Retail

Walmart, Amazon And Retail’s Reinvention

The Boston Red Sox and The New York Yankees are the most celebrated rivalry in sports history.

It all began in 1919, when the Red Sox franchise was awash in red ink and its owner sold Red Sox slugger, Babe Ruth, to the Yankees for $125,000. The Yankees went on to become the most successful team in baseball with 27 World Series titles and a slew of Hall of Famers. The Red Sox went on to develop the most passionate – and patient – hometown fans in baseball amidst an 86-year World Series losing streak. The “Curse of the Bambino” was finally broken in 2004, when the Red Sox came back from a 0-3 Series deficit against the Yankees to win their first World Series title since the Bambino was sent packing.

Ninety-seven years later, the rivalry remains as strong as ever and Red Sox/Yankees tickets are among the most coveted in baseball. We Bostonians have perfected the art of holding a grudge – and know how to work it.

There’s a rivalry in retail that may not be nearly as long in the making, but is just as intense: Amazon and Walmart.

It began when Amazon’s ecommerce flywheel (a Jeff Bezo-ism) started to crank and capture an increasing proportion of online sales. The more of a force Amazon became in online retail, the more observers pitted the online upstart against the world’s largest physical retailer – the retail rumble in the jungle I wrote about in detail earlier this year.

So when Amazon, for the first time, bested Walmart to become the world’s No. 1 retailer, as measured by market cap, it was like throwing red meat to the sharks – the media went nuts. Every move each of them makes now is the subject of intense scrutiny and analysis: Amazon against a backdrop of double-digit increases in online sales, and Walmart against the backdrop of years of declining physical store sales.

So when Walmart announced its $3.3 billion acquisition of Jet.com last week, the talk of that rivalry was taken to another decibel level.

JET PROPELLED WALMART

Walmart is now the proud owner of the two-year old self-professed Amazon-killer that’s said to lose 30 cents on every dollar it takes in, and the media said had to raise $554M at the end of last year or close up (Jet.com denied that allegation). At that time, Jet.com’s valuation was just a shade north of $1 billion.

This Thursday (Aug. 18) when Walmart reports earnings, media and analysts will be hanging on Doug McMillon’s every word. They’ll want to know if Walmart can string together two quarters of stronger than expected sales performance, but they will be listening intently to how Walmart.com did last quarter and to learn more about how Jet.com will fit into the Walmart enterprise.

No doubt, the comparisons to Amazon’s reported quarterly earnings will be inevitable, especially since Amazon absolutely crushed it last quarter.

Net sales were up 28.1 percent in the U.S. and 30 percent internationally. Marketplace sales are now nearly 50 percent of Amazon’s total number of units sold (49 percent to be precise, but up from 42 percent a year ago). Amazon now accounts for 60 percent of all eCommerce sales – and those sales are doing nothing but hockey-sticking, increasing 10.6 percent over the first half of this year and 14 percent from June to July.

That was a far cry from Walmart.com’s news last quarter.

In a growing market, Walmart.com lost ground – sales dropped .7 percent from the quarter before. It takes a bit of work to lose ground in a market that’s on fire, and that’s not something that Walmart’s CEO was particularly happy to explain away.

So Jet.com is being positioned now as Walmart’s saving grace as it tries to recapture its ecommerce mojo. And although the need to rev up that mojo is essential, it may be that the Jet.com acquisition is about more than merely giving Walmart.com a new lease on life.

The State of Retail

To understand why I say that, let’s first dig into the complicated state of affairs that’s retail in the U.S. today.

Consumer spending is up 4.2 percent – the best since 2014 – and gas prices are at historical lows. Yet retail sales in July were flat as a pancake and in June were only marginally better than flat. Instead of spending on clothes and electronics, consumers are buying cars and booking travel. They’re eating out less since grocery prices are so cheap (for which we can give thanks to the grocery wars that are keeping grocery prices in check.) Consumers are also spending more of their discretionary dollars on things that are not really discretionary, including health care (now 20 percent of their discretionary income) housing and to repay debt.

