Many investors consider as a forgone conclusion that Amazon (NASDAQ:AMZN) with its low-margin business model will eventually put traditional retailers like Wal-Mart (NYSE:WMT) out of business. However as I'll try to demonstrate below there's a real possibility for the opposite outcome to happen with Wal-Mart being the one that will put Amazon's existence in jeopardy.
Before I explain Wal-Mart's advantages over Amazon let's take a look at the core factors that drive their business models. Amazon's retail strategy is based on five things: low prices, fast delivery, excellent customer service, driving customer loyalty through its Prime membership program and dominating certain special categories by having the greatest number of products. So far these have been the pillars of Amazon's incredible success. Wal-Mart on the other had has also based its success on similar values. Its EDLP (Every Day Low Prices) program is a testament to its devotion to low prices, its Sam's Clubs are a great way to drive customer loyalty and is building its online side to offer excellent customer service.
However as Wal-Mart moves into the online commerce arena it brings along some not-easily copied advantages that will help it compete successfully with Amazon and be more profitable at the same time:
- Its physical store network and its distribution capabilities.
- The ability to experiment with different things in different markets.
- Huge amount of consumer behavior data.
- Extensive experience on online groceries sales.
- It's physical operations finance and provide enormous scale to its online store.
Physical Delivery Network
With its physical network of 4,740 locations (including Sam's Clubs) in the United States and 6,265 locations in various countries around the globe, Wal-Mart has already in place one of the most wide and efficient retail distribution network there is.
This existing network offers Wal-Mart a tremendous advantage versus online-only competitors like Amazon. It doesn't have a different distribution network, it just leverages its existing one. This allows Wal-Mart to run its online operations at better operating margins than competitors because the incremental cost of running a delivery route at a higher capacity is extremely small compared to creating a new one from scratch.
Last but not least Wal-Mart is able to offer more delivery options like store pick-up at a time of customer's choosing. And although this may seem insignificant, if you add it up with Wal-Mart's low prices and its ability to provide gas it may become the favorite delivery method for many people with non-standard working hours.
Consumer Behavior Data
Another strong point that Wal-Mart has over Amazon is that it has a lot more consumer behavior data as far as general merchandise is involved. Wal-Mart has been collecting and processing data on how and why consumers buy this or that for decades and knows consumer behavior probably better than any traditional or online US retailer.
Groceries Online Sales
It also has greater experience on selling groceries online, due to ASDA's (Wal-Mart's UK branch) online store in the UK. And this expertise is already used in building Wal-Mart's online grocery store. The company has tested its operation successfully in San Jose/San Francisco and currently expands its experimentation to Denver.
Physical Stores Back Up Costs
Apart from allowing for low-cost, high margin delivery of its online goods, Wal-Mart's physical stores supplement its online operations with a huge scale advantage. Being the biggest retailer in the world allows or extreme economies of scale which means extremely good merchandise costs that can be passed on to customers and thus be the lowest-cost provider for general merchandise.
So far Wal-Mart has utilized this advantage to gain market share and put many other retailers out of business. Fortunately for the company this competitive advantage is transferable to online commerce and in fact Wal-Mart can be cheaper than every online store out there without sacrificing its profits as Amazon does.
This is possible for two reasons. The first and biggest one is scale. Amazon may be the biggest bookstore in earth but it doesn't even come close to Wal-Mart's purchasing power as far as general merchandising is concerned. This means that Wal-Mart can get better pricing in almost every product it sells.
The second reason that Wal-Mart doesn't have to sacrifice its profits for beating Amazon's online prices is that its existing assets (distribution network, stores etc.) eliminate most of the costs of its online store like warehouses, trucks, administrative personnel and many more.
Wal-Mart is moving in online commerce and it has done it in a big way. It currently offers free shipping to any order above $50 and has the cheapest time "70% of the time you see a price online" according to Neil Ashe, Wal-Mart's President and CEO of the Global e-Commerce business. It has both the ability and the will to deprive Amazon of its most important advantage. The low-price advantage. And it can do it in a profitable way compared to Amazon and anybody else.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.