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.