Wal-Mart (WMT) took the first step by becoming public enemy number one when they launched their online marketplace in August 2009; this almost immediately led to a price war on things like books and DVD’s, and an early picture of what the future holds. Amazon (AMZN) took their counter-shot with AmazonTote, which is a weekly free home delivery service, essentially trying to pull customers towards their grocery and household items selection on a consistent basis. While this is small potatoes for now (only 20 ZIP codes in the Seattle area), the website says that this program “will be expanding soon”. In my opinion, these are just the early scuffles in what will likely become a long term competitive battle between two corporate giants.
Amazon reported earnings on Thursday, and the market was far from thrilled by the results. Revenues, despite rising 36%, missed forecasts, coming in at $12.95B, compared to $13.01B from analysts. On top of that, operating profit margin came in at 3.7%, compared with 5% last year, which didn’t sit well with investors; the stock fell more than 7% on the day to $171.14/share. Despite the response, there is an argument that this is exactly what investors are looking for. As noted by Ken Sena, an analyst at Evercore Partners, “Top line seems to be really strong, but to meet this demand, they’re having to invest in fulfillment and distribution, and that’s taking a bit of a short term margin toll”. Part of this investment is what investors should be happy to see; while margins are important, short term setbacks are key for dealing with a long term issue: Wal-Mart is very difficult to compete with on price.
Amazon has a sophisticated distribution system that has been noted for efficiency and cost-effectiveness. Regardless, they are still staring down a giant that has supplier relations, 12x the amount of sales, and is roughly 1% above AMZN on operating expenses, despite the added cost of running nearly 8,700 stores. In the past, companies have failed to realize that Wal-Mart’s success is more than just economies of scale, and paid the price for their miscalculation.
One example is Kmart; while their struggles can be attributed to a couple of things, there are two that stand out in relation to Wal-Mart. First, Kmart didn’t make the appropriate investments (in this case, computer technology) to compete with the efficient (and thus low cost competitor) supply chain strategy developed by Wal-Mart. After that, Kmart attempted to overcome this misstep by competing with Wal-Mart… on fashion. As noted by Kmart’s vice president for marketing at the time, "Apparel is our competitive advantage over other discounters." In an attempt to win many groups simultaneously, they ended up alienating a significant portion of both demographics; by failing to have a focused strategy, they destroyed any type of brand identity. Wal-Mart, on the other hand, has stuck to its roots: everyday low prices.
Despite Kmart’s struggles, this brings up an interesting issue: clearly, it is possible to compete with Wal-Mart. Target (TGT) does it each and every day, and I can guarantee you that Publix will do just fine even as Wal-Mart and Target both add more and more groceries to the shelves. How come? Target and Publix have differentiated themselves in a clear and consistent manner, so consumers realize what they are getting. Target, for example, doesn’t put nearly as much emphasis on pricing as Wal-Mart does (with the notable exception of the recent REDcard). The image is a sort of upscale Wal-Mart; competitive prices, but also a cleaner store with some flair, along with a (slightly) stronger emphasis on customer satisfaction (may be questionable depending on location). For some people, this is worth the couple percent extra that you pay at the checkout. The same can be said for retailers like Publix, which provide certain amenities (such as fresh deli meat/fresh fruit/seafood bar) that aren’t Wal-Mart’s expertise, which again, certain consumers are willing to spend extra for (count me as one).
The issue that rears its head with Amazon’s online business is the diminishing importance of brand name in e-commerce (against other already well know competitors at least). When shopping online, the consumer experience is almost nonexistent; it is hard to differentiate yourself in an environment where at the end, it all comes down to cost. While Amazon has taken steps to attract and retain customers (including safe check and programs like Prime), these advantages are almost immediately mitigated by a competitor like Wal-Mart, with brand recognition and supply chain/shipping capabilities (which has allowed them to offer 97 cent shipping). Raul Vazquez, chief executive of Walmart.com, says it is “only a matter of time” before Wal-Mart dominates Web shopping.
But from a quick search, it looks like Amazon pricing is consistently competitive with Wal-Mart on the items I looked for. While I have little besides anecdotal evidence (unfortunately), it appears that the price war between the two behemoths is as tight as ever. With the continued closing of the information gap and the simplicity with which prices can be compared, Amazon investors should be happy to see management investing the necessary resources to operate as efficiently and as cost-effectively as possible.
