A couple of weeks ago, I looked into how well Google (GOOG) and eBay (EBAY) could compete with Amazon. The conclusion? Not very well. It then became very relevant to look into how Wal-Mmart (WMT) and Costco (COST) would be able to compete. Why? Because I think it’s becoming more and more difficult for smaller players to compete with these megaplayers. I’ve often discussed my theory about dominating the ecosystem and I think those who succeed become very difficult to deal with. Why? Just think about the levels of automation Amazon is able to bring into its business in terms of making it easy for consumers to buy all kinds of products more easily than any other store. Add to that rock bottom prices (slim margins and good purchasing power does help) and it’s a major challenge. Are Wal-Mart and Costco the only players that can compete?
Better local presence: There is no doubt that both Wal-Mart and Costco have a much stronger local presence with big stores all across the US and in many other countries. That is a major advantage.
Cost structure: (employees, fixed costs, etc) On this front, the advantage for Amazon is very clear. It has fewer locations, employees and has been able to open warehouses with the overall goal of keeping costs low. It has also started using robots in its warehouses.
Amazon Has An Insurmountable Lead
The major advantage for Amazon over its competitors is that it was able to start off its business at square zero. It built everything geared towards this new business environment:
-Digital Products: Amazon has built a strong business around digital products thanks in large part to its Kindle. It has been able to sell digital books, streaming videos, etc.
-Same-day delivery: Amazon has been building warehouses in a very strategic way in order to be able to quickly offer same-day delivery to as many customers as possible. Wal-Mart and Costco built with a completely different mindset as they focused on which stores would get enough business.
-Technology Advantage: Building a website that sells products is easy. Having technology that will make it easy to target consumers with the right offers, to make purchases extremely easy, to have an active community that generates millions of product reviews, that is much more difficult and from that perspective, Amazon is at least a decade ahead.
AMZN Revenue Quarterly YoY Growth data by YCharts
Wal-Mart and others will survive
I don’t think that in the long term, Wal-Mart and Costco will be able to successfully compete with Amazon but those two players will certainly remain major, very relevant players. We’re not near the day where consumers stop going to physical stores so having a strong local presence obviously matters a great deal.
Disclosure: No positions on WMT, AMZN or COST