When it comes to shopping, however, there is certainly a shift afoot – pun very much intended.

RetailNext reported that foot traffic to physical stores in July was down 5.8 percent, although cheerfully reporting that at least it wasn’t as bad as it was the two months prior. But last month, uncharacteristically, there were also fewer sales per shopper; that was down 1.2 percent. That set off more a few alarm bells since until July, sales per shopper were up even as foot traffic was down. Retailers took some comfort in knowing that fewer feet were buying more. We’ll have to see whether July was a blip – the result some say of Amazon’s Prime Day diverting shoppers’ feet and pocketbooks, or the start of more bad retail news.

To add more worry beads to the pile, the rampant discounting that retailers must offer now as inducements to getting consumers through their front doors drove average transaction values down 1.6 percent last month, too. That’s playing out on the department store stage as sales continue to tank with the big guys reporting drop-offs in quarterly sales that average 5 percent for the quarter. This comes, of course, after prior quarters of the same sort of declines. In an effort to stop the bottom line from hemorrhaging, brands are shutting down stores, and some are shutting down altogether.

Of course, as goes department stores, so goes the suburban shopping mall – once the bastion of retail sales and driving as much as 50 percent of retail sales the decade that Amazon was born. Since the department stores are the anchors that bring in the feet that traipse past the stores that line the perimeter of the mall, those stores are tanking too.

There’s simply no joy in mall-ville these days.

Well, at least the ones that aren’t in the well-heeled suburbs – and even those are a question mark. Those who study population trends report that the number of people moving to the burbs has slowed over the last 20 years since people prefer living in an urban area where the things they need to buy are more convenient to access. It’s not surprising that some of the most successful malls are those in urban centers and part of or adjacent to office buildings, hotels and condos where there is a density of consumer demand an easy walk or Uber ride away.

So, put all of that together and it’s not a particularly rosy picture for physical retail. It may drive around 90 percent of all retail sales today, but it’s dominating the share of a market in decline. Month after month, the data shows that the traditional retailers, collectively, are losing ground while online is growing rapidly in key sectors that once drove physical retail performance, thanks to connected devices and the web and easy access to online marketplaces like Amazon.

Which is why all eyes are peeled on what the two biggest players in each of those spaces, Amazon and Walmart, will do to win in a retail space that’s now being shaped by a consumer who wants a different experience.

COMPARING APPLES TO APPLES

Amazon reported revenues in 2015 of $107 billion. That same year, Walmart reported revenues of $485 billion, of which roughly $14 billion was derived from Walmart.com. The acquisition of Jet.com, with its 2,400 merchants, 12 million SKUs, millennial customer base and 22.6 million average monthly visitors to is website is said to be Walmart’s strategy for keeping the Amazon online beast at bay.

But Amazon’s total revenue also includes revenues from Amazon Web Services, which accounts for 55.9 percent of their total revenue line. So if we carve that out of Amazon’s total revenue, Amazon’s retail business clocks in at something like $47.8 billion.

Nothing to sneeze at, for sure, and growing like a weed at the same time that Walmart, with the exception of last quarter, has shown a slight decline. But if the playing field we’re talking about is retail, then the comparison isn’t Amazon’s $107 billion to Walmart.com’s $14 billion, it’s Amazon’s $48 billion to Walmart’s $485 billion — putting Amazon just shy of 10% of Walmart in retail.

So if that’s the playing field, how are each of them playing to win the game?

BLURRED RETAIL LINES

At 10 percent of all consumer spend in the U.S., Walmart is betting on a retail future in which they become the penultimate omnichannel retailer. A massive network of physical stores worldwide and enough of the right inventory in those stores remains core to that strategy. Online is both a channel to reach new audiences and capitalize on a consumer who wants to buy online and on the go, but also a way to get more feet into their stores.

