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Overview:

Comparing the Internet tech Goliath Amazon (NASDAQ:AMZN) to the retail mega store Wal-Mart (NYSE:WMT) can be a more difficult event than otherwise perceived. The two companies are not so much an "apples and oranges" comparison, although Amazon would ship your oranges and Wal-Mart would require physical shopping at their location. Lately, Amazon and Wal-Mart are attempting to close the gap between physically shopping at a location and internet shopping through a push into each other's territory. In the future I see an expansion into each other's area of expertise although both companies will retain their original business model. This attempt will be a key factor in determining the success of each company and, in turn, how shoppers will choose to purchase items. Fulfillment centers are an advancement to increase customer satisfaction, and in some cases profits, that reveals an interesting set of details in the case of the two corporations taking part in the battle.

Wal-Mart's Push Into Amazon's World:

To better compete with the powerhouse Amazon, Wal-Mart has begun sending customers' orders to nearby stores. This alleviates filling orders on Wal-Mart's website. The "Ship-from-Store" idea has many benefits for the company and the customer. Some of those benefits are:

  • Avoids expensive markdowns and recoup sales;
  • Faster deliveries through shorter delivery routes;

The Ship-from-Store idea translates into items being shipped from an actual Wal-Mart location instead of a warehouse in a distant location. This means shorter shipping times vs. Amazon or comparable shipping times at a cheaper rate. A consumer purchasing from Amazon may have to pay a higher price for 1-2 day shipping. With Wal-Mart, they can pay for 3-5 day ground shipping for a lower price to receive their item from their nearest Wal-Mart location. Profit margins increase from online orders being processed through the Ship-from-Store process. Shipping from the store close to a person's home is cheaper than shipping from a warehouse out of state to the person's home. Also, the item will not sit on a shelf in a retail location too long which keeps inventory moving.

Neil Ashe, the head of global e-commerce at Wal-Mart stated the following as a result of the Ship-from-Store rollout in the past year:

  • 10% of items bought online are already shipped from Wal-Mart stores;
  • Around 35 stores already take part in the plan;
  • Two-thirds of the U.S. population lives within five miles of a Wal-Mart location and the company has a huge exposure of stores.

To recap, the main benefits of Ship-from-Store are:

  • Shorter ship times than Amazon;
  • Wal-Mart has 2600 distribution centers versus Amazon's 100;
  • Wal-Mart competes with Amazon largely on the online front and leverages the physical location of their stores as distribution centers to do so.

Wal-Mart is expecting $10 billion in online sales this year compared to Amazon's more than $61 billion in sales. Online sales still represent a minute portion of Wal-Mart's total sales of $444 billion in 2012. Joel Anderson, the CEO of Wal-Mart.com said in a recent interview:

"Wal-Mart.com has been able to speed up delivery 15% over the last two years while reducing costs 10 percent."

This is a strong indicator that the push to close the gap with Amazon is working.

Amazon's Push Into Wal-Mart's World:

Amazon is not just promoting fulfillment centers to please investors. Bloomberg reported that the company is spending $13.9 billion on fulfillment expenses that will include 50 new facilities. Although this is reported, this has not happened and is only in process at this time. It should not be thought that this is set in stone and completed. Amazon has had less of the success than Wal-Mart has taken part in as their profit margins are decreasing by opening more fulfillment centers. Bloomberg further reported on the decrease in margins in their report:

"The spending is crimping Amazon's margins. The company's trailing 12-month operating margin of 0.95 percent lumps it in the bottom 3 percent of peers in the Standard & Poor's 500 Index -- even though it ranks among the top 10 percent of that group by sales, according to data compiled by Bloomberg."

Amazon is having a hard time with the push since in some states they are forced to collect online sales tax in more states. This affects company's pricing advantage and, in turn, its profits.

