July 2019 Magazine

Walmart vs Amazon: Clash of the Retail Titans

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It’s not David and Goliath. It’s a clash of the titans – the retail titans. Walmart, the venerated king of brick-and-mortar discount stores, has locked horns with Amazon, the nouveau riche emperor of e-commerce in a battle that is destined to shape the future of the retail reality. 

Who will come out on top? 

When it comes to brick-and-mortar, Walmart continues to reign supreme. But not content to dominate just that arena, the retail giant has shifted its strategy to compete in the e-commerce space that Amazon now commands.  

Sparks flew in 2016 when Walmart, led by CEO Doug McMillon, embarked on the e-commerce marketplace by forging a deal to acquire Jet.com for approximately $3.3 billion. Jet.com became the platform for the retailer’s online shopping future. 

A year later, Amazon CEO Jeff Bezos returned fire when he purchased Whole Foods Market for $13.7 billion and made his entry into the brick-and-mortar retail industry. 

Amazon wants a portion of Walmart’s retail pie; likewise, Walmart is looking to find its way in the e-commerce space, and it’s using the weight of its considerable grocery revenue advantage to help fuel its online endeavors. 

According to researchers from Moody’s Investors Service, Amazon falls well behind Walmart in the grocery aisle. The online retailer generated an estimated $20 billion in revenue from groceries last year. Walmart generated an estimated $270 billion and has begun to use its physical stores in service of its online shopping platform. 

“There’s a bigger, macro, structural change that’s happening at Walmart today,” retail analyst Leon Nicholas, vice president of retail solutions at WestRock, says. “Walmart is evolving – or they’re going to have to evolve.” 

According to Nicholas, Walmart has begun to shift its strategy from store productivity to shopper productivity to aid the reduction of capital expenditures and focus on growth and scale. 

“If you look at Walmart’s numbers, looking back at fiscal ’15, all the way to fiscal ’20, there are a couple of things that are very interesting,” he says. “First of all, Walmart is reducing capital expenditures by about 10 percent. And that’s important. They used to spend $12.2 billion a year on [capital expenditures]. This year they’re going to spend about $11 billion.

“But the more important thing is how that allocation is going to change. E-commerce and technology are going to go from about 15 percent to about 40 percent of capital expenditures. Then, the most significant change: they used to spend about 15 percent on remodels. That now is going to move to about 40 percent, as well. Most of the capital expenditures are going to be spent on e-commerce and remodels. 

“New stores made up about half in fiscal 15. That’s no longer the case. The idea today is that Walmart is going to focus on online. In focusing on brick and mortar, it’s going to be about remodels. That means the existing stores, the asset base, has to work harder.”

Growth and scale, he says, were once the same thing for Walmart. Today, the scale is in the store, and the growth is online. 

“Walmart is going to use the scale part of their business to drive the growth part of their business,” Nicholas says. “Scale is going to fund growth. Scale is going to be in service of growth… That has implications on where they are going to expect growth to come from going forward. Looking back at fiscal ’15, new stores and clubs contributed about 60 percent of sales. Going forward, the biggest source of growth is going to come from e-commerce. About 55 percent of Walmart’s growth in this calendar year is going to come from e-commerce, not stores. 

“How are they going to have their online funded by stores? They’re going to do it the same way they always have: the productivity loop,” he adds. “Operate for less, cut costs, buy for less and sell for less, creating a virtual loop. Walmart is going to focus on the store to focus on operating for less. The language we would use here is discipline or leverage. Leveraging an asset.”

While Amazon has Amazon Web Services – a space where Walmart cannot compete – to help propel profits, Walmart has a physical footprint with which Amazon cannot compete. Amazon also has a head start on Walmart in regard to third-party sales and collecting fees for helping to facilitate those transactions. Researchers with Moody’s Investor Service believe Walmart will be able to narrow that gap moving forward. Its massive distribution network is a benefit, as is its ability to put a greater price squeeze on suppliers due to its size. 