“We’ve grown up in a super competitive environment where customers can check prices with one click, and we like it that way,” said Craig Berman, an Amazon spokesman (for a NYT article in November 2009). Looking forward, one thing’s for sure: Amazon will need to keep investing a significant percentage of capital in this area to stay on the cutting edge, lest they fall the way of Kmart.
Amazon reported earnings on Thursday, and the market was far from thrilled by the results. Revenues, despite rising 36%, missed forecasts, coming in at $12.95B, compared to $13.01B from analysts. On top of that, operating profit margin came in at 3.7%, compared with 5% last year, which didn’t sit well with investors; the stock fell more than 7% on the day to $171.14/share. Despite the response, there is an argument that this is exactly what investors are looking for. As noted by Ken Sena, an analyst at Evercore Partners, “Top line seems to be really strong, but to meet this demand, they’re having to invest in fulfillment and distribution, and that’s taking a bit of a short term margin toll”. Part of this investment is what investors should be happy to see; while margins are important, short term setbacks are key for dealing with a long term issue: Wal-Mart is very difficult to compete with on price.
Amazon has a sophisticated distribution system that has been noted for efficiency and cost-effectiveness. Regardless, they are still staring down a giant that has supplier relations, 12x the amount of sales, and is roughly 1% above AMZN on operating expenses, despite the added cost of running nearly 8,700 stores. In the past, companies have failed to realize that Wal-Mart’s success is more than just economies of scale, and paid the price for their miscalculation.
One example is Kmart; while their struggles can be attributed to a couple of things, there are two that stand out in relation to Wal-Mart. First, Kmart didn’t make the appropriate investments (in this case, computer technology) to compete with the efficient (and thus low cost competitor) supply chain strategy developed by Wal-Mart. After that, Kmart attempted to overcome this misstep by competing with Wal-Mart… on fashion. As noted by Kmart’s vice president for marketing at the time, "Apparel is our competitive advantage over other discounters." In an attempt to win many groups simultaneously, they ended up alienating a significant portion of both demographics; by failing to have a focused strategy, they destroyed any type of brand identity. Wal-Mart, on the other hand, has stuck to its roots: everyday low prices.
Despite Kmart’s struggles, this brings up an interesting issue: clearly, it is possible to compete with Wal-Mart. Target (TGT) does it each and every day, and I can guarantee you that Publix will do just fine even as Wal-Mart and Target both add more and more groceries to the shelves. How come? Target and Publix have differentiated themselves in a clear and consistent manner, so consumers realize what they are getting. Target, for example, doesn’t put nearly as much emphasis on pricing as Wal-Mart does (with the notable exception of the recent REDcard). The image is a sort of upscale Wal-Mart; competitive prices, but also a cleaner store with some flair, along with a (slightly) stronger emphasis on customer satisfaction (may be questionable depending on location). For some people, this is worth the couple percent extra that you pay at the checkout. The same can be said for retailers like Publix, which provide certain amenities (such as fresh deli meat/fresh fruit/seafood bar) that aren’t Wal-Mart’s expertise, which again, certain consumers are willing to spend extra for (count me as one).
The issue that rears its head with Amazon’s online business is the diminishing importance of brand name in e-commerce (against other already well know competitors at least). When shopping online, the consumer experience is almost nonexistent; it is hard to differentiate yourself in an environment where at the end, it all comes down to cost. While Amazon has taken steps to attract and retain customers (including safe check and programs like Prime), these advantages are almost immediately mitigated by a competitor like Wal-Mart, with brand recognition and supply chain/shipping capabilities (which has allowed them to offer 97 cent shipping). Raul Vazquez, chief executive of Walmart.com, says it is “only a matter of time” before Wal-Mart dominates Web shopping.
But from a quick search, it looks like Amazon pricing is consistently competitive with Wal-Mart on the items I looked for. While I have little besides anecdotal evidence (unfortunately), it appears that the price war between the two behemoths is as tight as ever. With the continued closing of the information gap and the simplicity with which prices can be compared, Amazon investors should be happy to see management investing the necessary resources to operate as efficiently and as cost-effectively as possible.
“We’ve grown up in a super competitive environment where customers can check prices with one click, and we like it that way,” said Craig Berman, an Amazon spokesman (for a NYT article in November 2009). Looking forward, one thing’s for sure: Amazon will need to keep investing a significant percentage of capital in this area to stay on the cutting edge, lest they fall the way of Kmart.
