 2-4%.

But forget about size and growth comparisons. What matters is how Jeff Bezos envisioned, and is so far successfully implementing, a unique global business model that capitalizes on the Internet, technology, and globalization. And he’s been leading the pack since inception.
However, even though Amazon has enjoyed several years as the king of e-commerce, and much of its growth was taken out of the hide of Walmart, the behemoth did wake up, and given its size, it’s not too late.

To its advantage, Walmart already has the most important (and costly) part of the 21st century retailing infrastructure in place: its stores. Plus they have the capital leverage to quickly expand and evolve their own incorporation of Amazon’s currently superior e-commerce model.

Stores are The New Distribution Centers

My first awakening to Walmart’s awakening was about a year ago when their CEO at the time, in an interview with the Wall Street Journal, said that their 4500 stores in the US are not “stores.” They are distribution centers that customers can also shop in. I said to myself, “wow, they are finally getting it .”

First of all, there is a Walmart store/DC just “down the road” for everybody in the US (a median distance of 4.2 miles). And this calculation was made before the rapid expansion of the smaller Walmart Express stores into hundreds of neighborhoods, including urban areas.

Viewed in this light, Amazon has a long way to go, with a mere 50 distribution centers in the US, which by the way, do not double as stores.
The advantages of physical proximity for Walmart are obvious: customers have the option of shopping online and in store (research finds they spend three times as much when shopping both). Shoppers can order online and pick up in store (with opportunity for impulse sales).

Walmart can provide one-day (potentially one-hour) delivery for online orders from its stores located around just about every corner with perhaps the largest trucking fleet in the US. And finally, physical locations can be used for online returns.

To this point of Walmart’s store/distribution center synergy, Amazon has to make up for its lack of pick- up and return convenience by renting lockers and space in Staples and Rite-Aid stores; in supermarkets; garages, and other physical platforms where customers can pick up or return goods, arguably a very cumbersome and inefficient process for both customers and Amazon.

I suspect Amazon realizes the danger of Walmart capitalizing on these advantages since Amazon has ramped up the expansion of the number and locations of distribution centers. And the ever increasing level of “buzz” about its intent to open physical stores is likely going to become a reality.

The Grocery Advantage

Another lever provided by Walmart’s physical proximity and trucking fleet is timely grocery delivery. While Webvan launched an online grocery business, and went bankrupt in two years due to consumers’ demand for freshness and quality, Walmart’s proximity allows the customer to order online and conveniently pick up in store, or to eventually have it delivered to them within an hour. In a test conducted by Walmart in Denver, 90% of consumers rated the “order online and pick up from stores” between average and outstanding.

Order Online, Pay Cash in Stores

Many of Walmart’s core customers, the lower-income demographic, do not have credit or debit cards. Therefore, Walmart has developed the facility to allow customers to order online and pay with cash when they come to the store for pick-up. As mentioned, this raises the potential of increasing the customer’s total purchase when they choose additional items while in store.

Crowdsourcing

Another distribution and delivery advantage which Amazon is incapable of matching is Walmart’s crowdsourcing strategy. If an in-store customer signs up to deliver/drop off another shopper’s online order on their way home, Walmart will offer an additional discount on their purchase. This innovation reduces transportation costs, increases delivery efficiency, and creates good will in the community.

How Long to Crush the Rest of Amazon’s Model?

So beyond the existing structural advantages that are in place, how long will it take Walmart to master the full implementation? More importantly, and much more complex, how long and how much human and financial capital will it take Walmart to reconfigure the rest of an Amazon-like model? When will Walmart be able to welcome the rest of the world (all brands, products, services, etc.) onto its distribution platform, either to operate their own businesses or to have Walmart manage it all?

Currently, only 19% of Walmart’s in-store shoppers shop at Walmart.com. And a whopping 53% of those in-store customers also shop at Amazon.com. Furthermore, 74% of Walmart.com shoppers also shop at Amazon.com, however, only 18% of Amazon.com shoppers, also shop at Walmart.com.

So, Walmart’s “day-one” job (to use Bezos’ mantra) has got to be building online awareness, traffic and conversion. And how long might that take? Walmart’s online sales grew 30% last year and they expect another 30% this year. Do the math. At 30% growth a year, it will take about seven years to reach Amazon’s current total sales of about $90 billion. Of course, Amazon will likely continue its blistering growth rate of 20+%, so it’s going to require more than acceleration.

Walmart’s new CEO, Doug McMillon has committed to invest heavily in its online strategy, estimated by UBS to be around $750 million in 2014. But this is just for boosting the online business. What about the larger, more complicated task of becoming an Amazon-scaled distribution platform for the world?

Well, one could argue that Walmart really doesn’t have to transform to the Amazon model. Conversely, one could argue that Amazon must transform to the Walmart model by opening stores, or converting all of the DC’s they are building to stores and destinations for pick-up and delivery.

Regardless, in my opinion, the advantage is Walmart’s, and the “race to catch up” is Amazon’s challenge. Closing in on $750 billion in sales, Walmart can afford to methodically evolve its model over time. Yes they have been losing share to Amazon and several other competitors, but they have awakened, and they already have the most capital intensive part of what Amazon doesn’t have (while still not making any money) — the construction and opening of distribution centers, A.K.A., stores.

So the burning questions for Amazon are: when will they complete penetration of distribution centers; how many, and at what cost? When will they configure the centers for both shopping and delivery? And when will they open stores, which they must, ultimately, to compete with the superior omnichannel retail model?

I think I have an answer for you in my next blog.

Related

Articles

Scroll to Top
Skip to content