Although Amazon has faced more hurdles than Wal-Mart in creating distribution centers, it may have been a very good choice by management to do so. This is because Amazon was forced to collect sales tax by California shippers starting nearly 13 months ago. The question here is that if Amazon has to pay taxes why not make the move for a physical presence where they will have to pay taxes anyway? This move to a physical presence simply expands the company's operations through fulfillment centers in other states to better serve their customers. Of course, Amazon will have to pay tax in these states, but they are already doing so now in California. This move seems like a smart decision seeking an expanded physical presence to fuel growth to offset said taxes.

Amazon may end up taking the collection of sales tax debate to the Supreme Court. Illinois voided the collection of online sales tax and New York has compelled the collection. Opposite state decisions can compel the Supreme Court to take the case in the end.

On another note, Amazon has products and a business that Wal-Mart does not take part in - a streaming movie service to compete with Netflix (NASDAQ:NFLX) as well as their Kindle which competes with Nook by Barnes and Noble (NYSE:BKS). This differentiation will help keep the company further separate from Wal-Mart so the two can coexist. The drive to expand Amazon's business can hurt the company, such as same day shipping, which is intelligently argued by SA contributor Paulo Santos.

Recent Distribution Center Openings for Online Orders:

  • Wal-Mart opened a distribution center in Fort Worth, Texas at 800,000 square foot and 275 employees on 10/1/2013;
  • Wal-Mart plans to open a 1 million square foot distribution center in Bethlehem, PA and it will employ 375 people;
  • Amazon opened a 1.1 million square foot center in Haslet and a slightly smaller 1 million square foot center in Coppell that is opening soon. Between the two, 1,000 people will be employed;
  • "Amazon employees 20,000 people full time at its U.S. fulfillment centers." - Source;
  • Amazon has set up distribution centers inside Proctor & Gamble's (NYSE:PG) warehouses, enabling faster product processing and less costs that Wal-Mart in housing products;
  • Amazon plans to open two distribution centers in the Czech Republic in 2013 and will employee 5,000 people. Amazon stated here that after these two centers are finished they will have 25 sites in seven European countries; and,
  • Amazon is opening a center in Hillsborough that will create 1,000 jobs and be 1.1 million square feet.
  • Amazon's recent opening of a one million square foot fulfillment center in Baltimore, adding 1,000 jobs.

Amazon is seen opening up more fulfillment centers to make up for the lost ground (literally) to Wal-Mart. An event that is not easy by a long shot, or cheap. Moreover, Amazon is very good to the workers they are employing, offering incentives such as 401(k)s and tuition reimbursement plans.

Analysis:

Wal-Mart is having big success in their drive to open fulfillment centers to better serve their customers with a higher profit margin on included sales. Amazon has faced more hurdles than Wal-Mart expanding physically. It is more costly to increase the size of your internet presence. Amazon will likely have time before the Supreme Court may have a trial on the sales tax issue and the company has the interim to make up the difference through increased growth. I applaud management for taking the decision to incur state tax through the increased growth and customer satisfaction that can come through state placed fulfillment centers. Instead of biting the bullet the company intelligently expanded fueling growth. The collection of sales tax is on the consumer side and would increase the price of the product to the consumer, not the cost to Amazon. This decreases Amazon's pricing power and in turn can affect sales.

Will the collection of sales tax plague the price of Amazon's products? It may have a possible negative effect by increasing the cost to purchase products, although there are other places to buy items cheaper including Wal-Mart's website. The company is unmatched on their prices and they do not have to upkeep massive retail locations that can increase the price of the products they have to sell. Wal-Mart has had amazing success in their drive to open fulfillment centers and after the hurdles I think Amazon will have success with their targeted metropolitan fulfillment center locations.