And, with more than 100 million people walking into a Walmart store in the U.S. every week, they have captured the flag for the greatest number of feet inside any store in America. Last quarter, they shocked everyone when they reported an increase of 1.5 percent in foot traffic at the same time that every other retailer reported a decline. The increase in foot traffic is what drove Walmart’s better than expected results.

Walmart attributed that increase to better inventory management – having the right stuff in stock – and paying closer attention to their grocery department, particularly fresh produce. It accounts for 25 percent of U.S. grocery sales, and is one of its “flywheel” strategies for getting people into the front door. People come in to pick up a few groceries and walk out with other things they didn’t come in with the intent to buy. But more importantly, they walk into the store.

Walmart has also made it pretty easy to get to one of their stores. Ninety percent of American consumers live within 10 miles – or a 15-minute ride — to one, and Walmart is using that proximity to experiment with its own buy online, pickup in-store initiatives, including curbside delivery. And in perhaps one of the earliest ever buy online/pickup in-store schemes, Walmart.com has been allowing its cash-centric consumers to buy online and pay cash in a Walmart store for years.

Jet.com was surely an acquisition to bolster Walmart.com and to get a seasoned ecommerce exec (and former Amazon exec) at the helm to help Walmart out-Amazon, Amazon. But Jet.com also gives Walmart access to its slick pricing algorithm that calculates basket price based on the quantity and proximity of the merchandise to the consumer’s location. Jet.com says it’s able to offer a basket price that’s consistently 10 percent lower than Amazon’s for the same items. That’s music to Walmart’s ears since delivering everyday low prices to consumers, every day, is job No. 1 and why consumers trust – and shop — the brand.

Walmart also has hundreds of fulfillment centers strategically located no more than 150 miles to any store so that inventory be replenished quickly. Perhaps the combination of Walmart’s fulfillment centers, Jet.com pricing algorithms and the potential to offer even lower prices to the end consumer if, say, they pick up their order in the store, could be a buy online pickup in-store – or deliver in an hour to wherever you live — match made in heaven. Being 15 minutes away from a Walmart opens up a lot of options for both Walmart, its Jet.com property and their collective customers. And having access to Walmart’s fulfillment centers gives Jet.com the chance to consolidate their inventory there instead of having to maintain – and pay for — its own.

It’s said that Jet.com will be a standalone site for now, but it’s not hard to imagine a scenario that could soon allow every Jet.com consumer to also have a Walmart.com account for shopping on that site but also giving those consumers the ability to also use their mobile phones to shop at a Walmart store. And giving Walmart the ability to further blur the lines between physical and online retail – to just retail.

Walmart might even reinvent the concept of malls as we know them by leveraging their foot traffic to expand its third-party marketplace concept to include sellers who’d like to be inside of their physical retail ecosystem.

AMAZON’S ALTERNATIVE VIEW OF RETAIL

Amazon also believes that omnichannel is the future of retail, but its starting point for delivering that consumer experience is very different.

It starts with an Amazon that captures as much share as it can for the retail categories in which they and their ecosystem are a natural online alternative, and building consumer trust in the brand with every one-click purchase. Books, electronics, sporting goods and clothing are among the categories that have experienced among the biggest drops in physical retail sales. It’s not entirely coincidental that they also happen to be the categories in which Amazon has captured a growing volume of sales.

Amazon’s retail strategy uses both its online marketplace and eponymous Pay with Amazon button as hooks for customers and merchants to get on board its vision for retail. Amazon continues to grow its online marketplace with third-party sellers at the same time it expands the breadth of its private label brands, giving its consumers more reasons to start and end their shopping journey there. It’s expanded into adjacencies such as meal ordering and delivery to give Prime customers new experiences. Amazon Fresh and Pantry are its efforts to capture online grocery sales. Amazon Pro Services makes it possible to find a plumber or a tutor online and pay using Amazon.

