The Economist: Walmart hits back at Amazon in a ‘war’ just beginning

In theory, this should be a good time to be Walmart, the dean of American retailers that came of age in the stagflationary era of the 1970s. Inflation is back, but no one better than the ‘Beast of Bentonville’ you know how to use the power of roar to convince suppliers to lower prices. Supply chains are collapsing, but Walmart has so much weight that it has chartered ships and bypassed rail services to secure its Halloween and Christmas wares earlier this year.

Workers are in short supply, but it managed to add 200,000 jobs to its global payroll of 2.3 million in the three months to September. “There’s a level of excitement in the air, you can feel it”Said an animated Doug McMillon, its chief executive, as Walmart raised its year-end sales and earnings targets after strong third-quarter earnings on Nov. 16.

However, there is a puzzle. Investors are not buying it. In the past year, Walmart’s stock price has lagged behind not just Amazon, the e-commerce giant, but other major American retailers, such as Target and Home Depot.

On November 16, its shares fell 3% more, as investors worried about what Simeon Gutman Morgan Stanley described profit margins as slightly “soft”. Is the stock market, so in love with all things new, missing the turnaround story of the decade? Or is there something else to worry about, namely stalking Amazon upon Walmart?

There are few more committed advocates of the history of change than Felix Oberholzer-Gee of the Business School of Harvard, who co-hosts a weekly podcast with two of his fellow professors called ‘After Hours’, a dose of ‘Seinfeld’ -like bonhomie for business enthusiasts.

The three analysts, who exchange high-level discussions about companies on topics ranging from Scandinavian crime drama to cocktail making, might not be regular visitors to the aisles of Walmart. But they are excited about his story. “Walmart is burning”He exclaimed Oberholzer-Gee in a recent episode. He acknowledges that investors haven’t caught on yet. But that could just be because their mindsets are skewed against former retailers, he argues.

The story of the change of course has two parts. First is the customer. Since the lockdowns ended, shoppers have returned to retail stores. WalmartAlthough not yet in sufficient numbers to prove that its nearly 800 million square feet of American retail space is worth keeping, more than the size of Manhattan. The company claims yes. He says that having stores within ten miles of 90% of Americans is vital to a strategy “omnicanal”That encourages your customers to buy in the store, online, or a combination of both.

But with the still unsatisfactory number of customers, your challenge is to attract online shoppers without cannibalizing store visitors. It is having some success. Surveys suggest that your new subscription service Walmart+, a lower-cost rival to Amazon Prime, is attracting young, urban, and wealthy online shoppers who might never walk into a Walmart store (a partnership with American Express’s platinum card reinforces the impression of improvement).

According Oberholzer-Gee, Walmart.com has also started showing brands “avant-garde” What Ray-Ban, who normally avoided physical stores of Walmart, which further attracts this cohort. What’s more, Walmart is implementing home delivery style Uber Eats in 900 cities through its network of independent drivers Spark. It’s an intriguing tactic. Walmart, the emblem of the suburbs, is tentatively moving towards the metropolitan heart of Amazon.

The second part of the story is the profit. Unlike Amazon, whose e-commerce business does not contribute much to profits, Walmart you need to justify the returns for everything you do. That encourages you to think sideways, as online profit margins are slim.

As a result, it seeks to cover the cost of its ecommerce distribution network by attracting outside merchants, rather than simply selling off-the-shelf stuff. Walmart. You are building a fast growing advertising business, called Connect, that according Gutman could generate US $ 2 billion in operating profit, 8% of last year’s total, by 2025. And it is delving into the fintech, specifically betting on customer financial support services ranging from bill payment to cryptocurrencies. All of this could reinforce the bottom line without detracting from the physical store’s sales.

However, the twist of the story says Marc Wulfraat from MWPVL, a logistics consultancy, is Amazon. Yes OK Walmart may be invading your urban territory, Amazon is fighting back in the suburban hinterland. Their weapons are the distribution centers, the vast warehouses from which retailers ship goods across the country. In 2018, he says Wulfraat, the size of the distribution network of Amazon in the United States it exceeded that of Walmart. Since then, Amazon has tried to double it again, building what Wulfraat estimates will be another 140 million square feet of distribution centers, as much as Walmart has built in the United States in its 59-year history.

It is an overwhelming operation. Wulfraat says that every week Amazon builds what some retailers build in a decade. “It’s almost like a war effort”, dice Ken Murphy, from ABRDN, an asset manager that invests in Amazon. He considers the logistics blitzkrieg to be part of the Amazon by cutting delivery times so drastically that people will have little incentive to go to stores. That makes Walmart, with its vast network of stores in the United States, vulnerable.

Defeat is not inevitable. More than half of the national sales of Walmart They are edibles, which people still hesitate to buy online. That gives you some protection against the carnage of Amazon. Until now, Amazon’s ownership of Whole Foods, a luxury grocery chain it bought in 2017, and its Fresh supermarket formats have been half-hearted attempts to take on its Bentonville rival.

But if Amazon masters the art of cashierless shopping, as it’s trying to do, it could change grocery shopping like everything else from selling books to cloud computing. Up to now, Walmart can take pride in keeping Amazon at bay while reinventing itself for an omnichannel world. And yet the supermarket war has only just begun. And the size of Amazon’s arsenal is growing.