Wal-Mart is valued almost $100 billion higher than Amazon. Fundamentally, Wal-Mart looks like a better buy and if I was considering investing in one of the two, I would choose Wal-Mart due to:

  • Lower P/E, P/B, P/S valuations;
  • Higher profit margin, ROA, ROE;
  • Dividend yield;
  • More success with distribution centers than Amazon with regards to shipping times us 15% and costs down 10%;

Company

Forward P/E

P/B

P/S

Total Cash

Total Debt

Profit Margin (TTM)

ROA

ROE

Dividend Yield

Debt/

Equity

Wal-Mart

13.36x

3.42x

0.52x

$9.03B

$57 B

3.61%

8.81%

23.45%

2.50%

74.15x

Amazon

114.94x

17.08x

2.23x

$7.46B

$3.04B

-0.15%

1.58%

-1.24%

N/A

34.83x

  • Lack of sales-tax related fights in the Supreme court than can affect the business model.

Separation:

Many investors would argue that the businesses are separate entities that compete in very different industries. Wal-Mart serves the grocery shopping mom culture and Amazon serves the individual looking to purchase specific items. I would argue that these two concepts led to the coexistence of the two entities themselves. The two companies have been able to coexist through the differentiation in their business.

The drive to open fulfillment centers does not cross the boundary between the two companies, it simply reduces shipping times and in some instances costs. It helps both companies maintain their lead against others such as Best Buy (NYSE:BBY). In the future, you may be able to buy produce from Amazon and receive it within a few hours from both retailers. Both companies can coexist and the argument that either one is "going under" is an unintelligent one at best. Although the fierce competition will likely exacerbate conditions at other faltering retailers and put them out on the street such as Sears (NASDAQ:SHLD) and RadioShack (NYSE:RSH).

Technical Analysis:


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Both Wal-Mart and Amazon are near the same RSI levels at 62.07 and 66.34 respectively. Although Amazon is above their 50 and 200 day moving average meanwhile Wal-Mart is sitting on its 50 and 200 day moving average. Although Amazon seems overpriced, investors will likely keep purchasing Amazon with an eye on the company's future. It is my opinion that a fundamental viewpoint with the key issues is more valuable with these two companies than a technical analysis viewpoint.

Caveats:

There are some things to keep in mind that could be positives or negatives for each company that has not already been mentioned. Some of these caveats include:

  • Customers being able to return their products to any Wal-Mart location without shipping it back, while also having the ability to see products in person;
  • Amazon's current decrease in taxes (fragmented and hard to follow in which states) that could decrease the cost to the consumer in some instances and in turn increases sales and revenue;
  • The saturation in each company's consumer base should not be underlined. Amazon is the online retailer with a high concentration of sellers and buyers that love the company and are not going anywhere soon. Wal-Mart's large physical presence and highly successful retail expertise will continue to serve everyone from the grocery shopper to the technology shopper. Amazon doesn't have any plans to offer a big box store, since if they did Wal-Mart would crush them.

Closing Idea for Amazon:

One thing that has always caught my eye is the success of online personal retailing giants like eBay (NASDAQ:EBAY) and the success of the small town flea market and garage sales. One idea that can work for Amazon, if eBay doesn't beat them too it, is the idea of having an expansion into a corporate based flea market division. As such, Amazon's sellers would have the option to ship their items to a physical location ("the big Amazon flea market location") where their products can be placed on shelves for sale to the consumer. This would mix the personal seller of the online world with the physical presence feeling of a Wal-Mart, while having cheaper prices on used items and a wider selection of harder to find items.

Conclusion:

The expansion of physical fulfillment centers is the latest drive by the physical and non-physical product powerhouses of our era to increase customer satisfaction. This drive intensifies the competition between Amazon and Wal-Mart without proving that they are taking each other over. It is my opinion that the increase in fulfillment centers by the two companies will decrease shipping times, increase margins for Wal-Mart and increase customer satisfaction. I think it will also put several faltering companies out of business due to their rocky status and inability to keep up. I do think that the companies will happily coexist here and abroad. If I absolutely had to pick one for an investment it would undoubtedly be Wal-Mart as they are beating Amazon at their own business while keeping a foothold on their own. The battle between the two demonstrates that it is much harder to make up physical ground than non-physical ground.

Source: Amazon Vs. Wal-Mart: The Physical Vs. Non-Physical Battle