Then there’s Alexa, her ecosystem and the now 1,900 skills and growing makes buying anything a voice command a way. Alexa’s also getting smarter and more contextual, too. She remembers past orders and can make repeatable purchases fast and easy – through Amazon, of course, but a growing number of retailers are also making Alexa their new best retail friend – Domino’s, 1-800-Flowers and Uber, just to name a few.

Central to that proposition is the familiar and trusted Pay-with-Amazon button. On Amazon, it offers a one-click experience. Off Amazon on merchant sites, it offers something it says is even more valuable to a mobile customer: an invisible checkout experience. Logging onto a merchant website that accepts Amazon is done with Amazon, so checkout is as invisible to the consumer as it is when getting out of an Uber. Amazon also says its buy button gives retailers information about what customers are doing once they enter the website – intelligence that they haven’t been privy to in the past that can improve the path to conversion for their customers.

So when Amazon thinks about blurring the lines between physical and online, it takes quite a different tact. It’s blurring the lines by bringing more merchandise once bought at physical retailers online via its marketplace. And it’s using its Pay-with-Amazon as a way to extend its ecosystem to online merchants that want to increase their online conversions and potentially offer a different in-store physical experience, too. There’s nothing to keep a multi-channel retailer from leveraging Amazon Fulfillment Centers so that customers can buy online and pickup in their store in the same day, or even order in the store and have it delivered same day – or same hour.

That’s today.

Amazon’s bookstore in Seattle is more or less its retail petri dish for Amazon to experiment with ways to reinvent the physical store experience. Today, anything purchased in the store can be done using the Pay-with-Amazon app. There are no visible prices anywhere in the store; to find out how much something costs, a consumer has to pop open the Amazon app and scan the barcode on the shelf. That’s also how a consumer gets product information and recommendations. And in the future, probably lots of other prompts, too, based on the massive purchase history that Amazon has on its customers, and inventory availability in an effort to increase the size of the basket at checkout and margin for Amazon.

Amazon says it plans to open other bookstores and has been aggressive in opening fulfillment centers all over the country so that it can reduce its shipping costs and expedite delivery. In 2014, it signed a 17-year lease for 470,000 square feet of space across from the Empire State Building, and last month it leased more than 600,000 square feet in Teterboro, New Jersey, a 15-minute ride to Manhattan. It’s also said to be opening a retail/bookstore combo in New York’s 17-million-square-foot Hudson Yards complex when complete in 2024.

So, Amazon’s plan to reinvent retail – and capture its chunk of it –starts with using all of the digital intelligence that it’s captured about consumers — how they shop and what they buy. Their move offline – as an Amazon brand and through third parties – will use that base to create a digitally driven retail experience in the store — all connected via the bright yellow, Pay-with-Amazon button.

And Amazon, too, could reinvent the notion of the mall by turning anchor tenant spots into fulfillment center pickup stations and retail showrooms, driving feet into those vast retail centers and breathing new life into the merchant storefronts that live inside.

THE END GAME

Sports rivalries are fun to watch and talk about because the balance of power between two great teams is always in flux. The Red Sox may have had an 86-year World Series drought, but they won lots of games every season and their fair share of American League Championships in between. After winning the Series in 2004, they went on to have one of the worst seasons ever in 2012, but won the Series again in 2013. They’re currently a few games in front of the Yankees this season, but there’s a lot of season left, so anything goes.

And even though the Yankees have won 27 World Series, they’ve had their fair share of ups and downs, too. In 1966, the team finished in 10th place, and the fans deserted them. The last game played in Yankee Stadium that year had 413 fans in the seats.

At least here in Boston, we pack the stands, win or lose. This retail rivalry between Amazon and Walmart is fun to watch because they are both giants but bring different strengths and weaknesses to the game. And each season bring its ups and downs – remember the Fire phone? But the real game to watch is the long game: what retail will look like in the next decade and even after that. It’s how each of these giants play to win that game – and watching their moves each year with that perspective in mind – that will make the headlines and clearly affect how we all shop in the decades to come.

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