The U.S. retail industry is filled with big box retailers who are taking away the lion’s share of the industry’s total revenues. We have Walmart (WMT, Financial) sitting at the top of the big box pile with nearly half a trillion dollars in sales, while Target (TGT, Financial), the second largest big box retailer, had $73.78 billion last year. On the other side there’s club warehouse leader Costco (COST, Financial) with $116.199 billion last year, while Amazon (AMZN, Financial) and Kroger (KR, Financial) brought in $107 billion and $109.83 billion.
That’s nearly a trillion dollars worth of sales from just five retail companies operating in various niches. Put in perspective, that’s somewhere between the GDPs of Indonesia ($937 billion) and Mexico ($1.01 trillion).
There is a reason why these five companies are at the top of the retail pile: There is something unique about each company even though the primary objective for all of them is to sell as much as possible. Walmart is synonymous with rock-bottom pricing; Costco’s membership loyalty is the envy of every company in the world; Amazon is the king of click sales and doorstep delivery; Kroger is an expert in bringing multiple brands to stand under a single roof; and Target has always stood out with their quality and customer service.
There is also one more element that unifies all these companies, and it is is their wafer-thin operating margins. Walmart and Target sit between 6 and 7%, while Costco and Kroger margins hover around 3% and Amazon right below that. Volume is the name of their game, and they’re good at it.
But which of these retailers has the momentum to come out on top over the next two decades? That’s the question I’d like to explore in this article. In the short-term, none of them is small enough to just ride off into the sunset as it were, so we have to look at a much longer timeline.
Walmart
The company commits to the lowest price possible every single day on each item it sells. It even throws you the bold challenge that if you are able find something cheaper elsewhere, Walmart is ready to match that offer. Though there is an asterisk symbol right next to the sentence on Walmart’s page, it doesn’t even matter. The idea is to position the company as the place with best possible price, and when that’s backed by nearly half a trillion dollars worth of goods sold every year, it's not easy for anyone to compete with it on an even scale.
But on the flip side, the very name “Walmart” carries somewhat of a negative aura around it. In nearly every new country it tries to enter, it's known as the “small business killers.” Not a very good introduction. And that’s also why the U.S. is still its biggest market and always will be until it learns to tread softly in new markets. As such, the company has yet to prove its worth outside the country.
If you’ve been reading my work, you’ll know that I am a big fan of the company’s neighborhood store concept, and I think that can take the company a long way into the future - or at least provide enough support to hold ground in the home market. The other key factor that will help Walmart is grocery sales, which has been gaining steadily over the years.
A strong urban concept and a robust contribution from perishables is what will keep Walmart ticking along despite the onslaught of e-commerce.
Amazon.com
The e-commerce juggernaut wants you stay at home as much as possible so it can bring all your stuff right to your doorstep. The benefit of being lazy is what it offers you, and it's tough to beat that. But Amazon was never known for profitability. Growth, yes, but not profitability. That’s changing now, but for years Amazon enjoyed the fact that its investors didn’t really care about profitability as long as the company was growing. The company has been doing that at a breakneck speed right through the past two decades.
It's already at the top of the e-commerce pecking order, and it will be extremely hard for another retailer to convince investors to forgo profitability in the name of growth. It’s happened before and it’s happening right now in India where Amazon unceremoniously beat Flipkart down to second place to take the pole position in three short years.
But one of the key drivers of that growth, at least since 2005, has been Amazon Prime. The company does not reveal Prime numbers (pardon the pun), but educated estimates put it somewhere in the range of 54 million members in the U.S. alone, giving it in excess of $5 billion in earnings from just domestic memberships each year. To top that off, each member spends an average of $1,100 per year, bringing segment revenues to nearly $60 billion.
As such, it’s going to be an impossible moat to cross, and the only ones capable of that are brick-and-mortar retailers who are fighting tooth and nail to find ways to one-up Amazon.
The Prime strategy is brilliant and it will take the company forward smoothly over the next two decades. With the kind of growth rate it's showing against Wal-Mart, Amazon may well overtake Sam Walton’s behemoth in the next 10 years.
But the real hero of this story is Amazon Web Services. By taking excess IT infrastructure and “renting” it out to other companies, the world’s largest e-commerce retailer has now become the world’s largest provide of cloud infrastructure services, leaving several tech majors choking on its exhaust fumes in the process.
What these two growth drivers are doing now is pumping billions of dollars worth of growth capital back into the business, giving Amazon a clear runway to expand all over the world and dominate the e-commerce space wherever it goes.
Now that we’ve seen the strongest two of the five retail majors in the U.S., in the next article of this series we’ll take a look at Costco, Target and Kroger to see if there are signs of weakness that may see one of more of them take a tumble in the next decade. Watch this space.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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