Walmart vs Amazon: A regime shift in motion

Financial analysts are not predicting a rosy short-term future for Amazon’s stock price. Recent blunders with the roll out of new Kindle devices and earnings under increasing pressure have these analysts predicting a shorting of Amazon stock. In all likelihood, Amazon’s share price will tumble.

So why is Walmart so worried about Amazon?

A recent article in Ad Age indicates that Walmart is preparing for what could be the “retail battle of the decade.” When you match the two up on numbers alone, it seems like the “mismatch of the decade.” Walmart is 10 times the size of Amazon in overall sales. It’s the largest retailer on the planet, but a huge margin. Amazon doesn’t even crack the top 10. In fact, Amazon sits at #44 on the list of Global retailers.

But let’s flip the numbers. When it comes to online sales, Amazon outsells Walmart 10 to 1, and it’s topline growth is 44% while Walmart’s per location sales growth is trapped in the low single digits (if there is growth at all). So, if online retail is a game changer, and if this signals a “regime shift” in the retail landscape, then Walmart is right to worry. In fact, they should be petrified.

Ad Age steps through Walmart’s strategy for ramping up e-commerce, but one line in particular raises a huge red flag:

“Walmart would love Amazon’s top-line growth, but isn’t about to settle for its profits.”

Walmart has built their empire on incredibly precise supply chain management, obsessing over the details of physical fulfillment. They hope to use this to their advantage in their war on Amazon. Fair enough. But when it comes to the tough calls required to fully embrace digital (and they will come), Walmart will be hampered by the need to protect an existing model that relies on bricks and mortar. This mixed set of priorities will virtually ensure they will move slower than Amazon, who has no option but to excel when it comes to e-com. This is a classic “regime shift” scenario, and history is not on Walmart’s side. The fact that their e-com head office is pretty far removed, philosophically and physically, from the head office in Bentonville, Arkansas speaks to the challenges that Walmart has ahead of it.

It’s Amazon’s move into CPG that has raised the ire of the giant from Bentonville. Soap, diapers and other consumer staples are the essentials that drive Walmart’s revenues, and these are areas that Amazon is aggressively expanding into. But it’s not just consumer packaged goods that Amazon has set its sights on. They are also going after the industrial and B2B market. In fact, Amazon is attacking the established marketplace on all fronts, with the full intention of smashing the current model and replacing it with one taking advantage of the benefits of online efficiencies. In short, if we remember the stages of a Kondratieff wave, they are building the foundations of the reconstruction phase.

Amazon’s plans go far beyond the Kindle sales and struggles with profit margins that are currently beleaguering their stock price. This is a massive long-term play, and one that I would be hesitant to bet against. The act of shopping is about to change forever. In my previous column on this topic, many commented that for some things, the ability to touch and feel a product is essential. That may be true, but there are many, many more things where we could care less about the need for physical evaluation. Also, this divide between online and physical shopping tends to be a shifting one. Things we couldn’t imagine buying sight unseen just a few years ago are now purchased online without a second thought.

I’m not sure what lies ahead for retail in general, or the battle between Walmart and Amazon specifically. But I do know the retail landscape of the future will bear little resemblance to the one we know today. And I also know that the battlefield will be littered with causalities. It’s not beyond reason (or historical evidence) to suspect that the world’s biggest retailer may well be one of them.

Orig­i­nally pub­lished in Mediapost’s Search Insider November 17, 2011