17 January 2011

the new new walmart

Everyone knows about the impact of Walmart on our daily lives. They've built the worlds' largest retailer by cutting out middlemen, building the smartest logistics system on the planet, and giving people what they want in a one-stop shop. They're the largest private employer in the US, and have lowered the cost of living for everyone. Certainly there have been many small businesses adversely impacted along the way, and there's probably an "atma-esque" debate on whether the net impact on society has been positive. I do have an opinion, but perhaps for another day.

For the first time, I feel the Walton clan faces a strong threat to its business model. It's not from anyone obvious; rather I see true competition from the company that I love to write about, Amazon.com. They're positioned for growth at the expense of traditional retailers like Walmart; but more importantly, they've built up their operations to take advantage of moving consumer trends while leveraging retailer best practices.

For one, e-commerce is booming. While only representing 5% of total consumer spend today, its growing at 15% per year. Walmart's only growth options is to build stores and take share away from competitors; Amazon doesn't necessarily have to do that to grow. But they are. Amazon's growth rates have been around 30%, which means they are not only taking their fair share from the Walmarts of the world, but from other ecommerce companies as well.

Walmart grew their business by increasing categories and products. Their fledgling grocery business now represents more than half of their US revenue. Similarly, Amazon continues to expand their product base every day (through acquisitions and on its own) to capture more share points. In the last couple of weeks alone, I bought diapers, high-end electronics, and air filters -- all delivered within 2 days, and all priced below every online and offline competitor i could find. Low cost, numerous offerings. Definitely the walmart way. What's even more remarkable is that they are not limited by shelf space like Walmart is; they already offer thousands of more products that Sam Walton does.

Third, and probably most important, is they've build a world class distribution system that rivals (and in some cases beats) Walmart. They've devised a clever hybrid distribution model that allows them to stock the most sold products and tightly control their third party delivered products to ensure delivery times and good in-stock ratios. Their server farms are so good that they lease space to smaller tech companies. At one point, Toys R Us and other retailers used Amazon to process and deliver their ecommerce sales (i'm not sure if they still do). They're better at brick-and-mortar style operations than most people give them credit for. This will help as they continue to scale.

Amazon has built a Walmart type back end, a front-end platform worthy of the #1 e-tailer status, world-class customer service, and prices that competitors can't match. They continue to grow fast without having to invest in traditional retail infrastructure and are taking a greater share of household purchases much like Walmart did during their growth years. And in the coming years, as ecommerce growth rates slow, don't be surprised to see Amazon.com stores in a city near you. While e-tailing is still in its infancy, there is no need to. But to me, this is a long-term growth strategy. It's easy to move into bricks and mortar when you have Amazon's infrastructure. It's more difficult to become a real e-commerce player if its not in your company DNA.

It's hard to crack into mass merchandising. I applaud Jeff Bezos for looking ahead many years out when building Amazon. He didn't want to just succeed in e-commerce; he wanted to build the next world-class retailer. Even though Amazon's $25B pales in comparison to Walmart's $400B of revenue, Mr. Bezos' company is poised to make a stronger and stronger noise in retailing, one that will eventually be heard in the tiny town of Bentonville Arkansas.


  1. Yes, interesting enough, I know many people in New York who have clubbed the $70 unlimited shipping free and they are buying everything from cosmetics to diapers to toilet paper online. The introduction of this service has had a significant impact on its sales. Actually people share one account and then buy everything as Amazon has no restrictions on the number of addresses (a typical Gujju thing). It is not only the cost savings but the time convenience - voila, I just need to go to my doorstep and not venture out into the woods. In fact, with the American unemployed and underemployed, many people are also having Amazon buying clubs (a penny saved is a penny earned).

    On another note, Amazon has created a truly remarkable system that works well globally. In super high priced Australia an American is shocked to see how expensive everything is from mushrooms to tvs (70-350%) more at times. My wife the other day ordered a calculator from Seattle and it came to us in Melbourne in three days on their basic shipping and qas still 30% cheaper. Faster than if we were to order it online from an Australian retailer. While the retailer are making large profits in Australia anyways they are protesting online sales to the government. The point is Amazon is not only making Walma obsolete but overseas retailers too. That is how efficient they are.

    I suppose Amazon will always benefit from the traditional store fronts. Hence, if one wants to see a new camera they will go to the store and then bang! buy it from Amazon. That being said Google has now tied in deeply with back ends of Best Buy and Target to provide instantaneous location specific availability of products. So if you are in the market for that camera, Google (it is in closed-beta) they will tell you one is available within the location you are at. Something for Amazon to think about.

    I suppose what is left is for Amazon is to figure out the grocery shipping. Otherwise, will Wal-Mart just only become an Albertson's/Safeway/IGA only?

    On a flip side, Dell was forced to abandon the online model and go direct into retail with online. Perhaps Dell could have taken a lesson from Amazon? I can not imagine that people need to always touch and feel laptops or computers, but that is a different argument.

    It is all economics, people will opt for the best price no matter what and if one person can do it better than the other than they will win.

    I am in India right now and the whole country is messed up with too many middle men. They are resisting every move. They rip off the suppliers and the sellers and make most of the margins. What Reliance and now Wal-Mart have been doing is setting up India specific style stores where their trucks go to the farmers or factories directly to get their wares. So doea an Amazon model work here - yes, if there is an internet and after this step I see why not Amazon coming in, because after all Wal-Mart will become the new middle man here or for that matter anywhere.

    I think the best company would be the company that can provide the global logistics to Amazon. I do not see Amazon getting into trucks and the messier side of distribution.

    All paths lead to least amount of friction, Amazon is doing it the best for now. Who knows, maybe in the future a Chinese Amazon will come to the US and then undercut Amazon on almost everything with its access to goods made directly in China where labor costs need not be considered. Actually that is a good idea....even the cost of paper is cheaper there. Start with a bookstore....

  2. What about groceries? I don't foresee anyone buying groceries online, especially produce.

    What if I need something now... like within a couple of hours? With everything else becoming instant gratification, I don't see people planning their shopping habits better than they do already.

  3. It is interesting to see what is happening online abroad and if Amazon is the right company to take advantage of local trends. I also agree there will always be place for traditional retail, but at only 5% penetration, ecommerce has a lot of market share left to grab. I think the strong retailers will survive, but will be hard for the marginal ones to overcome online competition.