“We’re going to squeeze an asset to make it be more productive so that it generates more gross profit dollars so they can fund online,” Nicholas says. “Beat Amazon. Use the store. Cut costs. Leverage those costs to drive returns and invest online. That’s the new [productivity] loop. It’s not a loop that stays in the store. It’s a loop that tosses cash to online.”

Because Walmart’s primary business is in grocery, which typically carries very low margins, the need to sell those items at the smallest possible margin is a challenge, and according to Nicholas, drives the need to increase shopper productivity. 

According to Nicholas, shopper productivity requires optimal merchandising, digital activation, store pickup and services that can also draw shoppers to brick-and-mortar to create conversion. Walmart, Nicholas says, is doing all those things. 

“If you are not helping shoppers be more productive, you are not doing enough,” Nicholas says. “Shoppers have to save time and money. Quality also indexes just as high as price among premium shoppers and busy families.”

Moody’s Investor Service researchers also note that retail sales heavily favor brick-and-mortar – with 85 percent of transactions still taking place in physical stores. Walmart owns more than 11,360 retail units across the globe.

And while Amazon is considered the king of the e-commerce space, Walmart has made tremendous strides in keeping pace. Walmart’s e-commerce sales climbed by 43 percent during the last holiday quarter, and the retail giant expects to see online sales to rise 35 percent this year. 

“We’re making progress in e-commerce,” McMillon told investor analysts in February. “Our focus remains on earning repeat [shopper] visits and strengthening our assortment of merchandise.”

Walmart has spent recent weeks rolling out new services to increase shopper productivity and save time. During June’s Walmart shareholders’ meetings, the retailer announced that it would, this fall, begin delivering groceries directly into the refrigerators of customers when they are away from home. The in-home service will utilize Walmart workers equipped with wearable cameras and using “smart entry technology,” allowing employees to enter a customer’s home to make a delivery. Customers will be able to control access and watch the deliveries remotely. 

Walmart has also announced that it will test unlimited grocery deliveries for a $98 annual fee. The service, called Delivery Unlimited, will roll out in four American cities and allow customers to avoid pre-order fees, much like Amazon’s $119 annual fee for Prime membership. 

Both announcements come on the heels of free, one-day shipping on orders over $35 and pick up towers at a number of stores. 

But while grocery pickup solves a problem for time-strapped consumers, it poses another challenge for Walmart as 15 percent of grocery pickup users are not coming into the store to get additional items.

Walmart is moving with speed. But it’s also playing the long game and has proven to be a real contender in e-commerce. In spite of worries about a global economic slowdown and a U.S.-China trade war, the retailer continued to shine online, even when compared to Amazon. 

During the first quarter of 2019, Walmart put up its best store sales growth in nine years: 3.4 percent. That comes in at a total of $80.3 billion. About 1.4 percent of that growth was due to its e-commerce segment, having jumped 37 percent compared to last year. 

Amazon online sales increased a pedestrian 10 percent, while sales from physical stores, including Whole Foods, were up just 1 percent. 

Walmart is narrowing the gap and winning with consumers. Perhaps it’s David and Goliath, after all. 

 

Walmart’s Top 30 Arkansas-based suppliers

Sam Walton opened the first Walmart store in Rogers in July 1962. Today, Walmart is the world’s largest company by revenue—more than $500 billion last year, according to Fortune—as well as the largest private employer in the world with 2.2 million employees. The company has more than 11,365 retail units, including 4,763 Walmart and 599 Sam’s Club stores in the United States and 6,006 Walmart stores in 27 countries and eCommerce websites in 10 countries.

To supply those stores, Walmart partners with 1,644 vendors, most have a presence within 30 miles of the Walmart’s Bentonville headquarters, according to Cameron Smith, a business recruiter for the retail giant.

Walmart’s growth and the economic clout has generated has been the main driver of Northwest Arkansas’ demographic and financial successes. Here are Walmart’s Top 30 suppliers with offices in Arkansas, listed by highest-to-lowest employment total.

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