The steady rise of Amazon’s (AMZN, Financial) market share in the North American retail market at one end and the slowly growing Walmart (WMT, Financial) sales numbers at the other end have put all the retailers in the U.S. on notice. Amazon is growing at double-digit rates, and it is just a few quarters away from hitting a morale-boosting $100 billion in annual retail sales from North America, and Walmart is a few years away from hitting $100 billion in quarterly sales.
The U.S. retail market is growing, but not fast enough to accommodate Amazon’s growth as well as Walmart’s. Since 2012, the U.S. retail market has been growing in the sub-5% range; if not for inflation, that number would be even lower. Amazon and Walmart are both growing their sales at rates that are faster than the overall market, which means they are taking away market share from competitors.
During the recently concluded quarter, Amazon’s sales in North America increased by $4.696 billion while Walmart’s sales in the U.S. increased by $2.497 billion. Both these companies are now taking away most of the industry's growth while also eating into other companies’ shares. More than Amazon, the growth of Walmart is a huge threat for all the other retailers.
In the second quarter of 2018, which ended July 31, Walmart fired on all cylinders. U.S. comparable sales grew 1.8%, which is a lot for a company that makes more than $75 billion in quarterly revenue. But what is even more impressive about Walmart’s performance during the second quarter is that the retailer’s traffic grew by 1.3% despite the company increasing prices by 0.5% during the period.
Amazon has already cornered tens of millions of customers in the U.S. for its Prime membership program, and the company is obsessed with increasing the services it offers to Prime members, making it difficult for existing users to turn them down. In addition, Amazon Prime members tend to order much more than non-Prime customers, and they will continue to improve Amazon’s sales numbers for many more years.
Walmart has just shown us this year that the company can grow despite its size, thanks to the steady growth of e-commerce sales and strong performance of its Neighborhood Markets. Walmart’s above-5% operating margin makes it even stronger than it looks, and it’s really bad news for all the other big box retailers. The industry is ripe for consolidation, so expect the weaker ones to make way for the stronger ones. If you have invested in the retail sector, it’s time to be cautious and spread your bets.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
